More Weakness Ahead For Natural Gas?

| July 29, 2013 | 0 Comments

natural gasNo doubt about it, July has been a remarkably boring month in the natural gas market.

In what’s usually a seasonally strong period for the commodity, the past few weeks have been filled with investor indecision.

As a result, the commodity has done nothing but trade in a tight 20-cent range between $3.55 and $3.75.

Take a look…

Natural Gas

As you can see, natural gas has been stuck in a clearly defined trading channel (blue lines) since late June.  With the exception of short-lived jump on July 18th, it’s fair to say natural gas has been stuck.

What’s going on?

As I mentioned in my May 10th article, the Spring months are seasonally weak periods for natural gas.  Prices generally move lower in May and early June as investors eye growing US inventories.

But once higher temperatures arrive in July, it usually changes the market’s tone from slightly bearish to bullish.  As consumers start feeling the summer heat, they inevitably crank up their cooling systems.  Of course, that increases electricity demand and pulls extra natural gas out of storage.

Last year, natural gas jumped from $2.80 mmBtu up to $3.20 in July as sweltering heat enveloped the eastern US, a key gas consuming region.

But things are a little different this year…

While we’ve definitely seen some very hot days over the past few weeks, there hasn’t been sustained heat like we saw last year.   In other words, each week of high temperatures is met by a cooling trend.

And that’s not all…

As you may remember, last year’s summer trading was ruled by the idea that utilities were switching into natural gas due to its relative cheapness versus coal.  The coal-to-gas switching trend increased natural gas demand, which in turn sent prices higher.

But with natural gas prices around 20% higher than last year at this time, many utilities have switched back to burning coal.  

Add it all up and it becomes apparent that the natural gas market is well supplied… 

In fact, last week’s EIA natural gas inventories are currently sitting at 2,786 billion cubic feet (bcf).  While that’s 399 bcf lower than last year’s storage level, it’s basically in-line with the 5-year average of 2,832 bcf.

Take a look at this chart from the EIA…

EIA Chart

As you can see, this year’s storage trend (blue line) is smack dab in the middle of the 5-year range.  And while that’s certainly better than last year’s blatant oversupply situation, inventories currently aren’t low enough to send natural gas prices higher.

So where are natural gas prices headed next?

With cooler weather forecasted for key cooling regions this week and next, traders are pricing in a larger than average upcoming EIA inventory builds.   As a result, natural gas is quickly dropping below technical support at $3.50 in this morning’s trading.

Bottom line…

Unless there’s a massive heat wave that boils the US in August (which long-range forecasts don’t see right now), it’s highly likely that natural gas will trade lower in coming weeks. 

In fact, I wouldn’t be surprised to see gas trade at $3.20 by the end of August.

Until Next Time,

Justin Bennett

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Category: Energy, Natural Gas

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.