Natural Gas Forecast: Higher as August Futures Expiry Sparks Volatility Fears

Highlights

• Natural gas futures nearing June 26 peak.
• Weather data shift triggers trader caution.
• August contract expiry to bring volatility.

Overview

Natural gas futures are showing signs of strength on Tuesday, pushing towards breaking the June 26 peak at 2.775. However, traders remain cautious due to a slight shift in weather data. Brace yourselves for a volatile week as the August contract expiration approaches, likely contributing to wild swings in the market.

Sizzling Heatwave Sweeps Across US

Over the weekend, weather data indicated one of the hottest patterns in the past 40+ years for July 25-30, with temperatures ranging from the upper 80s to 110s across most of the US. Only a limited area experienced comfortable highs in the 70s to lower 80s. Nevertheless, weather systems are expected to arrive over the Great Lakes and Northeast on August 1-7, leading to a drop in national demand from very high levels to only slightly above normal, according to NatGasWeather.

The NatGasWeather forecast for July 25-31 predicts high pressure to persist over the southern, western, and eastern US, resulting in scorching temperatures ranging from the upper 80s to 110s. This includes California to Texas, with the Midwest warming up to the upper 80s to lower 90s. However, relief is on the horizon as weather systems are expected to bring showers and comfortable highs of 70s to lower 80s across the Great Lakes and Northeast on Sunday and Monday. Overall, demand is anticipated to remain very high until Saturday before easing to high levels.

Texas Power Demand at Record High

In Texas, power demand has reached record highs due to a lingering heatwave, driving up gas consumption to produce electricity for cooling. The state’s power grid operator, Electric Reliability Council of Texas (ERCOT), expects the demand to remain elevated in the coming days. While gas prices rose about 7% last week, speculators reduced their net long gas futures and options positions for the first time in six weeks.

Volatility Currently at April 2022 Low

The market has seen less volatility recently, with the contract’s 30-day implied volatility index at its lowest since April 2022. However, meteorologists forecast hotter-than-normal weather in the Lower 48 states until at least August 8, potentially impacting demand.

LNG Exports Demand Set to Rise

Despite record gas output in July, the market expects a rise in gas demand, including exports, as liquefied natural gas (LNG) export plants are set to exit maintenance outages. While flows to U.S. LNG export plants have increased, they still remain below the monthly record due to ongoing maintenance at various facilities.

Short-Term Outlook:  Traders on Edge

With this mix of factors, the natural gas market remains on edge, with traders closely monitoring weather patterns, demand levels, and export plant operations. As we head into August, the direction of the market will largely depend on how these factors play out, making it crucial for investors to stay alert for any short-term bullish or bearish signals.

Technical Analysis

The Natural Gas market is currently exhibiting bullish sentiment, as indicated by the 4-hour price trading higher than the previous close. Both the 200-4H and 50-4H moving averages confirm the positive trend, with the 14-4H RSI reading of 53.92 suggesting stronger momentum.

The market’s price comfortably exceeds the main support area, indicating robust bullish sentiment. However, caution is advised as the price approaches the main resistance area. Traders should closely monitor for potential signs of a reversal or continuation of the bullish trend in this highly dynamic market.