Is the natural gas breakout over?

Natural gas prices performed strongly last week, but with price action slowing, is the rally over for futures?

Natural gas trading

Nat gas prices rally but find resistance

Cold weather leading to intense demand caused a rally in US natural gas futures across the last week that looked to be carrying on into Monday.

At the time of writing, on Tuesday 1^st February, prices appear to have run into resistance. Henry Hub futures are currently trading for $4.815, pulling back from Monday’s $5.049 high.

Last week’s inventories saw a drawdown, although there was talk that traders had already priced in US winter gas demand. Perhaps that’s why Henry Hub futures have hit a bit of a wall in trading today?

Still, we were asking last week if natural gas could stage a comeback, and it certainly did across the previous five days. At one point, prices were up 75% as an arctic blast hit the US. European supply constraints thrown up in the wake of Russian-Ukrainian tensions, causing countries to potentially look into sourcing American LNG for energy needs, also helped underscore prices.

What happens next is likely down to the weather and how the Ukraine situation plays out.

On the weather front, a classic Nor’easter is expected to bring rain, snow, and sleet to mainland USA, driving demand upwards.

Weather service Natural Gas Weather forecasts: “National demand will ease today as much of the US experiences a milder break with highs of highs of 40s to 70s besides colder air lingering over New England and a fresh Arctic blast arriving into the Rockies and N. Plains.

“This next Arctic blast into the Midwest Wednesday will spread south and eastward late in the week with widespread lows of -20s to 20s, including lows of 0s to 30s with snow and ice into Texas and the South to aid very strong national demand.

“Overall, national demand will be MODERATE Tue-Wed, the HIGH-VERY HIGH Thu-Mon.”

With over 120,000 Russian troops massing on the Ukraine border, and US intelligence reports saying casualty and medical services are there with them in anticipation of a hot conflict, the Ukrainian situation is threatening to escalate. Keep an eye on this.

EIA natural gas storage data & US rig counts

US natural gas rig counts increased in the week ending January 21^st.

Baker Hughes reports that two gas rigs were bought online in the review period. That brings the total up to 115. LNG exports and domestic demand are no doubt playing a big role in more infrastructure becoming operational.

With regards to inventories, in the week ending January 21^st, the Energy Information Administration reported that domestic natural gas supplies fell by 219 Bcf. This time last year, the EIA recorded a 137 Bcf storage withdrawal. The five-year average draw is 161 Bcf.

Working gas in storage now stands at 2,591 Bcf.

Estimates varied ahead of last week’s EIA report. A Bloomberg poll of gas traders suggested the drawdown would sit anywhere between 198 Bcf to 225 Bcf. On the other hand, those polled by Reuters estimated it could be as high as 230 Bcf.

The next US inventories report, for the week ending January 28^th, will be published on Thursday.