Natural gas sold off more than 2% on Thursday and continued the decline in today’s trading, losing another 1.6% with a close at $3.013. For the week overall, the contract for November settlement was little changed.
Despite the slide in prices, analysts remain bullish. A glut leftover from last winter is shrinking heading into this winter when demand is typically highest. Historic late summer heat has led to record demand for gas-fired power at a time of declining drilling activity. Natural-gas futures prices have surged to their highest levels since the winter of 2015, and Thursday’s settlement was still the third highest of this year.
The supportive weather, along with other bullish elements of the fundamental balance, has altered market participants’ views of the coming winter as well. A year ago, production growth still was relatively strong and storage inventories were on track to enter the winter season at record levels. While inventories today remain historically strong, it appears a foregone conclusion that the end-of-summer storage peak will fall shy of the 2015 record. Meanwhile, exports have shown significant year-on-year growth and domestic production has shown declines since the first quarter. As a result, average NYMEX pricing for the coming winter sits near $3.30 per MMBtu, compared to winter 2015-’16 prices 12 months ago well south of $3 per MMBtu.
One can see on the chart that the support level at $3.065 was penetrated today, cancelling any bullish implications of the preceding advance and suggesting the contract may be in the process of forming an important top, as can be seen on the daily chart. The next level of support is at the at $2.918. A failure at this level to hold would increase the probabilities of a further sell-off to test the September low.
A stabilization in price and move back above the rising trendline defining the advance from the September low is required to suggest natural gas has the potential to move up. A failure to move back above this trendline in the near term would confirm the establishment of a failed test of resistance and suggest natural gas is heading lower.