August Natural Gas Falls Into Expiry

Today was especially busy as the August natural gas contract went off the board, leading to some added volatility at the end of the day. The contract sold-off decently more than any other, as seen below. 

On a weekly basis, these losses pulled the August contract slightly lower so as to only be about even with the (minimal) gains seen by the winter contracts. On a monthly basis, this made the losses for the August contract rather extreme, especially seeing the record heat we have in the past couple of weeks. 

With attention away from the August contract and onto September, we see strong support for that contract around $2.60. That is where support was seen back in early June, and with the 50-day moving average at $2.63 and the 60-day at $2.59 we would expect to see some strong support in the coming days. Still, prices have reversed lower after morning rallies each of the last three days, a sign we may still have further lower to go. 

(Click on image to enlarge)

At least part of this seems weather-based, though some is likely to be technical in nature as well. In our Detailed Weekly Weather Update released each Monday we outline our natural gas sentiment through the week. This week we saw both weather and technical weakness combining for downside risk to significantly outweigh upside risk. 

(Click on image to enlarge)

Similarly, overnight and this morning we observed lingering bearish weather-related risk that we outlined in our Morning Update, when we saw any rallies off of key support levels likely to be limited. Through the day, spreads continued to indicate that winter contracts were struggling to get involved in the rally as well, eventually getting pulled down into the settle. 

(Click on image to enlarge)

The result is that even with a short-term forecast holding Population Weighted Cooling Degree Days significantly above average (as seen below), the prompt month contract was able to see sustained selling into expiry. 

(Click on image to enlarge)

Remaining natural gas bulls may take solace that in comparison to the prompt month contract, the winter contracts did not fall much today, nor did they approach the new lows they made for July exactly one week ago. 

(Click on image to enlarge)

Even with this, as we compile our Afternoon Premium Update for subscribers we are noting a decent amount of long-range bearish weather risk lingering, with the most recent run of the American GFS ensemble weather guidance increasing the risk of colder air intrusions across the East Day 14 which would limit early August cooling demand. 

With this expiry now behind us, and three days of selling in the books for the week, attention turns to the Energy Information Administration's Weekly Natural Gas Storage Report due out at 10:30 AM tomorrow. Another lean storage build is expected, though to stabilize the market we may need a miss to come under analyst expectations which are already quite low, generally from 20-25 bcf. To get the market rallying back up, we may need a miss of both the EIA data and a shift bullish in the weather.