Setting aside the noise produced by historic events to concentrate on market signals can always be challenging, and this is certainly true in this week’s energy markets.
Being sandwiched between twin hurricanes, we see 3 factors in natural gas markets to monitor over the final two days of the trading week to help binary traders slice through any distrctions and find market signals.
- Weather - especially changes in the forecast driven by monster storms.
- Supply and demand - comparing current pricing to the same period from prior year relative to current demand levels.
- Price action - Comparing pre-landfall pricing moves between Harvey and Irma.
The epic heat in Southern California and the Western US has abated somewhat, while cooler than average temperatures in the East remain intact.
With respect to the storm, weather forecasts for much of the country continue to turn cooler as the focus of storm impacts turns from a threat to Gulf production to the historic storms being a catalyst for cooler weather. This would translate to less demand for natural gas, and consequently, a surplus in supplies as natural gas cools roughly half the country.
Looking at Supply and Demand
As the natural gas market anticipates these weather trends playing out across the US, we could be at an elevated vulnerability to a corrective move downward in pricing. Compared to last year, Natural gas prices are roughly 11% higher than the same day last year, yet demand for electricity is off by 10% from the same period last year.
Prices are up compared to last year……..
....on lower demand
Comparing pre-Landfall Pricing Between Harvey and Irma
It is reasonable to partially attribute the disconnect to storm related noise. As the forecast turns cooler through this week and the hurricane track potentially shifts incrementally away from Gulf production platforms, we could see increased profit taking ahead of the weekend, which would lead to a downward trend.
We are ranging around the 50 day exponential moving average, as we were right before Harvey landed. As the storm got closer to landfall and the uncertainty and ambiguity lowered, we saw profit taking and a sharp move below the 50 day EMA. We could see a replication of that heading into this weeks close.
Outlook Through the End of The Week
Based on cooling weather patterns and lower risk to Gulf platforms, we see an extended softening in natural gas prices as probable. Near term support remains at the 2.88 level. While we remain in a highly volatile environment, it is challenging to envision a close below that level. A price in the lower half of the 2.90’s is more reasonable to end the week.