August Natural Gas futures soared this week to its highest level since the week-ending August 21, 2015. The catalyst behind the rally was a forecast for above average temperatures the next two weeks in most of the high demand areas of the U.S.
Early in the week, the market received a boost on concerns about a drop in production following an explosion at a processing plant. The explosion and fire occurred at a processing plant in Mississippi on Monday. According to S&P Global Platts, as much as 600 million cubic feet a day of output could be halted if it cannot be rerouted to another plant.
The rally gained traction mid-week after the release of a forecast that called for hot temperatures over the next two-weeks. This is expected to boost natural-gas demand.
I wrote last week that the current rise in natural gas demand was confounding some who expected a 40 percent rally in prices the past month would lead power plants to buy other fuels instead. This hasn’t happened yet, and as hotter weather has increased power demand, gas consumption grew about 1.5 percent month-to-date to nearly 67 billion cubic feet a day, according to Platts Analytics.
According to Genscape, Inc., a data provider, the higher natural gas prices have convinced some power generators to burn, coal, but gas consumption is still on the rise in the power sector. This has helped increase bullish sentiment in the gas market despite high stockpiles and production not far from record pace.
Image courtesy: Weather.com
With temperatures expected to remain high over the next two weeks, there is a lot of optimism in the market about a possible summertime rebalancing. With the forecasts also calling for a hotter-than-average summer, the bullish traders are buying in the hope that this high demand for gas-fired power will continue to soak up a glut of gas in storage.
Following a potentially bearish closing price reversal top on Wednesday, prices rebounded on Thursday after weekly inventory data showed that inventories grew less than expected last week.
According to the U.S. Energy Information Administration, producers added 42 billion cubic feet of natural gas to storage in the week ended June 24. This was less than the 48-bcf injections that analysts had expected.
If the strong weather-induced power demand continues and power generators continue to demand natural gas rather than other fuel alternatives, then the next two storage injections could also be light, helping to underpin August Natural Gas prices and possibly lift this futures contract to the psychological $3.00 level.
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Technically, the main trend is up according to the weekly swing chart. The market took out the swing top at $2.965 from the week-ending September 18, 2015. The confirmed the uptrend. The next targets according to the weekly swing chart are main tops at $3.180, $3.190 and $3.223.
Next week will be the seventh week up from the last swing bottom at $2.157. This will put the market in the window of time to form a potentially bearish closing price reversal top. Basically, we need to watch for a higher-high and a lower close on the weekly chart to signal that the selling is greater than the buying at current price levels.
Based on Thursday’s close at $2.930, the key angle to watch next week will come in at $2.928,
A sustained move over $2.928 will signal the presence of buyers. This could generate enough upside momentum to drive prices into the next downtrending angle at $3.075. This is the last potential resistance angle before the previously mentioned main tops.
A sustained move under $2.928 will indicate the presence of sellers. The daily chart is well above the nearest support angle at $2.1770 so this could trigger an acceleration to the downside with the next target a Fibonacci level at 2.752 and a steep uptrending angle at $2.717.
Forecasts for hot temperatures over the next two weeks should be supportive for natural gas prices next week. Any changes in the forecast, however, will likely give long investors an excuse to book profits.
Technically, we are in a momentum driven market as well as a news driven market. If this momentum continues then we are likely to continue to rally until we hit major resistance and this area appears to be $3.180 to $3.223.
We are also going to be in the window of time next week for a potentially bearish closing price reversal top. If we run into resistance in our zone and the market retreats below Friday’s close then the reversal top will form. This may not lead to a change in trend, but it could trigger a 2 to 3 week correction.
We could also see a closing price reversal top form by next Friday even if we don’t test the major tops zone. All we are looking for is a higher-higher next week and a lower close to signal that the sellers have arrived.
We may even see it in the government report next week if it shows evidence that the power generators have switched from burning gas to burning coal.