Natural gas prices have run up phenomenally since the June contract expired on 26 May at $1.963/mmBtu. The natural gas prices touched an intraday high of $2.48/mmBtu on 6 June before closing flat for the day.
Since October 2015, prices have not been able to cross the strong resistance area of $2.5/mmBtu, as seen in the chart below. Do the fundamentals support a breakout and higher prices in the coming weeks, or will we see a move back into the range?
(Click to enlarge)
We have to consider supply and demand, along with inventory data to understand whether prices justify their sharp rise, within such a short span of time.
(Click to enlarge)
Though natural gas storage levels remain elevated, the supply glut is slowing compared to analysts’ expectations. As of 27 May, the Energy Information Administration reported natural gas inventories of 2,907 Billion cubic feet, an increase of 82 Bcf, which was below the consensus expectations of 86-Bcf, according to The Wall Street Journal.
In the previous week, inventories were 37 percent above five-year average levels compared to the same week in 2015; however, this week the surplus shrank to 35 percent above five-year average levels. This is an indication of a diminishing surplus.
"The 82 Bcf net injection into storage for last week was slightly less than the consensus view and below the 98 Bcf five-year average for the date, and so at least somewhat supportive for prices," said Tim Evans of Citi Futures Perspective.
"The build was also well below our model's 96 Bcf forecast, and so will translate into a more bullish baseline for the reports to follow," reports Natural Gas Intel.
Demand and Supply
In the long-term, the demand for natural gas is on the rise, as outlined in the EIA’s Annual Energy Outlook. However, in the short-term, the immediate demand for natural gas influences prices. Mild winter conditions were partly to blame for the record low prices in March of this year, along with the excess supply. Related: Rebound In Oil Prices Changes Drillers’ Mindset
However, the recent forecast of a hotter summer is expected to increase the air conditioning requirements leading to increased gas-powered electricity.
“With the weather once again changing to another warming trend, the market is looking for a bump up in consumption at a time when production may be starting to ease,” said Dominick Chirichella, an analyst at the Energy Management Institute, reports The Wall Street Journal.
The natural gas rig count fell by five rigs to 82, according to the Baker Hughes rig count report for the week ending 3 June. The rig count has dropped 63.1 percent year-over-year.
Experts believe that though consumption will increase, supply will not return as quickly as the EIA anticipates, which will lead to a reduction in storage levels and increased gas prices. Related: Norway Set To Ban Fossil Fuel Cars In 2025
The current prices are close to the forecast of the World Bank estimates of $2.5/mmBtu and slightly above the EIA forecast of $2.32/mmBtu for 2016.
Considering the sharp run-up in the last few days, natural gas prices are likely to consolidate their gains, waiting for the fundamentals to catch up. A material change to the existing demand and supply situation is needed for the prices to break out of the stiff resistance level of $2.5/mmBtu.
By Rakesh Upadhyay for Oilprice.com
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