Natural gas trading outlook: futures drop after edging above $4

Natural gas futures failed to maintain above $4 yesterday, though the blue fuel logged an impressive 5% rally since Monday. Investors eye how a cool Canadian weather system plays out in the US, as massive natgas inventory builds are back on the agenda.

Front-month natural gas futures for settlement in October on the New York Mercantile Exchange traded at $3.961 per million British thermal units (mBtu) at 9:38 GMT, down 0.58% for the day. Prices ranged from $3.955 to $3.985 per mBtu. The contract added 2.79% on Tuesday and a further 2.19% on Monday.

The ominous Canadian weather system stoked some early heating hype for natural gas trade, resulting in the sizable rally since Monday, though the severe cold will not last and will induce heating only in lightly populated areas, while at the same time killing cooling demand over much wider areas, with a much higher population.

“The strong Canadian weather system will finally track across the US over the next several days … bringing very comfortable temperatures to the southern US and driving with much lower than normal cooling demand,” analysts at NatGasWeather.com wrote in a note to clients today. “We continue to believe any early winter season hype is unwarranted as weather patterns by early next week will be very pleasant.”

This weeks cold spell will likely have a positive impact on upcoming natgas inventory builds. Analysts project this Thursday’s EIA report will post the 21-st straight week of above average builds for natgas inventories, after last week the deficit to the 5-year average volume was narrowed to only 15.4%, down from a record 50% in March.

Next weeks report, which will cover builds this week, will probably start a series of much bigger than average injections, as the market enters Fall shoulder season.

“It is not unreasonable to think there are potentially at least 7-8 straight weeks of fairly big builds to come, with most, if not all, being much larger than normal,” the analysts at NatGasWeather.com wrote.

US weather outlook

A quite cool Canadian system is already tracking through the northwestern US and will have reached the central US by Wednesday, bringing temps down some 10-20 degrees over the Midwest and North Plains, as well as bringing heavy showers and thunderstorms, with secondary cooling later on over the Southeast and the East Coast. Temperature troughs could reach as low as 30-40 Fahrenheit, which will spur heating in some areas. The far South and the West will see mostly seasonal weather, and overall cooling demand will be dropping from moderate to low.

“The coldest air will remain over the northern Plains and into Minnesota, and will be a secondary weather system that follows late Sunday and into Monday for the Great Lakes where temperatures could again drop into the 30s,” NatGasWeather.com analysts wrote. “There will be hot temperatures over high population southern California cities at times over the next few weeks.”

New York will have a mostly cloudy Wednesday, with temperatures near normal at 68-78 degrees Fahrenheit, according to AccuWeather.com. readings will climb several degrees tomorrow, before dropping more than 10 degrees for the weekend and into next week. Chicago sets off the day with a heavy thunderstorm a slightly below-average temps at 54-76. Starting tomorrow and through to Sunday the temperature highs will be about 60, some 15-20 degrees below average, before climbing a few degrees into next week, while still holding significantly below the average.

Down South, Houston is set for a hot and humid day, with temps a few degrees above average at 76-94. Readings will slightly drop over the next two days, before sliding to several below average on Saturday, while next week will be largely normal with highs in the upper 80s. Over on the West Coast, Los Angeles will have a warm Wednesday, with temps at 66-86, a few above average, with readings slowly rising over the course of the week to stand more than 10 degrees above the average into next week.

Technical support and resistance levels

According to Binary Tribune’s daily analysis, October natural gas futures’ central pivot point stands at $3.951. In case the contract penetrates the first resistance level at $4.049 per million British thermal units, it will encounter next resistance at $4.114. If breached, upside movement will probably attempt to advance to $4.212 per mBtu.

If the energy source drops below its first support level at $3.886 per mBtu, it will next see support at $3.788. If the second key support zone is breached, the power-station fuel’s downward movement may extend to $3.723 per mBtu.