Trading in US natural gas has been influenced by discussions of output cuts, leading to a nearly 5% increase on Monday. This surge brings America’s favored indoor temperature control fuel closer to a triggering point for a possible extended rally.
According to Gelber & Associates, a Houston-based energy markets advisory, “Due to the low pricing environment in 2023, producers are expected to decrease drilling, and in recent weeks we have seen lower production volumes due to maintenance.
This drop may be indicative of further production decreases in the near future and is consequently putting upward pressure on natural gas prices.”
The front-month gas contract on the New York Mercantile Exchange’s Henry Hub closed at $2.3750 per metric million British thermal units, rising by 10.9 cents or 4.8% during the day. This increase follows last week’s 6% jump in the benchmark gas contract.
Gas futures have remained stagnant around the mid-$2 range or lower since mid-March, primarily due to mild weather conditions that have resulted in minimal demand for heating or cooling. Additionally, the robust production of natural gas has contributed to the surplus in supply.
As of the week ending May 5, the total gas stored in underground caverns in the United States reached 2.141 trillion cubic feet (tcf), marking a 31.2% increase from the previous year’s level of 1.632 tcf and an 18.4% rise above the five-year average of 1.809 tcf.
Despite the relative stability of gas prices at around $2, the front-month contract at Henry Hub has experienced a decline of over 50% since the end of last year.
In recent weeks, discussions of output cuts have gained momentum in the gas market, supported by the decline in drilling rigs that directly impacts production.
According to historical data released by the US Energy Information Administration, the US oil and gas rig count decreased by 17 to 731 in the week ending May 12.
This represents the lowest level observed since June 2022, with the weekly decrease marking the most significant drop since June 2020. However, the overall US rig count remains 17 higher, or 2% greater, than a year ago.
Gelber also mentioned the possibility of cooler weather in the US Northeast supporting indoor heating demand, as well as sweltering temperatures on the West Coast increasing the need for air-conditioning, which could drive power demand in the short term.
To initiate an extended rally in the gas market, proponents would need to push prices above the $2.40 mark.
Sunil Kumar Dixit, chief technical strategist at SKCharting.com, highlighted the importance of breaching the 50-Day Exponential Moving Average (EMA) at $2.39, followed by retesting the swing high at $2.53 and the 100-Day Simple Moving Average (SMA) at $2.74. The next significant hurdle would be crossing the $3.03 mark.
Conversely, a sustained drop below $2.03 would resume correction towards $1.94, with major support at $1.74.
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