July natural gas is set to open 3 cents lower Tuesday morning at $4.68 as traders admit Thursday's price advance may have been a little overdone and anticipate volatile weather-driven trading in the weeks ahead. Overnight oil markets were narrowly mixed.
Weather forecasts overnight turned a little cooler. WSI Corp. in its morning six- to 10-day outlook shows a ridge of below-normal temperatures centered over Kansas and Missouri and said, "[Tuesday's] six-10 day period forecast continues to trend cooler over the Plains in through the Northeast, as well as over the interior Northwest late in the period when compared to yesterday's forecast.
"Forecast confidence is close to average standards as a result of reasonable model agreement, [and] risk remains to the slight colder side over the eastern two-thirds under a digging cold trough. Slight warmer risks are in store over the West under an evolving +PNA [Pacific North American] type pattern."
In the short term, however, WSI said Midwest power generators can expect heat and humidity. "Variable temperatures are expected across the [MISO] power pool due to the expected unsettled weather. Northern areas may see temperatures vary in the 70s to mid 80s. Hot and humid conditions are expected across the lower Midwest through at least Thursday. Here highs may top out in the upper 80s to mid 90s along with heat indices well into the 90s. Unsettled weather may scale back some of this heat by the end of the week into the start of the weekend."
Observers see Monday's decline as a reflection of a market that has gotten a little ahead of itself. "Our main takeaway from [Monday's] trade was that last Thursday’s dramatic price up-spike was a bit of an overreaction and that even warmer temperature forecasts will not be able to spur much of a price advance in this market," said Jim Ritterbusch of Ritterbusch and Associates. "Although July futures failed to decline toward our preferred buying point of $4.64 in today's trade, we feel that such a development is a high probability during the next couple of sessions. The market may also be attempting to bake in another triple-digit storage increase that would further narrow the supply deficit against both last year and the five-year averages."
Trading opportunities could become more likely as summer progresses. "Otherwise, we are viewing this market as one that will be seeing greater and more disbursed price volatility following an exit from the shoulder period. The July-August summer phase will bring daily adjustments to the short-term temperature views that will be packing much more pricing punch. Furthermore, we look for physical pricing to lift this week as hot temperatures set in across the upper Midcontinent. Finally, we can see some additional rolling of speculative shorts out of the July contract ahead of next week's expiration."
Analyst Alan Lammey of WeatherBELL Analytics sees July futures fluctuating at and around $4.70 as "the market continues to weigh the supply-demand fundamentals against the storage refill season, which is lagging behind by a very large measure. In fact, as of last week, the EIA [Energy Information Administration] showed that natural gas stocks are 727 Bcf less than year-ago levels and 877 Bcf below the five-year average. With temperatures across the U.S. beginning to move into a phase of generally hotter conditions from July through September, weekly storage injections will be soon facing an uphill battle, which is bullish from the overall supply perspective."
From a technical perspective, Lammey calculates that "key resistance for July gas futures is seen at $4.73, followed by $4.85, $4.88 and $4.91. "If violated, look for a further advance up toward the next major resistance areas of $4.852, $4.93 and $5.00. On the downside of the spectrum, key support resides at $4.68, followed by between $4.65 and $4.61, while $4.55, $4.47 and $4.43 become the next lower areas of target support. If the latter is violated, the next major areas of support reside near the $4.36 to $4.30 zone," he said in morning comments to clients.
In overnight Globex trading July crude oil dropped 45 cents to $106.45/bbl and July RBOB gasoline fell fractionally to $3.0756/gal.