Natural Gas Forecast: Rebounding on Bullish Weather Forecasts, Increased Demand Outlook

Highlights

• Natural gas futures rebound, offsetting previous losses.
• Forecasts predict hotter-than-normal weather, boosting gas demand.
• Gas prices experience volatility, impacting major oil companies’ earnings.

Overview

Natural gas futures are rebounding on Monday, offsetting the previous session’s loss and indicating favorable developments in the weekend’s weather forecasts. The rise in futures came after a decline of about 1% on Friday, which resulted from record gas extraction and a larger-than-expected storage build. However, the outlook has turned positive due to forecasts of hotter-than-normal weather, particularly in Texas, and an increase in feedgas to the nation’s LNG export plants.

ERCOT Forecasts Record-High Heatwave

The Electric Reliability Council of Texas (ERCOT), responsible for the state’s power grid, projected another heatwave in the coming week, which is expected to drive electricity usage to a record high on July 12. Given that Texas heavily relies on gas-fired plants, generators burning gas to power air conditioning contribute significantly to the state’s energy consumption.

Gas Storage Surpasses Expectations: EIA

The U.S. Energy Information Administration (EIA) reported that utilities added 68 billion cubic feet (bcf) of gas into storage during the week ending June 30, surpassing analysts’ expectations and exceeding the five-year average increase. This build in storage came despite a reclassification of 4 bcf from base gas to working gas in the Nonsalt South Central region.

Gas Price Volatility Hits Lowest

Historic volatility in gas prices has decreased, reaching its lowest level since April 2022, with limited price movements in recent weeks. However, gas prices have experienced a significant drop this year, plunging in various benchmarks worldwide, including the Dutch Title Transfer Facility (TTF) in Europe, the Japan Korea Marker (JKM) in Asia, and the U.S. Henry Hub benchmark in Louisiana. This decline in prices is expected to have a notable impact on the second-quarter earnings of major oil companies like Shell PLC and Exxon Mobil Corp.

Rising Gas Output Fuels Demand

Turning to supply and demand dynamics, average gas output in the U.S. Lower 48 states has increased in July, surpassing the previous month’s levels and on track to potentially exceed the monthly record high in May. Despite the reduction in oil and gas rigs, gas production has remained resilient, and recent data show the addition of gas rigs. Meteorologists forecast a transition from near-normal weather to hotter-than-normal conditions in the Lower 48 states until at least July 22, driving an expected rise in U.S. gas demand and exports.

Short-Term Outlook

In conclusion, natural gas futures are rebounding on Monday, countering the losses from the previous session. The positive shift was driven by forecasts of hotter weather, increased gas demand, and rising output. Despite recent price volatility, the decline in gas prices this year has impacted global benchmarks and the earnings of major oil companies. Supply and demand dynamics indicate a potential increase in gas production and consumption, fueled by weather patterns and export demands.

Technical Analysis

The natural gas market is showing slightly bullish sentiment as the current 4-hour price stands at 2.683, indicating a modest upward movement from the previous close of 2.666. The price remains above the key 200-4H moving average of 2.507, reflecting a positive long-term trend, while it is below the 50-4H moving average of 2.729, suggesting some short-term weakness. The 14-4H RSI reading of 49.48 indicates a neutral market sentiment.

The main support area ranges from 2.508 to 2.576, while the main resistance area is between 2.811 and 2.880. Traders should monitor price behavior in relation to these levels for potential market movements. Crossing to the strong side of the 50-4H moving average could create the momentum needed to challenge the resistance zone.