Warmer Autumn Weather Cools Off Natural Gas – Selling Suggested

Natural gas prices have been trading sideways to lower since late September as stocks have continued to build slowly due to cooler Autumn weather, that has reduced demand for air conditioning, thereby reducing power consumption.

The weekly report from the U.S. Energy Information Administration on Thursday reported that inventories held in storage in the U.S. rose less than expected during the week ended September 23rd. The EIA said stockpiles rose by 49 billion cubic feet last week, to 3.6 trillion cubic feet, up 90 billion cubic feet from a year ago and 220 billion cubic feet above the five-year average.

Lower gas prices have discouraged drilling activity and caused production to start falling, while consumption has been hitting record levels. All these factors combined have boosted natural gas higher to reach the highest levels since January 2015. Gas demand for electricity generation has been consistently rising, as cheap gas and climate policy have encouraged power producers to replace old and inefficient coal-fired power plants with more efficient and cleaner gas-fired power plants.

Changing weather conditions have also played a part in altering the supply-demand dynamic. According to official data, temperatures across the most populated areas of the United States have been consistently above normal since the end of May, which has spurred higher than usual demand for air-conditioning usage this summer and caused prices to rise.

The summer demand has now neared an end and autumn is the time when traders usually bet on the strength of the heating market. As a result, warmer-than-average temperatures are likely to lower the heating demand usually witnessed at this time of the year. Monday’s weather updates have reported above-normal temperatures settling in across nearly the entire U.S for the next two weeks. With temperatures expected to be moderately above seasonal norms, it is understandable that traders have been on the sidelines and let prices trade sideways.

In the long run, the drilling downturn has shrunk the earlier supply surplus. Small weekly additions to gas stockpiles have caused the surplus over last year’s levels to decline to just 2.6% more than the stockpiles last year, and the surplus compared to the five-year average to drop to just 6.5% above the 5-year average, as on Sept. 23. All data is based on the U.S. Energy Information Administration report from Thursday.

Meanwhile, the winter of 2016/17 is forecast to be colder than the record warm winter of 2015/16, ensuring higher gas consumption for heating. With more gas-fired power plants scheduled to start up over the next 12 months, natural gas prices are expected to continue rising in the last quarter of 2016.

Technical Analysis

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Fig: Natural Gas H4 Technical Chart

Natural Gas is trapped in a trading range between 2.875 and 2.935 after falling as much as 8.9% from the high at 3.165. Both the short-term and long-term MAs are placed above the price action and casting downward pressure on prices. The market may fall further towards the support zone at the 23.6% retracement level at 2.797 as the market currently remains gripped by bearish sentiment.

Trade suggestion

Sell Stop at 2.875, Stop loss at 2.935, Take profit at 2.797

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