Last week, Henry Hub natural gas prices fell 14.4%—the highest weekly decline in the last year. The United States Natural Gas Fund LP (UNG) fell 14%. Natural gas active futures fell for the third consecutive week. The bearish weather forecast is an important factor behind the downturn in natural gas.
Compared to the reading on November 29, Refinitiv’s “GFS00” weather model suggests a rise of 14.3 HDD (heating degree days) today. However, “EC00” suggests a decline of 9.3 HDD from the forecast on November 29. The weather forecast is valid until December 17. A mixed weather forecast could be a concern for natural gas bulls.
Natural gas’s monthly production
The EIA released the “Monthly Crude Oil and Natural Gas Production” report last week. According to the report, the natural gas production in the US rose to 112.9 Bcf (billion cubic feet) per day in September. On a year-over-year basis, the natural gas production rose 7.8%.
Higher natural gas production and a possible fall in HDDs are bearish for natural gas prices. Last week, the natural gas rig count increased by two to 131—the first rise in the natural gas rig count since August. Another gain in the rig count could impact natural gas prices. Read Rise in Natural Gas Production Might Not Be Avoided to learn more.
Energy stocks’ earnings will be impacted
Analysts’ consensus estimates projected Chesapeake Energy and Range Resources’ fourth-quarter adjusted EPS at minus 6 cents and one cent, respectively. In the third quarter, Chesapeake Energy and Range Resources operated with a production of over 60% in natural gas.
To learn more about these energy stocks, please read Range Resources: A Look at Its Institutional Holdings and Chesapeake: Gauging Institutional Investors’ Stance in Q3.
Natural gas’s moving averages and target price
In November, active natural gas futures fell 13.4%. However, early in the last month, natural gas active futures rose to almost $3 per MMBtu. Since January, natural gas futures haven’t closed above $3. Last week, the difference between natural gas active futures’ 50-DMA (day moving average) and the 200-DMA narrowed to just 0.1%.
If the 50-DMA moves above the 200-DMA, natural gas prices might be able to pass the $3 level. This week, the 200-DMA at $2.39 is the immediate resistance zone for natural gas futures.
On November 29, natural gas’s implied volatility was at 53.1%. Natural gas active futures will likely close between $2.14 per MMBtu and $2.42 per MMBtu until the end of this week. The price range has been derived from natural gas’s implied volatility, a confidence interval at 68%, and the assumption of a normal distribution of prices.
Refinitiv expects a decline of 14 Bcf in natural gas inventories for last week. On Thursday, if the EIA reports the same decline in inventories, then the negative “inventories spread” will contract to 11 basis points. Any contraction in the negative inventories spread or the difference between natural gas inventories and their five-year average could drag natural gas prices to the lower limit of our price forecast.
Read Can the Natural Gas Inventories Spread Rescue Natural Gas Bulls? to learn more.