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Will Natural Gas Break the Key Support of $2.60 per MMBtu?

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Short-term demand

The daily estimates from the industry consensus suggest that demand from residential and commercial increased from the previous day. Demand from electric power plants also increased week-over-week. The lower natural gas prices are driving the demand from industrial power plants. The warm weather estimates will curb the short-term demand for natural gas in the US.

Last week, the EIA (U.S. Energy Information Administration) reported that natural gas in storage was 1,461 Bcf (billion cubic feet) for the week ending March 27. This was a decline of 1.2% from the previous week. The weekly natural gas report is due today. The market estimates an increase of about 11 Bcf. The increase in inventory implies weak demand. The oversupplied gas market and massive inventory buildup will put downward pressure on the natural gas prices. Today, the EIA’s natural gas storage report would be a key catalyst in driving the natural gas prices.

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As a result, the key support for natural gas is seen at $2.60 per MMBtu (British thermal units in millions). Natural gas prices hit this mark on April 1, 2015. Prices are trading below their 20 and 50-day moving average. May and June natural gas futures volume increased by 12,000 and 7,500 contracts, respectively, from their five-day average volume. The resistance for natural gas is seen at $2.75 per MMBtu. Gas prices could breach this level if the demand outlook improves.

Falling natural gas prices dragged down ETFs like the Spider Oil and Gas (XOP) and the Energy Select Sector SPDR ETF (XLE). XOP dropped by 2.82% and settled at $52.14. XLE dropped marginally by 0.81% and settled at $78.53. Oil and gas stocks like Ultra Peroleum (UPL), Rice Energy (RICE), Exco Resources (XCO), and Rex Energy (REXX) dragged XOP lower.

These stocks have a natural gas production mix greater than 65% of their production portfolio. They account for 4% of XOP. These four stocks were down by more than 4% in yesterday’s trade. Surprisingly, all of these stocks are small capitalization E&P (exploration and production) companies.

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