Natural Gas Weighed Down By Stocks – Is This A Good Time To Pick A Bottom?
Natural gas prices have been in a down-move since last Tuesday and are currently suffering a fourth session of losses in the last five trading days. August witnessed prices dropping by more than 3%, and the market opened September with large losses on Thursday after data from the U.S. Energy Information Administration showed a larger-than-expected storage addition during the week through August 26th. However, the natural gas market’s surplus is expected to be nearing its end, as cheap prices are discouraging production but stoking consumption.
Reports from the U.S EIA showed that natural gas stockpiles rose by 51 billion cubic feet (bcf) for the week ended August 26. The figure was far beyond expectations of a 43 bcf increase, taking total stocks to 3.401 trillion cubic feet, up 238 bcf from a year ago and 334 bcf above the five-year average.
High temperatures have been the main driver for the rally in natural gas this summer. Consistently intense heat powered consumption of air conditioning, and raised demand for electricity. Although weather forecasts are still reporting hotter-than-normal weather across the eastern half of the country for the next two weeks, September has stepped in with less extreme heat and cooled down the usage of air conditioners.
Additionally, according to market sources, wind-power generation also increased enough during the week ended August 26th to have caused a reduction in power plants’ gas consumption by 1.6 bcf a day. These two factors could have helped cause the larger-than-expected storage number.
Nonetheless, the current surplus could be erased in upcoming months as onshore natural-gas production has been falling in June for the fourth consecutive month. According to Bakes Hughes, the number of rotary rigs drilling for gas in North America hit an all-time low at 81 last week.
Along with the reduction in drilling rigs, the cheapness of gas has nudged U.S power producers to replace coal with natural gas. Last year, the U.S electricity sector used 1.4 times as much coal by energy value as compared to natural gas. This is a huge contraction compared to a ratio of 4.5 times 20 years ago. The EIA had forecast in March that gas use would overtake coal for the first time ever, in 2016.
As financial markets in Canada and the U.S. are shut on Monday for the Labour Day holiday, the natural gas market is expected to be relatively quiet and thin today.
Fig: Natural Gas H4 Technical chart
Natural gas prices created a wide gap down on the market open and also broke below the ascending trend line which connects the higher lows for the period August 2nd to September 2nd. Lower lows being formed by the recent price action (over the last 1 week) and lower lows being created in the indicator window suggest that the bear is getting stronger. The 20-period MA has converged with the 50-period MA, signaling further declines.
Sell Stop at 2.750, Take profit at 2.730, Stop loss at 2.765