Cautious Trade but Supported by Strong Demand Outlook

Overview

Currently, natural gas prices are experiencing a decline as comfortable weather systems sweep through the Midwest and Great Lakes region. However, the market remains well-supported due to expectations of high national demand over the next 15 days. While the news is being factored into the market, fresh bullish weather updates are needed to trigger an upside breakout in the near term.

Supply and Demand Outlook

In Texas, the Electric Reliability Council (ERCOT) is projecting record-high electricity usage as the latest heatwave prompts increased air conditioner usage. This leads to heightened gas consumption in gas-fired plants, which account for a significant portion of the state’s power generation.

Additionally, Equitrans Midstream, a major U.S. energy company, is exploring legal options, including an emergency appeal to the U.S. Supreme Court, after the construction of the West Virginia-Virginia Mountain Valley gas pipeline has been halted. This pipeline plays a crucial role in unlocking more gas supplies in the pipeline-constrained Appalachian region.

Price Volatility and Historical Trends

Historic volatility for natural gas futures is currently at its lowest level since April 2022, with limited price movements in recent weeks. The daily volatility has witnessed both record highs and lows in the past. However, the current historic volatility average for this year stands at a record high of 85.4%. Comparatively, the five-year average from 2018 to 2022 is 57.9%.

Short-Term Forecast

According to Refinitiv data, gas output in the U.S. Lower 48 states is rising in July and has the potential to surpass the previously achieved monthly record high in May. However, daily output is currently experiencing a decline, primarily due to decreased production in Texas, West Virginia, and North Dakota. Nonetheless, meteorologists are projecting that hotter-than-normal weather will persist in the Lower 48 states at least until July 25.

Consequently, Refinitiv forecasts an increase in U.S. gas demand, including exports, from this week to the next. Although gas flows to major LNG export plants are rising in July, they still remain below the monthly record due to ongoing maintenance.

In summary, natural gas prices are currently declining due to comfortable weather conditions, but the market remains supported by anticipated high demand. Record-breaking electricity usage in Texas and legal issues surrounding a significant pipeline project in the Appalachian region contribute to the overall supply and demand dynamics. Traders should closely monitor fresh bullish weather updates for potential short-term price breakouts in the market.

Technical Analysis

Natural Gas market sentiment remains neutral to slightly bullish despite a slight decline from the previous session. The current price of 2.706 is trading above both the 200-4H and 50-4H moving averages, indicating potential support. The 14-4H RSI at 54.91 suggests a balanced sentiment without extreme overbought or oversold conditions.

The main support area is observed between 2.487 and 2.542, while the main resistance area is between 2.782 and 2.836. With the price currently above the main support but below the main resistance, the market sentiment leans slightly towards bullishness. Traders should closely monitor price action in relation to these key levels for potential market shifts.

Traders’ reaction to the 50-4H level at 2.688 is likely to determine the market direction on Wednesday, considering its proximity to the current price.