Warming Weather And Slowing Stockpile Draws Send Gas Prices Plunging
After reaching multi-year highs at the end of 2016, the opening weeks of 2017 have seen December’s gas gains entirely erased, as concerns about rising production and warmer weather disrupt the ongoing upward trend. The sharp gap down at the beginning of the year and subsequent losses in gas prices have only recently found some support, amid concerns that wintery conditions will prevail across the United States for the coming two weeks.
The main catalyst behind the most recent momentum lower however was inventory levels.Data reported a week earlier by the Energy Information Administration highlighted a decelerated pace of drawdowns which were significantly below the seasonal average, despite freezing conditions across 49 US States. Adding to concerns about the outlook for prices is the number of producers returning to previously shelved projects, as the rally in gas prices makes drilling viable in certain higher cost undertakings.
Gas Prices Plunge After Epic Rally
While the rebound in oil prices over the second half of 2016 was deemed pretty spectacular, it paled in comparison to the jump in gas over the last twelve months after prices reached a multi-decade low. Since falling as low as $1.612 per MMBTu back in March of 2016, gas prices have since risen over 100.00% to trade at the highest point since 2014, due to rising demand for gas at electrical utilities across the States, growing LNG exports, and seasonal forces like household heating needs.With a colder than anticipated winter prevailing across much of the continental United States, prices have found significant support as burgeoning inventories are drawn down to fulfill demand.
However, in a sign that the furious pace of drawdowns over the last few weeks is slowing, the EIA reported that gas stockpiles only fell by 49 BCF (billion cubic feet) during the last week of December relative to forecasts of an 82 BCF decline. Colder winter temperatures are usually a catalyst for higher demand considering most US homes use natural gas as a heating source. So far, demand has helped reduce the glut that prevailed a year earlier when stockpiles stood 364 BCF above current levels. Nevertheless, the smaller drawdown in inventories could just be an aberration, with stockpile figures due on Thursday likely to show that supplies have fallen further.Should a larger than anticipated drawdown transpire, it could actually reverse the most recent price decline.
Weather in Focus
Even though the production side of the natural gas equation is important, it is taking a backseat to seasonal demand forces and weather conditions in terms of pricing. According to energy services giant Baker Hughes, the US added 3 additional gas drill rigs last week, bringing the total to 135 active rigs and raising the prospect of growing production over the coming months should prices remain elevated. Nevertheless, forecasts for relatively normal weather conditions during February could offset any production concerns, lifting prices even further from current levels.
Looking at the natural gas price action over the last few week, it has become evident that several conflicting technical forces are acting on the commodity. Gas prices have been trending within a bullish equidistant channel formation for the better part of the last year. After touching the upper channel line at the end of December, prices have since been on the retreat, with momentum indicators moving from overbought territory to oversold territory. While momentum indicators imply that prices could fall further from current levels, the key level to watch on the downside is the lower channel line coinciding with the 200-day moving average acting as support.
Should prices manage a candlestick close below the lower channel line, it could suggest a reversal, paving the way for a test of support at $2.530 per MMBTu. However, ideally, bullish positions established near the lower channel line should target the upper channel line for an exit. With the current seasonal backdrop still in play from a fundamental perspective, the latest decline likely represents more of a technical correction than a trend reversal, setting the stage for prices to rise towards $4.000 per MMBTu over the medium-term.
What Binary Options Traders Should Watch For
Based on the move from November lows to December highs, the ongoing correction in prices remains within the boundaries of an uptrend. The main fundamental reasons for any such development would be expanded gas production or warmer winter temperatures which result in reduced demand for natural gas.However, with conditions forecast to remain relatively cool over the coming weeks alongside increased long-term utility demand and rising liquefied natural gas exports, an upside in prices may be inevitable.
In the coming sessions, the most important developments to watch will be the weekly gas inventory figures from the EIA due on Thursday along with the Baker Hughes rig count on Friday. Any significant changes in the outlook for weather will also impact prices, with warmer conditions considered negative for prices while cooler conditions are looked upon positively. However, with an unchanged backdrop, expect the prevailing uptrend to resume as the gas selling pressure ebbs.