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Can The Natural Gas Rally Continue?

Natural Gas Storage

Natural gas prices are on a tear, and every small dip is being aggressively bought by the traders. Technically, the current rally should rise to the next resistance level of $2.95/MMBtu, but do the fundamentals justify the rise?

(Click to enlarge)

Natural gas supply

The latest U.S. Energy Information Administration’s Natural gas weekly update reports a drop in production in all the seven shale-producing regions. The production is 1 percent below last year, averaging 73 billion cubic feet per day (Bcf/d). However, drilling is likely to increase with a sharp rise in natural gas prices.

Natural gas storage

The injections into the storage have slowed, compared to both the previous year and the 5-year average. The stocks exceeded 3,000 billion cubic feet (Bcf), but year-over-year, the storage surplus has fallen for eleven consecutive weeks.

Related: Saudi Arabia’s Oil Storage Falling As Exports Exceed Production

Compared to last year, the stocks are 618 Bcf higher and are 678 Bcf above the five-year average of 2,425 Bcf.

Natural gas demand

Aided by higher than average temperatures and increased exports to Mexico, the demand remains robust and higher than the previous year. The power burn rate of 26 billion cubic feet per day (Bcf/d) is 10 percent greater than the previous year.

Natural gas prices are sensitive to weather forecasts—either a hotter summer or a record chilly winter increases the consumption of natural gas for cooling and heating. However, a gentle winter pushed natural gas prices to multi-year lows in February.

The markets were way oversold at $1.666/mmBtu, and a rebound was inevitable, because a large drop in the drilling rigs meant lowered supply in the future.

“In general, (traders) no longer believe that the market is oversupplied,” Kent Bayazitoglu, analyst at the energy-consulting firm Gelber & Associates in Houston, said in a note, reports The Wall Street Journal.

As the markets pulled back, the news of above-average weather encouraged traders to go long in anticipation of higher consumption.

(Click to enlarge)

Cyclically, the markets have turned down in June or remained flat, barring 2012, when prices continued their uptrend.

Though the current rally resembles 2012 when prices made a similar dash to the upside after making a significant bottom, a pullback is in the cards due to the near vertical rise from the levels of $2/mmBtu. Related: Does The U.S. Really Need A Strategic Petroleum Reserve?

“While I do think it’s overbought, you can point to multiple reasons this thing has come to life here,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. “You should expect a pullback in the coming days, but I don’t think you can expect a very deep pullback,” reports the WSJ.

Natural gas stocks are above the five-year average, but demand is also likely to rise further. NatGasWeather.com forecasts temperature in the high 90s to 100s in the western, central, and southern U.S., which is likely to increase natural gas demand.

One also needs to consider that higher natural gas prices have encouraged firms to consume more coal. The trend for coal consumption has followed higher natural gas prices. Since week ending 19 May, coal consumption has increased 29 percent nationwide.

As long as the weather doesn’t play spoilsport, natural gas prices should march higher. Nevertheless, if there is any respite in the hot summer, prices will correct, due to the lack of fundamental support.

By Rakesh Upadhyay for Oilprice.com

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