Natural gas prices soared to new highs on Tuesday, reaching the highest level since May 22, as the bullish trend continued to dominate the market. The commodity was supported by strong demand, low inventories, and favorable weather conditions. Natural gas prices have risen more than 55% since the start of the year, outperforming other energy sources.
Demand Outstrips Supply
One of the main drivers of natural gas prices is the imbalance between demand and supply. The demand for natural gas has been increasing due to the economic recovery from the pandemic, the shift to cleaner energy sources, and the seasonal factors. Natural gas is used for power generation, heating, cooling, and industrial purposes.
The supply of natural gas, on the other hand, has been lagging behind the demand. The production of natural gas has been constrained by low investment, environmental regulations, and infrastructure bottlenecks. The storage of natural gas has also been below average levels, leaving little room for cushioning any unexpected spikes in demand.
According to the U.S. Energy Information Administration (EIA), the natural gas inventories in the lower 48 states were 2,574 billion cubic feet (Bcf) as of July 30, 2023, which was 16.6% lower than the five-year average and 17.8% lower than the same week last year. The EIA expects the natural gas inventories to end the injection season (end of October) at 3,477 Bcf, which would be 6.6% lower than the five-year average.
Weather Boosts Demand
Another factor that has been supporting natural gas prices is the weather. The summer season in the U.S. has been hotter than normal, increasing the demand for natural gas for cooling purposes. According to the National Oceanic and Atmospheric Administration (NOAA), July 2023 was the hottest month on record for the contiguous U.S., with an average temperature of 75.7 degrees Fahrenheit, which was 2.1 degrees above the 20th-century average.
The weather outlook for August and September also indicates above-normal temperatures for most parts of the U.S., especially in the West and South regions, where drought and wildfires have been worsening. This could lead to higher demand for natural gas for power generation and irrigation.
Moreover, the hurricane season in the Atlantic Ocean could also affect natural gas prices, as it could disrupt the production and transportation of natural gas in the Gulf of Mexico, which accounts for about 15% of the U.S. natural gas output. According to NOAA, there is a 65% chance of an above-normal hurricane season this year, with 15 to 21 named storms, of which six to ten could become hurricanes.
Technical Analysis: Bullish Breakout
From a technical perspective, natural gas prices have broken out of a consolidation pattern that lasted from May to July, indicating a continuation of the bullish trend that started in March. The breakout was confirmed by a strong volume and momentum, as well as a crossover of the 50-day and 200-day moving averages.
The next resistance level for natural gas prices is around $3.00 per million British thermal units (MMBtu), which is near the May 19 peak and a psychological barrier. A break above this level could open the door for further gains toward $3.20-$3.30 per MMBtu, which is where several Fibonacci retracement levels converge.
The support level for natural gas prices is around $2.80 per MMBtu, which is near the upper boundary of the consolidation pattern and a previous resistance turned support. A break below this level could signal a reversal of the bullish trend and trigger a correction toward $2.60-$2.50 per MMBtu, which is where several moving averages and trend lines converge.
