Natural gas prices surged on Friday, driving the market higher for the week, and possibly generating enough upside momentum to challenge the May 5 top at $2.588 this week. The skyrocketing rally may have been fueled by a spike in spot gas prices, which rallied as sweltering heat led to a $2-plus gain in California.
Last week, October natural gas futures settled at $2.495, up $0.119 or +5.01%.
The weather picture remains mixed with most of the country hot and the heavy-demand East Coast region comfortable. Meanwhile, lower production and a rise in liquefied natural gas (LNG) feed gas demand continues to provide support.
US Energy Information Administration Weekly Storage Report
The EIA reported Thursday that domestic supplies of natural gas rose by 58 billion cubic feet for the week ending August 7. That was slightly higher than the average increase of 51 billion forecast by analysts polled by S&P Global Platts.
Total stocks now stand at 3.332 trillion cubic feet, up 608 billion cubic feet from a year ago, and 443 billion cubic feet above the five-year average, the government said.
The government report also showed that broken down by region, the Midwest added 26 Bcf into storage, and the East added 20 Bcf. Mountain and Pacific inventories each grew by less than 5 Bcf, while the South Central region reported a net injection of 5 Bcf, which included a 1 Bcf build into salt facilities and a 5 Bcf build in nonsalts.
Weekly Weather Outlook
According to NatGasWeather for August 14 – August 20, “Very warm to hot conditions will continue across the western and southern U.S. with highs of 90s and 100s, hottest California and the Southwest. Comfortable highs of 70s to 80s will bring light demand from the Midwest to the Northeast as weak systems track through. Stronger weather systems will arrive across the eastern half of the U.S. next week with highs of 70s to 80s for moderate national demand although very hot over the West.”
It’s hard not to think the natural gas market will be bullish this week, given the strong performance on Friday. However, the tendency the last few years has been to sell the upside price spikes so we have to respect that trading style.
Momentum was strong at the end of the week so there may be some carryover. The changing fundamentals may be enough to support the market, but probably not strong enough to support a mid-to-long-term rally.
Friday’s rally was a surprise and may have been fueled by massive short-covering. If short-covering was behind the rally then prices will retreat or consolidate this week especially if the forecasts show cooling temperatures, higher production and weaker LNG demand.
Our work over the weekend suggests Friday’s surge was fueled by a reaction to a jump in cash prices in California, which may have caught traders off-guard. If users gain control of prices then futures could retreat, however, if prices remain lofty in the region then natural gas futures could remain underpinned.
Basically, this week it comes down to trading momentum or the fundamentals. In order for the market to continue the rally, bullish momentum traders are going to have to continue to ignore the fundamentals. If the fundamental traders decide to stop the rally by hedging the move then upside momentum could come to a halt.