Written by: Bryen Deutsch
The time has come for natural gas traders to refocus on US weather outlooks. June 1st marks the official start of hurricane season. While we did see an early season storm on the Atlantic seaboard
a few weeks ago, the bulk of cyclone activity occurs during the next 6 months. The past 2 years the US has seen below normal tropical storm activity and expectations are for this to continue for a third year in a row due to El Nino. However, below normal can still mean 6-12 named storms. When Hurricane Andrew struck in 1992, the US was in the midst of a moderate El Nino.
Furthermore, Memorial Day has passed and we are now entering the hottest part of the year where cooling needs peak in the US and natural gas usage by power plants typically spikes. Natural gas traders remember the summer of 2014 where temperatures were cooler than normal. In fact, natural gas prices topped out just under $5 mid June 2014 and dropped substantially into July and then flat lined the remainder of the summer as below normal temperatures occurred throughout most of the US. We have not gotten close to the $5 level since that time and the market is currently hovering above the lowest levels we have seen in years.
Current inventory levels are higher than last year at this time but are in line with the 3 year and 5 year average. Last week, nat gas rigs increased by 3 to 225 rigs but are 101 rigs below a year ago at this time. In 2012, the last time natural gas prices traded at these levels, rigs for both gas and oil and gas were double what they were at the current time. Natural gas consumption for electricity generation is approximately 10% lower than the peak in 2012 when prices hit rock bottom but usage is still running close to the five year average and well above the 10 year average.
Taking current prices and fundamentals into consideration, it is tough to think that there is considerable downside at this point. Current weather models do not show any extreme heat or tropical activity at this time. However, close eyes must be watched on weather as any shift in forecasts will likely encourage a short covering rally. Right now, the market is trading below the 21, 50, 100 and 200 day moving averages. There are a couple gaps to be filled on the continuation chart between $3.500 and $4.500 which will serve as likely targets when the market decides to make a move higher.
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