October Natural Gas
Early last week, October Natural Gas futures appeared to be showing signs of life as the technical picture started to take on a bullish look on the weekly chart. However, like many technical breakouts in the past, this one died once traders realized that any rally would not last without a bullish fundamental outlook.
Last week’s technical breakout was thwarted when the U.S. Energy Information Administration released a report that projected natural gas inventories to reach the second-highest level on record. Basically, it was a case of supply increasing faster than demand that convinced the EIA that inventories would continue to rise at a near record pace until at least the end of October.
According to the EIA, natural gas inventories at the end of July were 23% higher than a year ago and 2% above the previous five-year average for that week at 2.91 trillion cubic feet (Tcf).
The EIA report also said that inventories began the gas refill season in April about 173 billion cubic feet (Bcf) below the five-year average, but record domestic gas production has allowed for strong injections that have kept inventories above the five-year average since the end of May.
Based on its latest assessment of supply/demand conditions, the EIA projects that gas inventories will reach 3.867 Tcf by October 31, the end of the summer refill season. This estimate for end-of-season inventories will be about 69 Bcf above the five-year average.
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Technically, the sideways chart pattern produced a triangle chart formation on the weekly chart. Although the market tried to breakout to the upside early last week, the move never gained enough traction to take out the previous tops at 2.983 and 3.013. This indicated that strong sellers are still controlling the market.
Given the $2.638 to $3.180 range, the rally essentially found resistance at the mid-point of the range at $2.909.
The market is likely to finish the week lower based on the price action following the release of last week’s EIA inventory figures. The momentum created by the sell-off and the chart pattern suggests the market is now headed to the bottom of the triangle that comes in at $2.755 this week.
In addition to the supply/demand projections, the EIA report also said that it expects monthly average spot prices to remain lower than $3/MMBtu through October, and lower than $4/MMBtu through the end of 2016.