3.75% decline in nat gas hints at further downside

After spiking towards $6.5/MMBtu earlier this year on a combination of improving demand and supply concerns as the polar vortex made its way across North America, natural gas prices trading on NYMEX seemed to have traded sideways to lower throughout April as the cold front abated. Stockpile data compiled by the DOE shows steady drawdowns throughout the first three months of the year with front month prices finding support towards $4.25/MMBtu despite warmer weather as inventories bottomed out.

The most recent weekly DOE inventory report however, could hint at the potential for substantial downside in front month futures. With the latest release of weekly natural gas stock data indicating a 74bn cubic feet increase in inventories, 3.75bn cubic feet more than the median estimate increase of 70.25bn cubic feet, front month natural gas prices have dropped to their lowest levels in three weeks, erasing 3.75% yesterday alone to close at $4.572/MMBtu, just above shorter term support at the 50 day MA. Trading was on considerably higher volumes, with levels breaching the 200 day MA for the first time since mid-April.

Prices have been well supported above the 100 day MA over the past few weeks, but the greater than expected increase in stocks saw this level breached yesterday and further gains could put considerable downward pressure on prices in the coming sessions. Given that updated weather forecasts predict warmer than average weather conditions throughout much of the US, heating demand may decline any breach of long term trend line support towards $4.450 could see declines extend as far as the 200 day MA, currently at $4.145/MMBtu.    

Declining inventories supported higher prices, congruent with previous cycles

DOENUST1 Index US DOE Working N 2014 05 09 10 57 51

But as stocks show signs of increasing prices could retrace to lower levels

NG1 Comdty Generic 1St NG Fut 2014 05 09 10 31 58

Topics: Natural Gas
More from: Kash Kamal