August natural gas futures dropped below $2.00/MMBtu as near-term bearishness persisted, but shifts in sentiment and technical indicators implied higher prices when the September contract moves into the lead position on Tuesday.
The August New York Mercantile Exchange (Nymex) contract settled Friday (July 26) at $2.006 after briefly sinking below the $2.00 level. Losses continued in the Monday session as morning trade saw the contract sink to a $1.937 low. Traders sold into expiration at the close of business. September futures followed, sinking as low as $1.999. August futures were down 5.7 cents to $1.949, while September fell 1.9 cents to $2.032 at around 1 p.m. ET.
Investors appeared to be selling off their positions in natural gas futures as the price dropped, causing prices to move still lower, Carley Garner of DeCarley Trading told NGI. But the “long squeeze” was suspected to have run its course now that traders were mostly positioned into contracts with more time to expiration, Garner said.
Technically, a pivot line on the chart was offering support near $1.90, “with a high probability of holding and producing a rally,” Garner said.
Further, as September futures take center stage, Garner said the market could shift from discussing hot weather and air conditioning usage to cold weather and heater usage. “As the market prices in seasonality and recovers from what appears to have been fundamentally excessive selling, we should see a rebound into the $2.50ish area.”
Thus far, summer seasonality has proven bearish. Temperatures soared into the 100s across large swaths of the country and cooling demand climbed. Generally, though, lighter-than-average storage injections have slowly been wearing away at a hefty storage overhang.
According to U.S. Energy Information Administration estimates, working gas in storage was 3,231 Bcf as of July 19. This reflected a net increase of 22 Bcf from the previous week. Stocks were left 249 Bcf higher than the prior year and 456 Bcf above the five-year average of 2,775 Bcf.
The overhang continues to concern the market heading toward the fall shoulder season.
EBW Analytics Group’s Eli Rubin, senior analyst, noted that the past 11 final settlement sessions for injection-season contracts have averaged a 9.9-cent decline. That offers further near-term bearish risks at the front of the curve, Rubin said.
With a well-supplied gas market and production estimated by Wood Mackenzie above 102 Bcf over the recent seven days and expected to hold that level, “shut-ins in the Northeast are likely amid oversupply this fall,” Rubin said.
Rubin cautioned that production could rise if Northeast gas producers do not actively curtail supply. Still, as weather forecasts called for a sweltering August, he noted daily weather-driven demand could climb, and LNG feed gas demand was nearing 13.0 Bcf/d.
“If near-term support can hold, natural gas may form a double-bottom technical pattern—all suggesting moderate upside for the September contract after it becomes the Nymex front-month,” Rubin said.
Even without fundamentals to support the upside, risks of another substantial speculator short-covering event are a “latent bullish catalyst for natural gas,” Rubin said. “Current speculator short positions are near late-April levels before a significant short-covering event amplified a rally in early summer.”
Rubin said Friday’s Commodity Futures Trading Commission Commitments of Traders data reported an 11,000-contract decline in outstanding natural gas speculator short positions for the week ended Tuesday (July 23). Longs added 5,000 contracts to reach the highest level since early April.
“While seasonal fundamentals are bearish, short-covering possibilities could still lead gas prices higher over the next 30-45 days – even if fundamental justifications are thin,” Rubin said.
Mizuho Securities USA LLC’s Robert Yawger, executive director – Energy Futures, said, “Natural Gas is looking at resistance versus the five-month high of $3.159 on June 11 and the seven-month high of $3.392 on January 9.”
