Natural Gas Forecast: LNG Export Flows Decline, While Demand Remains Strong Amid Heat Forecasts

Highlights

• Natural gas futures respond to heat forecasts and strong near-term demand.
• Weather outlook indicates hotter-than-normal conditions in the Lower 48 states.
• Decline in gas flows to LNG export plants, but rising gas exports to Mexico.

Overview

Natural gas futures are edging higher on Wednesday but remain inside Monday’s wide range, supported by forecasts calling for strong near-term demand, but capped by the need for updates on the weather. The price action suggests that the current forecasts for heat have been priced in. U.S. natural gas futures eased about 1% on Tuesday from a three-month high, reflecting lower demand expectations and a decline in gas flowing to LNG export plants.

Weather Remains Hotter than Normal

Forecasts indicate that the weather will remain hotter than normal in the Lower 48 states from June 28 to July 12. Gas-fired plants heavily rely on extreme heat to increase the amount of gas consumed by power generators for air conditioning purposes in Texas.Despite the record-breaking electric use projected by the Electric Reliability Council of Texas (ERCOT), which operates the state’s power grid, ERCOT has previously missed such demand projections due to storm-related power outages and consumer energy conservation efforts.

According to NatGasWeather for June 28-July 4, the southern US, particularly Texas, Oklahoma, and the Southwest deserts, will experience scorching temperatures with highs ranging from the 90s to 110°F, resulting in significant demand for natural gas in the region. However, weather systems moving through the West and East will bring showers and more comfortable temperatures in the 70s-80s, leading to lighter demand in those areas. Next week, the East will see a warming trend with temperatures reaching the 80s to lower 90s, while Texas will experience a cooling trend with temperatures dropping from the 100s to the 90s.

LNG Flows to Plants Down in June

Gas flows to the seven major U.S. LNG export plants have declined in June, averaging 11.4 billion cubic feet per day (bcfd) compared to 13.0 bcfd in May. Maintenance activities at facilities like Cheniere Energy Inc’s Sabine Pass and Corpus Christi have contributed to this decrease. However, U.S. exports to Mexico have risen, averaging 6.6 bcfd in June, compared to 6.2 bcfd in May.

Output Down, Demand Up

Average gas output in the U.S. Lower 48 states has fallen to 101.5 bcfd in June from a record 102.5 bcfd in May. Daily output is expected to reach a preliminary 20-week low of 99.2 bcfd on Tuesday. This is primarily due to declines in Pennsylvania and Texas. Despite this, Refinitiv forecasts that U.S. gas demand, including exports, will rise from 97.0 bcfd this week to 102.2 bcfd next week, indicating an increase in overall demand.

Forecast: Bullish but Nearing Overbought

The fundamentals support further upside activity with output down in June, while demand has been strong. Furthermore, hot temperatures are expected to remain in place, especially in Texas, until at least July 4. Traders should be a little cautious chasing the market higher because of overbought technical conditions. Additionally, weather forecasts could change at any time, meaning volatility has been heightened.

Technical Analysis

Natural gas prices are showing slightly bullish sentiment as the current price of 2.858 remains above the 200-4H moving average of 2.416 and the 50-4H moving average of 2.632. The 14-4H RSI reading of 71.30 indicates an overbought market condition.

However, the price is approaching the main resistance area at 2.998, suggesting potential resistance ahead. Our work identifies the main support area as 2.333 to 2.285. However, some will consider the former resistance at 2.681 to 2.717 new support.

Overall, the market sentiment leans towards bullish. However, traders should be cautious of a potential price correction due to the overbought RSI. Continue to monitor the price action in relation to the resistance and support areas.