Excess inventory and weather conditions create pessimistic mood
The ongoing bearish sentiment is largely due to oversupply, exacerbated by high inventories. The Energy Information Administration (EIA) reported a stronger-than-expected storage addition of 35 billion cubic feet (Bcf) for the week ending August 16, beating market expectations and heightening oversupply fears. Current inventories are 12.6% above the five-year average, putting additional pressure on prices.
Weather conditions are also contributing to the weakness of the market. Although record temperatures in the Midwest of the USA are creating strong demand in the electricity sector, due to the timing – late August – this surge in demand is likely to be short-lived. With cooler temperatures expected in the northern USA in particular, overall demand for natural gas is likely to fall significantly, further clouding the price outlook.
High coal reserves pose additional risks
The pessimistic forecast is further reinforced by the fact that high coal inventories exert indirect pressure on natural gas prices. Analysts at EBW Analytics have pointed out that long-term take-or-pay contracts for coal-fired power plants can lead to “uneconomic” decisions to burn coal, even when low dark spreads prevail. This scenario represents a pessimistic threat to electricity markets and thus also to natural gas prices.
Market outlook: Bearish trend likely to continue
In the short term, the outlook for natural gas remains pessimistic. With the off-season approaching and inventories high, prices are expected to decline. The $1.882 level serves as a key support and target, and a break below this level could trigger further selling, with some market participants eyeing even lower targets around $1.60 or $1.48.
While late summer heat waves may provide temporary support, a significant price recovery ahead of the winter heating season is unlikely. Traders should closely monitor upcoming EIA storage reports, weather forecasts and global demand trends for signs of a potential change in market conditions. Overall, the market remains vulnerable to further declines as the fundamental factors driving the bearish trend show little sign of abating.
