Natural Gas Runs Ahead Of Its Fundamentals

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After rallying for six straight sessions, natural gas prices hit their highest level in 22 months before settling in to a tight consolidation range. However, those forecasting the energy commodity’s long-term trend has turned bullish need to tread cautiously. When prices are not correcting despite the obvious bearish fundamental backdrop, chances are that speculators have gained control over the market. The main problem with these “not so smart money” operators is that when one big player goes short, the domino effect can affect all those that bought at the top.The result of situations in which the market is overwhelmingly on one side of a trade can lead to a quicker correction as sentiment tips.

Two Main Seasonal Peaks

Like crude, natural gas has inched its way higher since bottoming during the spring of this year. Much of the grind higher was due to output cuts, as producers reacted to prices dipping below breakeven levels during the prolonged tumble in natural gas. The latest strength in prices is largely a function of Hurricane Matthew and the anticipated damage to production within the Gulf Coast. However, Matthew’s minimal impact, and the over-enthusiastic speculative charge was just what the well operators were waiting for to hedge their future production. With prices trending above their breakeven costs, producers are effectively able to lock in prices in the event of another dramatic slide in prices.Now that natural gas is entering its late October seasonal peak, prices seem to have moved ahead of fundamentals, suggesting a heightened potential for a correction.

The natural gas market is typically defined by two main seasonal peaks. The first occurs during spring months and the other during the final weeks of October. The current demand and supply mismatch is strongly indicated by storage injections last week coming in at 80 billion cubic feet, over 11 BCF higher than the consensus estimate of 69 BCF. When taken in tandem with less than anticipated damage to natural gas installations across the Gulf of Mexico, these factors suggest prices have moved well beyond their average seasonal peak. The peak may become more evident as investors realize the market is still flooded with supply, while demand remains tepid on a seasonal basis. However, despite domestic factors that are weighing on prices, there are some external factors that may put a floor in US natural gas prices.

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Stacy Barendse 5 years ago Member's comment

I don't see that only 94 nat gas rigs operating now as opposed to 1600 in 2008 as being a "obvious bearish fundamental".