Natural gas prices regained their footing in today's trade following Monday's sell off as buyers came in on early weakness to rally the market back toward an 8-week high.
For a second day in a row, the June 15 contract stalled near the 2.930 level topping out today at a 2.931 high. Yesterday's high was 2.935.
The momentum has shifted over the past 2 1/2 weeks turning the technical picture toward a more bullish outlook. This in turn has brought in renewed fund buying as hedges funds had for the most part exited the natural gas market as it reached a 31-month low in April.
In order the turn the longer term trend higher for natural gas, there is going to have to be a combination of production falling and consumption rising. The market is currently oversupplied by 4-6 Bcf per day which has kept weekly storage injections the past 5 weeks well above the 5-year average.
An early start to summer cooling demand in the eastern part of the U.S. has been a catalyst for the recent price reversal.
Another factor is the possibility of falling production which reached a new all-time daily high of 73.8 Bcf on April 27th. In the most recent drilling report, the EIA forecast a production drop in June which if correct would come at an early rate than initially projected. Last Friday's Baker-Hughes rig count report showed 221 natural gas rigs, 4 rigs above the all-time low reached during April.
Declining production might finally be coming into the natural gas market after 5 straight years of record increases.
Power generator demand has also been and should continue to be a bullish factor for the market as natural gas displaces coal this summer. Demand in early-2015 for natural gas by utilities was 18.5% above 2014 and at an all-time high during January and February.
Summer forecasts remain a bearish factor longer term as a hotter than normal summer is not expected. Several private forecasters are predicting below-normal temperatures in the Midwest which is a large user of natural gas for summer cooling. But forecasts can be wrong and this summer has started out slightly warmer than initially expected.
The summer rally higher is on. How high it goes will depend on summer cooling demand. If higher demand doesn't appear, new price lows should follow later this year likely during the months of August or September. But if demand turns out to be higher than anticipated, a multi-year low could be set in the natural gas market.
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