Weather Forecasts Set Bullish Tone

Overview

In a week of continuous gains, natural gas futures are on the rise again, supported by bullish traders who foresee an extension of the upward trend. A smaller-than-expected storage build and a drop in daily output contributed to Thursday’s jump of about 6%, pushing the futures to a two-week high. What’s more, weather forecasts are reinforcing this upward momentum, with expectations of the hottest pattern in 40 years for July 25-31.

EIA Reports Smaller-than-Expected Build

The U.S. Energy Information Administration (EIA) reported a storage increase of 41 billion cubic feet (bcf) of gas during the hotter-than-normal week ended July 14. Surprisingly lower than analysts’ predictions of 48 bcf, this data suggests a tightening supply situation. In comparison to last year’s 35 bcf build and a five-year average increase of 45 bcf, it is evident that demand is outpacing expectations.

The scorching weather has led to a record surge in power demand in Texas, the state’s power grid operator, ERCOT, reported. Air conditioners are working at full capacity as homes and businesses strive to escape the relentless heat wave. Texas relies significantly on gas-fired plants, which accounted for about 49% of the state’s power in 2022. This surge in gas consumption for power generation is further fueling the demand for natural gas futures.

Russian Threats Drive European Prices Higher

An additional factor contributing to the boost in U.S. gas prices is geopolitical tension. Russian threats to Ukrainian ships and attacks on its Black Sea ports have put international sanctions in focus. Russia demanded the lifting of sanctions restricting fertilizer exports, which could increase Russia’s demand for gas as it is the primary feedstock for fertilizer production. This development is not only affecting the U.S. market, but gas prices in Europe rose by about 9% on Thursday.

Looking ahead, gas output in the U.S. Lower 48 states has seen a slight rise in July, but daily output has experienced a recent decline. With meteorologists forecasting prolonged hot weather in the Lower 48 states until at least August 4, gas demand is expected to continue surging. Alongside the rise in demand from LNG export plants, Refinitiv forecasts U.S. gas demand, including exports, to reach 106.8 bcfd next week, surpassing earlier expectations.

Short-Term Outlook:  Extreme Heat Driven Demand

In conclusion, natural gas futures are on a bullish run, backed by robust demand, a smaller-than-expected storage build, and geopolitical factors. The extreme heat wave in Texas is boosting gas consumption for power generation, while international sanctions could lead to increased gas demand from Russia. With the weather outlook remaining hot and LNG exports driving up demand, the foreseeable future of natural gas futures points to a bullish trend.

Technical Analysis

The natural gas market shows bullish sentiment as the current 4-hour price of 2.740 hovers above the previous 4-hour close of 2.745. Additionally, it remains well-positioned above the 200-4H moving average of 2.574 and the 50-4H moving average of 2.631, indicating potential support levels. The 14-4H RSI reading at 75.15 further confirms strong bullish momentum.

The momentum is strong but buyers could face challenges on a test of the resistance zone at 2.782 to 2.836 because of the overbought RSI signal. Nonetheless, we are in a weather market so sometimes the fundamentals trump the technicals.