Natural Gas Forecast: Heatwave Concerns Dampened by Low Volatility

Highlights

• Natural gas futures rise on hotter overnight weather data.
• High-pressure system to bring scorching temperatures, driving national demand.
• Speculators increase positions while historic volatility hits lowest level.

Overview

Natural gas futures are edging higher on Tuesday, driven by hotter overnight weather data. According to NatGasWeather, the GFS model recorded a significant increase of 9 Cooling Degree Days (CDDs), signaling a shift towards higher temperatures. However, caution is advised as previous summers have seen impressive heat in the 10-15-day forecast period cool down by the 3-9-day mark. Nevertheless, the recent overnight data did trend hotter, and the persistent dangerous heat across California to Texas could support an upward movement in natural gas prices.

High Pressure Brings Hotter Weather

Looking ahead to July 18-24, NatGasWeather forecasts high pressure dominating the southern, western, and eastern US, resulting in upper 80s to 110s temperatures. California and Texas will experience the hottest conditions, with the East Coast seeing mid-90s. The Great Lakes/Ohio Valley will enjoy more comfortable weather with showers and temperatures in the 70s and 80s. This weather pattern is expected to drive strong national demand for natural gas.

Increased Output Capping Gains

In a recap of Monday’s market, US natural gas futures dropped 1% to a three-week low due to increased output and revised forecasts of less hot weather in the next two weeks. Despite this decline, overall weather conditions in the country will remain hotter-than-normal, particularly in Texas.

Specs Raise Net Long Positions

Speculators have increased their net long gas futures and options positions on the New York Mercantile and Intercontinental Exchanges, reaching their highest level since April 2022. However, recent weeks have seen limited price movements, resulting in decreased historic volatility to its lowest level since April 2022.

Refinitiv:  Mixed Supply/Demand Picture

Refinitiv data reveals that average gas output in the US Lower 48 states rose to 101.7 billion cubic feet per day (bcfd) in July, slightly higher than June but below the monthly record set in May. Meteorologists predict that hotter-than-normal weather will persist until at least August 1, leading to a forecasted increase in US gas demand, including exports. Ongoing maintenance at major LNG export plants has limited gas flows, despite a slight increase compared to June.

Short-Term Outlook:  Cautiously Bullish

In summary, natural gas futures are rising due to hotter overnight weather data and the persisting dangerous heat across California to Texas. The 10-15-day forecast period carries some risk, but the recent data suggests increased temperatures. Strong national demand is expected as high pressure dominates various regions in the US.

Speculators have increased their positions, although historic volatility has reached its lowest level in months. Gas output has seen a modest increase, and demand is projected to rise in the coming weeks. Ongoing maintenance at LNG export plants has limited gas flows, despite a slight increase compared to June.

Technical Analysis

The current market sentiment for Natural Gas is relatively neutral, with the price slightly higher than the previous close. The 4-hour moving averages indicate a moderate upward movement, with the price straddling the 200-4H moving average, suggesting upside momentum may be developing. The 14-4H RSI sits in the neutral zone, indicating weaker momentum below the neutral level of 50.

Main support lies between 2.487 and 2.560, while the main resistance area ranges from 2.782 to 2.836. Overall, the market appears balanced with traders respecting both the 200-4H moving average and the support zone.

The extremely low volatility is helping to keep a lid on the price action, but any upward movement coupled with a jump in volatility may trigger a breakout over the 50-4H moving average at 2.616.