Commodity Blog

Commodity news, technical and fundamental analysis, market data on precious metals, energies, industrial metals, and soft commodities

Archives

June Natural Gas Outlook

May 31, 2016 at 14:34 by Wade Powers

May 26th EIA Report

One of the few bearish signals on natural gas, The United States Energy Information Administration natural gas report released on May 26th showed an abnormally high storage level, reporting 2,825 billion cubic feet compared to 2,069 billion cubic feet this time last year. Current storage numbers also eclipse the 5 year average by almost the same amount. A reversal of gains in injection numbers for the coming months is needed to balance out the discrepancy.

One clear bearish signal is the fact that all regions reported a higher holding of gas over the last two weeks. While this may be due to a cooler than normal spring season in the United States, there is the possibility that this is the new normal. Traders should watch for a reversal of injection numbers in the short term as a clear bull signal, while keeping in mind the need for above average cold during the upcoming winter months to continue that trend.

Lagging prices marked the end of May and should continue into early June. Early in May natural gas rose to 2.3 dollars per million British thermal unit (MMbtu), but saw the month end at 2.169 dollars per MMbtu. At this time of year especially, weather is the single biggest indicator of natural gas futures.

May Natural Gas Price Chart

Weather Outlook is Extremely Bullish

Natural Gas is the most popular form of energy used to power air conditioner units for millions of Americans. As such, there is a direct correlation between the temperature and the cost of natural gas. Weather outlooks are not always accurate, but the meteorologists are actually quite good at their jobs, and usually come pretty close with their projections.

The 6–10 day outlook from the National Weather Service Climate Prediction Center for the start of June looks marginally bullish. Many of the western states and southeast coast of the United States predicted to have above average temperatures. That being said, large population zones in the Northeast Corridor and Texas are predicted to be at below average temperatures. Traders can only expect a slight bump in prices based on the 6–10 day outlook, if any at all.

6-10 day outlook

8–14 day outlook does not show much difference, with basically the same fundamentals as the 6–10 day outlook. There is a noticeable but slight increase in overall above average temperature projections over this time period, and that looks to continue on into the heart of summer months.

For the month, a natural gas play looks like a solid idea. The first two weeks of June weather look to produce a marginal at best influence on pricing. That, in combination with natural gas at a 10-week low in price, should make for a comfortable entry into the market during this shortened holiday trading week. The one month projection from the Climate Prediction Center shows a small area of the Midwest looking at below average temperatures, with the rest of the nation at or exceeding averages.

As we can see on the map below, the Climate Prediction Center is calling for above average temperatures over the next three months for almost the entirety of the United States. The air conditioners will be running more than normal, which is likely to spike the price of natural gas. Positions established early in June have a good chance mature to profitability before the end of summer, if not much sooner.

NOAA 3 month weather outlook

Conclusion

Two factors, weather and gas storage injection rates, will determine the fate of natural gas in June.

Traders should closely watch the weekly net changes in storage, as rising injection numbers will put storage capabilities at near capacity. Any movement towards the downside in injection numbers is a clear bullish signal. Over-supply is in fact the only foreseeable thing standing in the way of rising prices.

Should weather predictions be mostly accurate, the overabundance of storage will cause prices to remain at current levels or even dip a little. Above average weather forecasts for the rest of the summer months mean the short term is a fertile ground for establishing a strong position.

Traders can start to establish positions incrementally at the current level of $2.169 and feel comfortable picking up more contracts if there is a slight dip to around the $2 level. Full positions should be established no later than June 10th when temperature averages forecast higher. Exit level is around the previous $2.30 resistance line, where profit taking is encouraged.

If you have any questions and comments on the commodities today, use the form below to reply.

Leave a Reply

required
required  

Navigation

Menu