For the first time in years, US natural gas inventories experienced a summer inventory drawdown to the tune of 6 billion cubic feet, a very rare occurrence considering summer is usually the season of inventory builds ahead of higher winter consumption.However, instead of sending natural gas higher on the news, prices have been on the retreat since the report, falling in four of the last five sessions.The pressure on the energy product remains high as summer cooling demand fades and traders await the next seasonal demand factor relating to heating needs.While temperatures are forecast to be higher than normal this next week, the combination of weather and falling stockpiles has failed to cushion the recent decline in natural gas, adding to concerns that the inventory glut will remain intact for the foreseeable future.

Weather Dependency Abates

As the summer months have clearly put on display, natural gas remains highly sensitive to changes in the weather and the resulting pickup in energy demand. However, with the countdown till the end of summer already underway, another week of temperatures that are expected to be above average has barely moved the needle for natural gas prices. In fact, in spite of increased consumer demand and record power plant demand reported just weeks ago, these factors have barely made a dent in overall demand as evidenced by the latest report by the Energy Information Administration which showed demand falling from 75.5 billion cubic feet per day for the week ending August 3rd from the 77.7 Bcf of demand reported the week prior. What is more interesting is the seasonal drawdown in inventories that transpired, marking 6 Bcf withdrawn from stockpiles.

Inventories remain at historically high levels, still trending well above the stockpiles reported a year ago and the highest points recorded over the last five years. However, curiosity has been piqued following a rare summer drawdown that transpired in the last report. Typically drawdowns are customary during winter months when consumer heating needs ramp higher. The latest drawdown comes amid rising domestic production rising to an average of 74.0 billion Bcf per day versus 73.0 Bcf a week earlier. Although any decline in inventories would typically be viewed as highly bullish for natural gas prices, no such development transpired, with prices surprisingly declining after the announcement. Moreover, a falling rig count could be viewed as another bullish development, especially if it leads to reduced production. However, with prices continuing to fall, natural gas might be undergoing a technical correction that persists over the coming weeks.

Technically Speaking

Looking at the recent losses in natural gas prices on a more historical basis shows that the prices are currently in a phase of consolidation after snapping a multi-year downtrend and bear market. After being unable to pass breach resistance sitting at $3.000 per MMBtu back in July, prices have been progressively back on the decline with peak summer consumption behind the energy product. The recent crossover over the 50-day moving average to the downside feeds into the belief that there is an ongoing correction in prices following the beginning of a new bull market earlier this year. Additionally, while the longer-term outlook may be bullish for prices closer to the winter months, the longer-term head & shoulders bullish pattern currently forming in natural gas could add to upside optimism. However, that implies a correction towards $2.480 per MMBtu before rebounding to the upside.

Based on the Fibonacci levels that would be indicative of a momentum pullback, the key support levels that coincide the 38.2 and 61.8 levels include 2.595 and 2.353. Any move below the second level would indicate a resumption of the longer-term downtrend, whereas a bounce from these levels would be supportive of a continuation of the medium-term uptrend. However, near-term on the 4-hour candlestick chart, the picture maintains a more negative outlook for prices. With gas prices currently consolidating in a descending triangle formation, accompanied by falling volume and volatility, any candlestick close below support sitting at $2.630 could be an early indication of a bearish breakout in natural gas prices. Considering falling volumes and volatility usually accompany a reversal, should this be the case, the next level of support targeted on the downside would be $2.480.