Natural Gas Surges as Texas Heat, Production Dip Tighten Balance

Nymex natural gas futures jumped to a one-month high Wednesday after updated weather forecasts extended a prolonged heat wave across the South and West through late August and into early September. The rally broke through several resistance levels, flipping the main trend to up for the first time in weeks, before stalling just short of the 50-day moving average.

September futures settled at $2.837, up $0.061 or 2.20%. The move started when buyers overtook the 50% retracement level at $2.790. They then cleared the swing top at $2.830 and accelerated above Fibonacci resistance at $2.840. The rally ran out of steam at $2.875, just below the 50-day moving average sitting at $2.945. Traders said that moving average is the next major hurdle; overtaking it would open the door to the long-term retracement zone from $2.996 to $3.085.

Three factors converged on the same session. Lower-48 dry gas output dipped modestly from the August highs. LNG feedgas deliveries to the nine major U.S. export terminals held near 17.2 to 17.7 billion cubic feet per day, close to record levels. And weather models kept temperatures elevated across the South, with Houston expected to average near 100 degrees Fahrenheit from Aug. 20 through Aug. 23. ERCOT could set a new peak demand record if the heat holds and wind generation drops during peak hours, according to the grid operator's outlook.

The production dip was small – about 0.1 to 0.2 Bcf/d from the August average of 111.5-111.6 Bcf/d – but the timing was everything. For months, strong output from the Permian Basin and Haynesville had absorbed summer power demand without much trouble. Associated gas from oil drilling in the Permian has been a persistent source of supply pressure; oil producers do not adjust drilling plans based on gas prices. Wednesday's decline was the first session where the production number and the weather forecast moved in the same direction at the same time.