Natural gas prices have fallen into a slumber the last couple of weeks. Our blog from last Friday highlighted $2.68-$2.72 as support and $2.78-$2.82 as resistance. We have moved into both those ranges this week, but have failed to break out. Including today (using data from 1:30 PM, when the August contract was trading at $2.728), we are about to see our lowest 10-day annualized volatility print for the prompt mont contract since mid-March, with 30-day volatility approaching lows as well. As can also be seen, however, it is rare that this simplistic volatility measure stays that low for that long.

When looking at the prompt month contract for the past two months this makes sense; prices have barely moved over the past 10 days. The 30-day moving average has provided support and kept prices from breaking much lower from the highs set on July 1st.

Interestingly, this slumber has not been without day-trading action for the active natural gas traders. Though volatility has fallen off quite significantly, we have seen the average daily trading range fall off marginally less, indicating there have often been larger intraday swings that have not translated into large day-to-day moves. Even here, however, we see over the past week the average trading range is falling off with prices stuck in this stubborn range.

Part of this may be due to the number of technical levels we are stuck within. Our post last week analyzed the August contract specifically (currently the prompt month), where we saw that prices appeared stuck between the 20 and 30-day moving averages over the last few days. The same thing appears to be going on today, with prices holding on right on the 30-day August contract moving average (above we showed the 30-day moving average for the prompt month, which included some early values from the July contract before expiry).

The same support and resistance levels as last week linger; $2.7 is a critical level for the August contract with resistance around $2.8. Of course, these slow periods are quite common. In late April/early May we saw trading stuck within a relatively narrow range, though the daily moves of the front-month contract tended to be larger than those of the last few days.

But why are we seeing this in the historically hottest period in the East?

First, on a seasonal basis, natural gas prices are typically stable in the middle of July before concerns about storage drag them down in late July through August.

Additionally, natural gas stockpiles remain at record high levels despite a slower-than-average injection pace through the summer. This has capped upside already, with concerns about available storage come October and November.

To counteract these bearish headwinds, we have seen cooling demand remain significantly above average, keeping power burns elevated across the country. The National Weather Service forecasts Population Weighted Cooling Degree Days (PWCDDs) to be 26% above average through the next 7 days, with forecasts today again trending warmer July 23rd and 24th.

This expectation of warmth has continued to keep the prompt month contract bolstered, even as the September contract has moved into backwardation. This would seem to fit with seasonal trends, as short-term heat can only keep prices propped up for so long. However, as seen below, morning GFS ensemble forecasts for Friday July 29th (10 days out) continue to show widespread warmth across the country with no region likely to see significantly cooler than average temperatures.

The Climate Prediction Center 8-14 Day forecast is similarly hot.

Even with this heat, however, we have seen storage injections over the past couple of months generally exceeding those of 2012, preventing prices from rallying as much as they did in the 2012 supply glut. Higher production levels from 2012 are mostly to blame.

The result thus continues to look like a market held up by short-term hot weather, but with bearish fundamental undertones. Our one test of the $3 level resulted in significant demand fall-offs over the July 4th holiday, and we have not seen any sustained movement back upwards since then. Short-term heat could be enough for a couple more rallies, especially if spot prices began to get more excited about some short-term record heat than they currently are. However, we have not seen much evidence of skyrocketing cash prices, which would seem necessary in order to really rally this market. Otherwise, concerns over storage levels to end the injection season may dominate, limiting how much short-term upside there is in the natural gas market and pulling down prices through the second half of the summer into the fall should demand not increase further or production fall off markedly.