After reaching a three-year low in 2019, natural gas is finally expected to gain a short-term upside momentum as the cold winter weather kicks in across the US.
On January 10, natural gas prices surged higher, rising nearly 3 per cent, as cold air started to slip down into the US. The weather is predicted to remain colder than normal on the west coast and warmer on the east coast over the next six-to-10 days. If the temperature drops further, the market will be supported by increasing demand, driving the market prices higher.
So, is there a chance the price of natural gas will finally rebound in January?
What makes the weather an important factor for the gas market?
Natural gas prices are mainly a function of market demand and supply. The weather is undoubtedly among the most important factors in determining short-term price movements, with the temperature influencing the need for cooling and heating.
Prices tend to follow a seasonal cycle. The best period for the natural gas value is usually the winter, as power generation needs collide with heating to boost consumption some 40-70 per cent over summer. And, as the rule goes, with higher demand come higher prices.
Natural gas price analysis: should traders wait for cold weather to fuel the rally?
Natural gas prices fell on the first trading day of 2020, extending a month-long slide. On January 3, the commodity sunk as low as $2.07.
According to a report from the Energy Information Administration (EIA), domestic supplies of natural gas only fell by 44 billion cubic feet (Bcf) for the week ended January 3, showing disappointing consumption rate.
Analysts at Tudor, Pickering, Holt & Co. (TPH) said that an “ugly run of weather” has taken its toll in terms of the storage picture, yielding weaker-than-normal inventory withdrawals. The 44 Bcf pull is much smaller than historical norms for this time of year, with a five-year average of 169 Bcf.
However, although the draw on inventories was actually smaller than the estimates, the second week of the year saw natural gas move up. What pushed the price higher was the forecast for colder weather in North America in the next 8 to 14 days, something that usually precedes a longer period of cold.
Based on the data from IHS Markit, total US consumption of natural gas grew by 10 per cent compared with the previous report week. Industrial sector consumption climbed by 2 per cent week over week, while surging over 15 per cent in the residential and commercial sectors.
Read more: Natural gas price forecast: what to expect from the global gas market
On January 10, the market spiked higher ahead of the weekend as new forecasts calling for more winter-like temperatures in late January were released. Encouraged traders were hoping the weather models would make a definitive move to colder or milder before the next week began.
On January 13, the commodity was trading slightly lower. However, it remained inside Friday’s range, indicating investor indecision and impending volatility. The further size of the price rally will be determined by how far the cold weather will travel and whether it hits high demand areas.
NatGasWeather is an online service that provides daily weather forecasts focused on the US national gas industry, specifically how coming weather patterns may affect heating demand and the commodity’s prices. According to their forecast for this week, “Very cold air will continue across the Northern Plains with highs of only -0s to 20s for locally strong demand. However, high pressure will dominate the south and east with much warmer versus normal temperatures as highs reach the upper 60s to 80s for Texas, south, and south-east, 40s to 60s mid-Atlantic coast to most major north-east cities. The west will see a mix of cool/cold weather systems with mild breaks. Colder air will release across the upper mid-west and interior north-east Thursday through Friday for a minor increase in demand, but still light nationally. Overall, low to very low demand into next weekend.”
So, where is the natural gas price heading next? What does the latest natural gas price analysis look like? Watch David Jones, chief market strategist at Capital.com, review the commodity’s recent performance and make his own natural gas price forecast today:
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Where to next?
With the attempts of governments across the globe to cut down on greenhouse gas emissions, it is expected that natural gas will see a rapidly growing demand in the foreseeable future. The latest International Gas Union (IGU) report showed a 35 per cent increase in the demand for the commodity, mainly due to the existing climate change policies.
On the technical side, our natural gas analysis revealed the closest resistance to be around $2.17, while the nearest support is at $2.07. The tightening of these levels on both sides could mean less volatility for the commodity’s price in January 2020. However, any cold snap could change the natural gas price forecast to the upside, with the area around $2.30 looking like the next resistance and $2.45 being a potential target for the month.
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