Natural gas trading outlook: futures drop on cooler weather ahead of EIA report

Natural gas was down in early European trading on Thursday as cooler conditions across the US Midwest and East curb cooling demand, while the Energy Information Administration is expected to report a near-normal inventory build later in the day. Tropical storm Erika was also in focus.

Natural gas for delivery in October traded 0.92% lower at $2.678 per million British thermal units at 07:52 GMT. Prices shifted in a daily range of $2.699 – $2.663. The contract rose 0.3% on Wednesday, helping it flip into positive weekly territory at the time, but is currently down 0.7% for the week.

The EIA will likely report today a build of about 60 bcf for the week ended August 21st, compared to the five-year average increase of 61 bcf and the year-ago one of 77 bcf, reflecting very warm to hot temperatures over most of the US early last week that offset a cooler system which tracked across the northern US.

A week-ago report showed that supplies rose by 53 billion cubic feet in the seven days ended August 14th, which brought the total gas held in US storage hubs to 3.030 trillion cubic feet, slightly narrowing a deficit to the average 2.950 trillion to 2.7% from 2.8% a week earlier.

Market sentiment has recently been driven by weather developments as investors focus on a cool system with showers and thunderstorms that has been tracking across the Midwest and East, resulting in highs in the upper 60s to 70s over key consuming regions. Cooler readings also managed to briefly push into the southeastern US with the progression of the week, helping curb national natural gas demand to moderate.

This will affect September 3rd’s report, which is expected to print a build above the average. Early estimates point to a stockpiles gain of about 80 bcf for the seven days ended August 28th, compared to the five-year average build of 60 bcf and a 79-bcf increase a year earlier.

Still, very warm to hot weather with highs in the upper 80s to 100s continues to dominate the South and West, including Texas and California. As the aforementioned weather system exits the country late in the week, high pressure will recover ground over the eastern US but fresh weak systems will keep overall demand at moderate levels.

High pressure will strengthen over much of the US next week, including the Midwest and Northeast, although the West will be cooler as Pacific weather systems push inland. However, the question arises whether it will be hot enough to drop inventory builds below normal and for how long will the heat last. Temperatures are expected to get warm enough to warrant high cooling demand, but there are flaws in the ridge of high pressure that could quickly turn mid-term weather sentiment to bearish, according to NatGasWeather.com.

Meanwhile, tropical storm Erika is tracking westward, nearing the Leeward Islands, and is expected to move west to west-northwest over the next 48 hours with maximum sustained winds of 45 mph (75 km/h). It is still uncertain how Erika will impact the Gulf and the Southeast US, depending on the strength it gathers, but there are scenarios of it even impacting the East Coast, thus close monitoring will be required.

Readings

According to AccuWeather.com, highs in New York will jump into the upper 80s and 90 on August 29 – September 2nd, compared to the average 80, followed by a drop to near-seasonal. Chicago will peak in the mid-upper 70s through August 29th, below the usual 81, before afternoon highs reach the mid 80s for several days.

Down South, readings in Houston will max out at 94 degrees today and tomorrow, 2 above normal, before dropping a few degrees afterwards. On the West Coast, Los Angeles will peak at 92-95 degrees the next three days, followed by a drop to the low-mid 80s.

Pivot points

According to Binary Tribune’s daily analysis, October natural gas futures’ central pivot point stands at $2.703. In case the contract penetrates the first resistance level at $2.725 per million British thermal units, it will encounter next resistance at $2.747. If breached, upside movement may attempt to advance to $2.769 per mBtu.

If the energy source drops below its S1 level at $2.681 per mBtu, it will next see support at $2.659. In case the second key support zone is breached, the power-station fuel’s downward movement may extend to $2.637 per mBtu.

In weekly terms, the central pivot point is at $2.738. The three key resistance levels are as follows: R1 – $2.783, R2 – $2.868, R3 – $2.913. The three key support levels are: S1 – $2.653, S2 – $2.608, S3 – $2.523.