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Natural Gas Price Fundamental Weekly Forecast – Supported by Possible Oil Deal, but Demand Remains Key Worry

James Hyerczyk

Natural gas futures closed lower last week after hitting another multi-year low earlier in the week. The weakness was primarily driven by worries over demand destruction due to the impact of the coronavirus on the economy and forecasts calling for milder temperatures.

Last week’s U.S. Energy Information Administration (EIA) report was bearish, but traders ignored this news. Instead, shorts covered late in the week after the announcement of a possible meeting between Russia and Saudi Arabia to discuss production cuts.

Last week, May natural gas settled at $1.621, down $0.050 or -2.99%.

U.S. Energy Information Administration Weekly Storage Report

The EIA reported Thursday that domestic supplies of natural gas fell by 19 billion cubic feet (bcf) for the week-ended March 27.

Estimates ahead of the EIA report ranged widely from a withdrawal as small as 16 Bcf to as large as 31 Bcf. Bloomberg analysts were looking for a 31 Bcf withdrawal. A Wall Street Journal survey called for a 26 Bcf pull and the Natural Gas Intelligence (NGI) model estimated a 10 Bcf draw.

Last year, the EIA recorded a 6 Bcf injection for the similar week, while the five-year average stands at a withdrawal of 19 Bcf.

Total stocks now stand at 1.986 trillion cubic feet (TCF), up 863 Bcf from a year ago, and 292 Bcf above the five-year average, the government said.

Short-Term Weather Outlook

According to NatGasWeather for April 6-12, “Mild to warm conditions will rule the Midwest and East the next several days with very comfortable highs of 60s and 70s from Chicago to NYC. Warm conditions continue across the southern U.S. with highs of 70s and 80s, aiding very light national demand. Weather systems will track into the West with areas of rain and snow of 40s to 70s. A fresh cool shot with lows of 20s and 30s will sweep across the northern U.S. Thursday – Saturday for a swing to strong national demand.”

Weekly Forecast

A chillier forecast across the Lower 48 could underpin prices early in the week, briefly softening concerns over demand destruction caused by coronavirus. However, given that the cash market did not show a similar move, we suspect there may be more to Friday’s late session rally than just the weather. We feel that shorts are covering because they fear that Russia and Saudi Arabia will eventually reach a deal to curb production.

“It is not entirely clear what prompted that late move higher,” Bespoke Weather Services chief meteorologist Brian Lovern said. “We do have higher weather demand on the way, but we’ve been seeing that colder move for three to four days now, so it is difficult to pin the move solely on that, although it helps, to be sure.”

Natural Gas Intelligence (NGI) reported that Lovern said gas may be simply following the move of oil, “with just general buying in energy as a whole.” Friday’s market behavior “certainly leads one to wonder if we can say that the final bottom is in. We do feel like prices down in the low $1.50s are not sustainable longer-term, but we hesitate to say that “the” final low is in, as it has felt that way before, only to see a renewed downturn.”

The market still has no good idea how long demand destruction will carry on, “which really is the big issue going forward,” according to Lovern.

Our work suggests that shorts are covering on the dips, but we really haven’t seen new buyers come in to continue the initial rallies. It is possible that cheap prices, cooler weather and a possible bottom in crude oil are providing support, but until the new case coronavirus curve begins to flatten, demand destruction will continue to keep a lid on prices.

This article was originally posted on FX Empire