Natural Gas Forecast: Power Generation Demand Holds Key to Price Movement

Highlights

• Natural gas prices show signs of recovery through short-covering and speculative buying.
• Decline in U.S. natural gas futures driven by maintenance, milder weather forecasts, and decreased demand.
• Power generation demand and weather outlook crucial for shaping natural gas market.

Overview

Natural gas prices are showing signs of recovery on Wednesday as short-covering and speculative buying emerged in the market. However, a major catalyst, likely related to weather, is still needed for a significant speculative rally.

To recap, Tuesday’s events saw a decline in U.S. natural gas futures. This decline was driven by lower gas flows to liquefied natural gas (LNG) plants due to maintenance, forecasts of milder weather, decreased demand over the next two weeks, and a drop in global gas prices.

Hotter Weather Will Set Bullish Tone

Despite these factors, power generators continued to burn more gas for electricity generation as wind power remained low and forecasts indicated hot weather in the coming weeks. The weather outlook played a significant role in shaping the natural gas market. After experiencing hotter trends over the weekend, the overnight weather data showed a reversal with cooler trends for the 8-15-day period. Although the front 8-day period indicated light demand, strong demand was expected from June 15-20. However, any decrease in heat indicated by the weather data could lead to disappointment, considering the substantial surpluses expected to reach around +380 billion cubic feet (Bcf). Meteorologists projected mostly normal weather conditions in the Lower 48 states until June 14, followed by hotter-than-normal conditions from June 15-21.

Lower US Demand, Higher Exports to Mexico

Refinitiv forecasted a decline in U.S. gas demand, including exports, from 95.4 billion cubic feet per day (bcfd) to 94.1 bcfd in the upcoming week. This forecast, lower than Refinitiv’s previous outlook, reflected the impact of low wind power forcing power generators to burn more gas. Conversely, U.S. exports to Mexico showed an increase, rising to an average of 7.5 bcfd in June compared to 5.9 bcfd in May.

US Gas Output Declines, Supply Constraints

On the supply side, gas output in the U.S. Lower 48 states decreased to 102.3 bcfd in June, down from the monthly record of 102.5 bcfd in May. Preliminary data suggested a potential drop to a six-week low of 101.3 bcfd on Tuesday. Supply to the major U.S. LNG export plants also decreased to an average of 12.0 bcfd in June, primarily due to maintenance activities at facilities such as Cheniere Energy Inc’s LNG.A Sabine Pass in Louisiana.

Traders Seek Weather Catalyst for Short-Term Bullish Outlook

The natural gas market needs a weather-related catalyst for a significant speculative rally. Hotter-than-normal conditions are expected over the near-term. Recent price declines were influenced by maintenance and milder weather forecasts. Increased demand during air conditioning usage could drive prices up. Monitoring weather patterns and power generation trends is crucial for assessing the short-term outlook.

Technical Analysis

Natural gas is edging higher on Wednesday, putting the market in a position to challenge the PIVOT at $2.190. Since the main trend is down, sellers are likely to defend this price level. However, overtaking it could trigger an acceleration to the upside with $2.465 (R1) the next potential target.

A successful defense of $2.190 will mean the market is still in the strong hands of the bears. If this continues to generate enough downside pressure, we could see a retest of the recent bottom at $2.136 and eventually $1.761 (S1).

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