According to a seasoned gas trader and analyst, natural gas prices will have some difficult times in the upcoming late summer and fall period. With expected low shoulder month demand, accompanied by abundant supplies, something has to give.

“If the high prices we’re seeing now fully discount upcoming events, the market needs to figure out what it’s going to do with the gas that’s available for the next 75 days. It’s not winter,” says Bob Deman, analyst with Houston-based Woodward Gas Marketing. “What will be interesting is that there will probably be two bullish EIA reports in a row, but they are meaningless. I’m looking for 3.3 Tcf of gas in storage by Nov. 1.

“Prices need to work lower. In order to put gas in the ground it gets increasingly more difficult to inject with pressures as high as they are. That means that more incentives are necessary to pay for the higher cost of injection. The price has to fall. The only way to stop the movement to lower prices would be for gas to get below the price of coal or some competitive fuel.

“If that happens, then there is a floor,” Deman added. “Our figures show that at $2.50 per MMBtu natural gas and coal are about even. In the lower demand period of late summer and early fall there should be competition between the fuels for market share. This will reflect conditions of lower and lower demand. It will be very interesting.

“A weak economy is part of the equation, but there will be more gas than there is demand for it in a couple of weeks. One problem is that trading is taking place for September gas on the basis of the immediate heat in the Northeast. Those two factors are not compatible. The value of gas in September is not the value of gas every day in the East. Gas is being traded because it’s hot, but it won’t be come September,” he asserted.

If that’s the case, it should set up a trading opportunity to sell the presumably mis-priced September gas and cover during a period of lower demand.

“If traders want to rally September past $3.10, that’s fine, I think traders will sell September gas and buy it on the physical market as demand is reduced in the northern tier of states,” Deman said. “I think the hottest days of the year are behind us. If that’s the case, where is the next element of demand?

“Nuclear plants will have to go down, but that is planned every year,” he said. “There is a new wrinkle with the Nuclear Regulatory Commission looking into certain plants with possible mechanical issues, but they are not saying that they have to take the plants down. They want to plan; they always play over-conservative. Right now you don’t value gas at a higher level because of that.

“Overall I think the market will trade in a range. Over the next 75 days prices could test 50 to 60 cents lower, and with storage the way it is, it’s hard for me to think anyone will want to buy gas at $3.30,” said Deman.

Technical traders, however, hint that prices might move higher. “There have been a number of weeks where prices have not broken above the three-week moving average,” he said. “A weekly close over $2.86 this week will mark the first time that the market has closed over that average since it closed below $2.90. This tells me that this could be the start of a three-week move higher,” says an Oklahoma City energy banker. “I’m not in a hurry to fade the market for a nickel, but now the market looks pretty impressive. The way it looked on Thursday, it looks like it could be off to the races.”

(Republished with permission from Bill Burson, https://gastrader.net)

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