Mild Weather Neutralizes Future Deficit Scenario. NG Put Options Preferred
Natural gas prices drifted lower on Monday but are trading near the highest since December 2014. The natural gas market seems to be on track to go into a deficit in 2017 as production is not likely to catch up with the rapid pace at which demand is increasing for power generation, global LNG usage, and new industrial demand.
On the supply side, natural gas stocks have increased much more slowly than usual this year. As reported by the U.S. Energy Information Administration (EIA), since the start of May, stocks have risen by less than the five-year average every week. Latest weekly data from the EIA on Thursday reported that natural gas supplies rose 79 billion cubic feet (bcf) for the week ending October 7th.
The increase, which was below analyst estimates that had called for a rise of 87 bcf, sent total stocks to 3.759 trillion cubic feet, up 56 billion cubic feet from a year ago. In late-March, stocks were 1,014 billion cubic feet above prior-year levels. This indicates that the gas market has swung from a huge surplus at the end of the first quarter to near balance at the start of the fourth quarter. If this pace continues, we may witness a potential deficit in 2017, as this year’s winter is forecast to be colder than that of last year.
On the other hand, demand for natural gas this winter will not be from power generators only, as the U.S is ramping up exports of LNG and natural gas through pipelines. Demand from the industrial sector which is taking advantage of cheap natural gas, is also foreseen to boost gas prices in the coming months.
However, in the short-term, the natural gas market is observing a mild start to the heating season as an unusually warm summer and higher than normal temperatures for October have cut heating demand for gas and may cause gas stocks to rise as a result. But in the long run when the winter arrives in full strength, natural gas is expected to jump strongly on the back of a tightening market, that may not be able to smoothly handle any sharp spike in demand.
Fig: Natural gas H4 Technical chart
Natural gas prices have been moving lower since it hit multi-year highs at around 3.350. The price action has crossed over the short-term MA20, which indicates a reversal into a downtrend. However, the support at the 38.2% Fibonacci level and the long-term MA50 are within the sight. Therefore, the downside may be limited. The RSI index is also near the neutral level, which indicates that the market may not become strongly bearish, and may recover after a corrective dip.
Trade suggestion
Buy Digital Put Option from 3.230 to 3.200 valid until 20:00 GMT October 17, 2016
