Unusual Weather Patterns Creating A Unique Profit Opportunity In Natural Gas
Natural gas rose on Monday after closing lower in the last session as concerns over a fuel surplus fade. Thanks to a hot summer with higher temperatures requiring above normal usage of air conditioning, natural gas consumption by power generators has been exceptionally strong, while the production has lagged.
Last Thursday, the U.S. Energy Information Administration reported an inventory injection of 22 cubic feet of natural gas for the week ending August 12. The total number of stocks stood at 3.339 trillion cubic feet, 10.9% higher than the same period last year and 13.8% above the five-year average. However, in general, U.S stocks in inventory are rising at a much slower pace than normal for this time of the year, as mounting electricity demand from air-conditioner usage has forced power producers to burn more gas.
Temperatures have been consistently higher than normal in the last 3 months across most of the U.S, spurring record air-conditioning demand. Total air-conditioning demand so far in 2016 has been 4% higher than a year ago and 12% above the long-term average. Additionally, cheap natural gas is a major encouragement for power producers to maximize gas-fired generation at the expense of other fuels.
Meanwhile, low prices have also discouraged the drilling of new wells after production grew strongly in 2014 and 2015, which explains the steady retreat in the oversupply numbers in natural gas over recent months. Natural gas stocks started the year at a record high, owing to mild weather in February and March, but the excess has been whittled away by strong power producer consumption. By the middle of August, stocks were only 312 billion cubic feet (bcf), down significantly from the figures in mid-March, which were at 1,014 bcf.
Stocks are still at a record high for this time of the year, around 2% higher than the previous peak and 14% higher than the five-year average, but the continuing heatwave of the seemingly unending summer across eastern United States may keep the stock builds at lows.
Fig: Natural Gas H4 technical chart
Natural gas prices remain comfortably above 2.582, which represents the 23.6% retracement level. Despite various failed attempts by sellers to push prices below this level, prices seem stable in this zone. The market is in favor of the bulls with the confirmation from the RSI (14) that has surged above the 50 line. Prices have moved past both the short-term and the long-term moving averages and reversed into a bullish posture, after the recent dip in the first two weeks of August. Further support is being provided via the stochastic lines that are heading upwards.
Buy Stop at 2.700, Take profit at 2.760, Stop loss at 2.654