Natural Gas Price Fundamental Daily Forecast – Struggling to Gain Traction as Short-Sellers Raise Stakes

Natural Gas futures are trading higher after recovering from an early session setback that erased about 4% from the previous session’s close. The catalyst behind the selling pressure were forecasts calling for cooler temperatures and lower cooling demand from consumers and businesses into the end of August than previous expected.

At 17:27 GMT, October natural gas futures are trading $8.824, up $0.080 or +0.91%. The United States Natural Gas Fund ETF (UNG) is at $30.47, up $0.21 or +0.69%.

The market was also driven lower by a more than 5% drop in crude oil prices, and the on-going outage at the Freeport liquefied natural gas (LNG) export plant in Texas, which is not expected to come back online until October. In the meantime, more gas is available in the United States for utilities to inject into stockpiles for the winter heating season.

Oil-to-Gas Ratio Falling

The oil-to-gas ratio is used to capture the relative valuation of these two important energy commodities. The higher the oil price to natural gas ratio, the greater the price of oil relative to natural gas. If the ratio declines, then this means the difference in the prices of the two commodities is narrowing.

Oftentimes, traders will purchase crude oil futures when the oil price to natural gas ratio is below its historical averages, believing that they are receiving a bargain price for oil. Likewise, they will purchase natural gas futures when the ratio is above its historical norm. The same strategy can also work in reverse, selling oil futures when the ratio is high and selling natural gas futures when the ratio is low.

Currently, the oil-to-gas ratio is at 10-to-1. So far in 2022, crude has traded about 17 times over gas. That compares with crude’s average premium over gas of 19 times in 2021 and a five-year average (2017-2021) of 20 times. On an energy equivalent basis, oil should trade only six times over gas.

Short-Sellers Guiding the Market

Last week, gas speculators boosted their net short futures and options positions on the New York Mercantile and Intercontinental Exchanges for a third week in a row to the most since March 2020, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders report.

Short-Term Outlook

An intraday turnaround of today’s magnitude usually suggests a possible bullish change in the mid-session weather pattern.

The market was under pressure earlier in the day after weather models trended cooler over the weekend, including a small loss of 2-3 cooling degree days (CDD) from the European model, according to NatGasWeather.

Additionally, “…, weather patterns are viewed as seasonal/neutral going forward, a significant change compared to solidly bullish weather patterns finally arriving.”