Will Natural Gas Experience A Setback As The Seasons Change? Demand-Supply Equation Bullish

Natural gas futures prices are talking small steps on Monday after a significant loss on Friday due to a strengthening U.S dollar. Before that, natural gas spiked to $2.883 per million British thermal units (mmBTU) owing to an unexpected fall in reserves in the U.S, but had to give back the gains to close the week at $2.757 per mmBTU.

In the weekly inventory report on Thursday, the U.S. Energy Information Administration reported that natural gas inventories in the U.S. declined by 6 billion cubic feet (Bcf) in the week ended July 29, as a result of the recent heat wave which prompted households to ramp up usage of air conditioning. Approximately 50% of US households use natural gas for heating and cooling. The sharp decrease in last week’s figures was in contrast to forecasts for an increase of 3 billion.

However, the peak summer heat is expected to come to subside as updated weather forecasts are predicting mild weather across most parts of the U.S. over the coming days. This means the demand for natural gas, which is used to power air conditioning, shall witness a fall.

PointLogic reported that US natural gas consumption fell for the second time in the last nine weeks by 2.8% between July 28 and August 3, 2016. Gas flows to the power sector fell by 8.3% week-over-week

On the supply side, U.S. producers have largely used drilled but uncompleted wells (DUCs) to maintain production levels flat around the 71 Bcf per day over the last several months. Thanks to pipeline maintenance, there have been temporary dips below 70 Bcf per day but temporary supply disruptions won’t affect storage much.

PointLogic further reported that US natural gas supplies rose by 0.2% to 81.2 Bcf per day between July 28 and August 3, 2016. Meanwhile, Baker Hughes reported that natural gas rigs were trimmed by 5 to 81 last week.

At the moment, the natural gas market is quiet as both sides are retreating. Most gas producers are saying that they are waiting for the winter to bring on additional supplies.  How cold the winter gets will affect the future demand and the production plans of producers. In the long-term, the U.S. Energy Information Administration has forecast that production will rise slightly in 2016 and 2017 due to rise in production in US shale regions and increasing demand from Mexico.

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Fig: Natural gas H4 technical chart

Natural gas is pulling back slightly from the lower trend line marking the current trading channel. Although the 2 moving averages are hanging above the price action, a break through this trend line and channel is not currently expected, as the last time when two MAs were pointing downwards and were about to cross over, prices unexpectedly rocketed upwards and reversed into a bullish trend. ADX (14) has ticked up to 32.4446 but the –Di line is pointing downwards, which suggests that bearish pressure is minimal at this time.

Trade suggestion

Buy Stop at 2.750, Take profit at 2.770, Stop loss at 2.730

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