Natural Gas Forecast: Mild Weather, Maintenance Work Weigh on Prices

Highlights

• Natural gas prices decline due to revised demand forecasts.
• Maintenance work and Canadian wildfires reduce natural gas demand.
• Mild weather conditions result in decreased volatility for natural gas.

Overview

Natural gas is experiencing a slight decline on Monday, following a 4% drop in the previous session. The decrease can be attributed to revised forecasts indicating lower demand in the upcoming two weeks. These revised forecasts are currently limiting any potential price gains. Adding to this, the mild weather observed throughout the year has resulted in historical volatility in natural gas futures reaching a 13-month low.

At 10:46 GMT, Natural Gas is trading $2.2015, down 0.0025 or -0.11%.

Mixed Weather Outlook Impacts Demand

As we look ahead to June 12-18, the weather pattern suggests an active week with weather systems traversing the United States, bringing showers, thunderstorms, and comfortable temperatures ranging from the 60s to 80s. This weather outlook indicates light demand for natural gas, except in regions such as the Southwest, Texas, the South, and Florida, where a hot ridge will lead to higher temperatures ranging from the 90s to locally 100s, resulting in stronger regional demand.

LNG Export Plant Maintenance Most Significant Influence

A significant factor contributing to the recent depressed demand for natural gas in the United States has been a decline in the volume of gas flowing to liquefied natural gas (LNG) export plants. This reduction is primarily due to maintenance work at various facilities and the associated pipelines. Interestingly, despite the decrease in U.S. gas output, a surge in global gas prices, and near-record exports to Mexico, the price of natural gas experienced a decline on Friday. This was coupled with an increase in gas usage by U.S. power generators for electricity production, prompted by a decrease in wind and solar power output, partly due to smoke from wildfires in Canada.

Rise in US Gas Power Generation Amid Price Decline

In response to the aforementioned factors, the proportion of power generated by gas in the United States rose to 45% last week, up from approximately 40% in previous weeks. Despite the recent decline in prices, the front-month natural gas prices were still up by around 4% for the week after experiencing a slight decrease of less than 1% last week.

Mild Weather Reduces Natural Gas Volatility

It is worth noting that the prevailing mild weather conditions this year have resulted in a notable reduction in historic volatility for natural gas. The 30-day close-to-close volatility currently stands at 62.2%, the lowest since May 2022. In contrast, historic volatility reached a record high of 177.7% in February 2022 and a record low of 7.3% in June 1991. The average historic volatility for this year has been 89.4%, compared to an annual record high of 92.8% in 2022 and a five-year (2018-2022) average of 57.9%.

Short-Term Outlook:  Volatility to Return

Downward pressure on natural gas prices stemmed from revised demand forecasts for the next two weeks. Maintenance work at LNG export plants and associated pipelines, along with decreased wind and solar power output caused by Canadian wildfires, contributed to the decline in demand for natural gas.

Despite the recent drop, prices remained positive for the week. The worst of the selling appears to be over, but without a catalyst, market rally remains uncertain. However, investors should brace for the return of month-long volatility as the current 30-day-close-to-close volatility stands at 62.2%, the lowest in over a year. The mild weather conditions observed throughout the year have also resulted in decreased volatility in natural gas futures.

Technical Analysis

Natural gas is edging lower on Monday while straddling the PIVOT at $2.190.

If regaining the pivot creates enough upside momentum then we could see a near-term rally into $2.465 (R1). However, not without a bullish catalyst, which seems to be missing from the equation.

A sustained move under $2.190 will signal a resumption of the downtrend with $2.036 the next target.

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