Last week, natural gas prices fell 1.3% and settled at $2.13 per MMBtu (million British thermal units). It was the second consecutive weekly decline. On Friday, active natural gas futures touched an intra-day low of $2.083 per MMBtu, the lowest since August 9. If natural gas futures decline another 4% next week, prices would be below the $2 level, the first time since April 19, 2016.
But, in the last two weeks, WTI (West Texas Intermediate) has risen 4.3%. The rising tension between the US and Iran has pushed oil prices up. The “OPEC+” deeper output cut also supported oil’s rise. Higher oil prices pose a threat to active natural gas futures’ upside.
Natural gas supplies
Last week, the oil rig count declined by seven to 670. However, if the US oil producers increase oil output because of higher oil prices, we might see a further rise in natural gas supplies. Read Rise in Natural Gas Production Might Not Be Avoided to understand this relationship. The US natural gas marketed production was at 3,175,779 million cubic feet in October. This is at its record high since 1973.
According to the EIA (US Energy Information Administration) DPR (Drilling Productivity Report), they expect natural gas supplies in the major seven shale regions to rise by 11.6% this month on a YoY (year-over-year) basis. Also, it expects a similar rise in crude oil production from these shale regions.
Inventories level for natural gas prices
On Friday, natural gas prices rose by 0.4% after natural gas inventories declined by 58 Bcf (billion cubic feet) for the week ended on December 27, based on the EIA report. The decline was 1 Bcf more than what Reuters Poll forecasted. But, the decline in the EIA data was 32 Bcf less than five-year average withdrawal. However, on a YoY basis, the EIA’s reported a withdrawal was 38 Bcf higher.
Natural gas inventories and their five-year average difference or the “inventories spread” was at minus 1.2% in the week ending on December 27. In the week ending on December 20, the “inventories spread” was at minus 2.1%. The contraction in the negative “inventories spread” is a bearish development for natural gas prices.
Natural gas inventories could decline by 49 Bcf in the last week, based on Refinitiv. On January 9, if the EIA reports the same decline in inventories, the “inventories spread” could rise to 2.2%. If the “inventories spread” turns positive, natural gas prices might test the $2 level. The rising tensions between the US and Iran is also a bearish driver for natural gas.
On Friday, Refinitiv weather forecast model, “GFS00,” suggests a fall of 4 HDD (heating degree days) compared to Thursday’s reading. The “EC00” weather forecast model indicates a fall of 3.5 HDD from Thursday’s reading. The weather forecast is up to January 18. The “GFS00” and “EC00” weather forecast model readings were 73 HDD and 52 HDD below the normal, respectively. This might be a bearish driver for natural gas prices next week.
Energy stocks, including Chesapeake Energy Corp (CHK) and Antero Resources Corp (AR), might be in trouble if natural gas declines further next week. Warmer weather in the 2019-20 winter season could drag these energy stocks similar to that of 2015-16 winter.
On Friday, the total flow of feedgas for LNG liquefication was at 8.7 Bcf per day. This is compared to 8.5 Bcf per day a day ago, based on Refinitiv. A higher flow of feedgas could reduce natural gas inventories.
Natural gas price moving averages
Last week, active natural gas futures were 6.2%, 12.9%, 11.2%, and 12.3% below 20-, 50-, 100-, and 200-DMA (day moving averages), respectively. Technically, prices below these moving average suggest further weakness in natural gas. The 50-DMA was 0.7% above the 200-DMA. If prices continue their downward trend next week, the 50-DMA could fall below the 200-DMA. Also, the 20-DMA at $2.27 level is a resistance zone for natural gas futures.
On Friday, natural gas implied volatility was at 40.5%. Based on this implied volatility, natural gas prices could close between $2.02—$2.24 per MMBtu from January 6 to January 10. To know more about this price model, read Natural Gas Update and Key Price Levels Next Week.