The spike in September Natural Gas futures came to an abrupt ending early last week as weather forecasts took out the chance for an extended heat wave across the United States. The short-covering rally triggered by excess demand briefly breached a minor 50% price level at 4.327, reaching 4.586 before selling off. The inability to attract fresh buying and the quick ending to the rally is a solid example of just how much supply is out there.
Without weather to steer the market higher, expectations are for the market to continue to trade sideways-to-lower over the near-term. Taking excessive heat out of the equation means a return to seasonally normal weather and a return to normal electricity demand.
Also driving prices lower last week was the news that the U.S. Energy Information Administration reported a rise in natural gas storage of 60 billion cubic feet. This was above the pre-report consensus estimate of 58 billion cubic feet.
Traders also reacted negatively to rising production levels. A report from the industry research group Baker Hughes said that the number of active drilling rigs increased to 889 from 885. This was the highest level in eleven weeks and the fourth gain in five weeks. As long as the rig count remains well above the 800-level, there should be an overbalance of supply in the market.
Technically, solid support remains at 4.067 to 4.012. On the upside, the market is not expected to exceed 4.539 to 4.65 over the near-term.
Factors Affecting Natural Gas This Week:
• Although the weather has shifted to more seasonal temperatures and the forecasts are calling for much of the same going forward, the unpredictable nature of this year’s summer weather means that short traders have to continue to approach this side of the market with caution. Any change in the forecast to another round of high temperatures could send shorts scrambling to cover positions once again. Excessive heat puts more strain on electricity plants, creating more demand to meet air conditioning needs.
• On Thursday, the U.S. EIA will release its weekly inventory figures. Traders expect to see a slight increase in demand because this report will cover the excess usage caused by the Midwest and East Coast heat waves. The question remains whether new supply was able to offset this increase in demand.
• It’s a long-shot, but problems increasing the U.S. debt ceiling may exert pressure on the Natural Gas market. The threat of default of U.S. debt obligations could freeze credit markets, triggering a sharp rise in short-term interest rates. This could lead to manufacturing plant shut-downs, slashing demand and driving up supply. Prices would likely plunge on the news.
By. Commodities Mansion
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