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Natural Gas Outlook: Prices Sink to Support on NOAA Weather Forecasts

Natural Gas Talking Points

  • Natural gas puts in sharp drop on updated NOAA temperature forecasting
  • Supply and demand drivers appear bearish in short- to mid-term for NG Prices
  • Technical support offered at 50-day moving average may offer relief
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U.S. natural gas futures are trading nearly 12% lower on the week following an updated temperature model from the National Oceanic and Atmospheric Administration (NOAA). The agency’s updated 8-14 day temperature outlook for the United States shows a warmer-than-average temperature probability. The updated outlook chilled investor sentiment on the commodity.

NOAA 8-14 Day Outlook Temperature Probability

NOAA Temperature forecast

Source: NOAA

The total loss for November now approaches 20% after falling from October’s closing price of 3.29 to the current price just below 2.70, the lowest since mid-October. Investors started bidding prices up in August as bets for a cold winter fueled buying pressure. However, the recent forecast tempered those demand drivers.

The supply side is likely compounding weather forecasts’ negative effect on price action. Inventory levels are subject to seasonal cycles with suppliers typically increasing their storage through warmer months, called the ‘injection season’. As colder months approach, these inventory levels are drawn upon to meet demand (the chart below illustrates this season cycle).

Natural Gas Inventory levels

Source: EIA.GOV

The Covid pandemic caused a sharp contraction in economic activity earlier this year. As a consequence, there was a smaller-than-expected drawdown in inventory levels to close out the 2019-2020 heating cycle. Given the higher starting point, the most recent injection season saw inventory levels rise to 3,920 billion cubic feet (Bcf), the highest since late 2016, according to the EIA.

Consequently, higher than average inventory levels leave natural gas prices at greater risk to weaker demand-side factors. Moreover, the latest EIA NG Storage Report shows an 8 Bcf increase for the week ending November 6. The current level is now 196 Bcf higher compared to the same period in 2019, and 176 Bcf over its 5-year average, according to the EIA.

Natural Gas underground storage

Source: EIA.GOV

Taking a look at technical levels for NYMEX natural gas futures shows price action directly above its 50-day moving average (2.66). A prior area of resistance at August’s closing low of 2.65 may come into play to offer new support.

If the price does reverse higher at the 2.65-2.66 level, last week’s swing low level at 2.82 may turn into resistance. A break lower from the current price, however, may push prices to October’s closing low at 2.43. Finally, traders will be watching underlying fundamentals and weather forecasts closely to gauge where natural gas is heading next.

Natural Gas Futures Daily Price Chart

Natural gas futures

Chart created with TradingView

— Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwateron Twitter