On Thursday, the U.S. Energy Information Administration reported that the storage injection for the week ending July 31, 2015 was 32 Bcf. The reported injection smashed the median estimate of analysts of 42 Bcf and was 6 Bcf lower than even the lowest analyst estimate.
So, now traders and investors of natural gas are asking… can the commodity go higher?
Following the bullish report, natural gas prices for September ’15 delivery jumped over 8 cents to trade in the $2.82 area, an area of support and resistance as the commodity has traveled through its recent range bound price channel.
At the same time, the commodity had no follow-through price action as it slowly faded throughout the regular trading session and overnight into today.
Here are three factors to consider when determining if natural gas prices can go higher:
1. Two Weeks of August Heat
The GFS forecasting models for the next two weeks in August show above average temperatures in the West and Producing regions while relatively cooler temperatures in the East (mostly Northeast).
The Electric Reliability Council of Texas (ERCOT) has predicted that the system load could peak at 68,175 MW on Friday, nearing all-time highs. Demand could continue to see 68,500 MW early next week according to ERCOT. In addition to about 2,500 MW of wind power, natural gas is the primary fuel source used to fire the plants to produce such electricity.
2. The Fall Shoulder Season
Temperatures in September and October will set the early direction of natural gas heading into Winter 2015/2016.
A warmer fall will result in lower injections and keep a lid on the final end-of-injection season storage level. However, a cool fall with production in full swing (maintenance over) will push the limits of the EIA’s 3,919 Bcf end-of-injection season prediction.
Any tropical activity in these months could lead to higher prices, but so far this year, tropical activity has been relatively non-existent as a factor for the commodity.
3. Impending El Nino
The warming of the ocean’s surface has created the strongest El Niño recorded since 1997-1998 and the first official El Niño in more than five years.
The typical impact of an El Niño event for the United States is warmer than normal temperatures in the northern United States, which results in low heating demand and thus less use of natural gas.
With a potentially much milder winter ahead due to the El Niño, traders and investors may show caution for long positions of the commodity. Thus, any rally due to short-term bullish factors such as yesterday’s storage report can easily be sold into given this long-term bearish scenario.
Traders and investors of natural gas can likely expect prices to continue in current range-bound movement.
Rallies will likely be sold, bottom-end support will likely hold, and traders and investors will await the unexpected event that will finally take natural gas prices out of the channel.
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