Natural Gas Breaks Down: EIA Willing, That Is

Natural gas prices appear to have broken down. Below we show the latest daily candle just printed for the August natural gas contract, which shows a successful break below $2.70 support and the 30-day moving average. There's some weak support around the $2.6 level, but real support does not look to come in until closer to $2.55, where the 50-day moving average is sitting. 

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This should not come as much of a surprise. Yesterday, we wrote that the slumber of natural gas prices in this tight range was likely to end, and last week we were warning of the risk of a break down as well, seeing background fundamentals gradually deteriorating while the prompt month contract was supported by hot weather forecasts. This morning we issued a report to subscribers warning that bearish weather forecast risk was finally increasing more significantly in the medium and long-range, and we saw that today could be the day that natural gas prices more significantly broke down, as seen below. 

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Still, though the breakdown today occurred as we expected, this does not necessarily make it a lock. The Weekly Natural Gas Storage Report from the Energy Information Administration is due out tomorrow, and if that shows a leaner storage build than expected then we could see prices shoot right back into the range they were trading in previously. In this way it can be important to always keep an eye on fundamentals when trading natural gas on a technical basis, as even though this chart now shows more weakness ahead we could see a short-term spike tomorrow (that could even act as another shorting opportunity). 

When reviewing the data for tomorrow, we see that most analysts expect a net implied flow somewhere in the upper 30s or lower 40s. The 5-year average is 61 bcf and the number last year was 70 bcf. However, the injection in 2012 was a measly 26 bcf, an indication that once again it is likely we inject more gas into storage than we did for the same week in 2012, even though we have even more gas already in storage. This at least partially explains the near-term cap we see for natural gas prices, and why over the past month we have seen the September (U6) and October (V6) contracts sell off more than any other. 

Additionally, the selling today was heaviest along the prompt month August contract, indicating that slightly cooler medium-term forecast trends may have been at least partially to blame. 

Still, the strong selling that we have seen across the natural gas strip could be a sign of more pain to come in the coming days and weeks without either a more significant demand pickup or production slowdown. 

For now, our eye will be on EIA data, to see if the market may have missed either one of those two surprises that could send prices right back higher, restoring strength to the daily natural gas chart.