Natural gas and heating oil turned bearish this week on the basis of weather forecasts which call for mild temperatures and soft demand for heating fuels. WTI crude oil is well on its way to retracing this month's price increases which led the November contract as high as $50.28 on the daily chart on October 9. Heating oil tested a breach of support from late August at $1.41 earlier this morning but bounced higher from $1.40. Meanwhile, Natural gas appears to be on its way to a test of support from April 2012 on the monthly chart at $1.90.
The downside price action in front month natural gas seems overdone and at midmorning Tuesday, the contract has recovered from a low of $1.94 back upward to $2.11. November Natgas futures gapped 5 cents lower earlier this week, suggesting fresh resistance at $2.23. November heating oil is less overdone and has fallen much more tepidly on much lower volume suggesting less potential for an upside surprise.
Both natural gas and heating oil are responding to forecasts which call for warmer than expected weather near-term as an estimated 48% of U.S. homes are heated with natgas. Natural gas is also under pressure from strong national stocks which are expected to reflect a record injection season by the end of October. The potentially record setting injections pace has firmed national inventories above the top end of the five year average. Slight increases in drilling activity have aided additions to U.S. supplies and rig counts have increased in two of the last five weeks. As prices sink, however, drilling activity may cool as production margins thin.
Heating oil has also made strides toward the top end of the five-year average supply range, although it still has some room within that range to grow before breaking out of the top. Currently stocks are just shy of 20 million barrels above the same time last year. Near-term prices will be driven more by weather on the East Coast as more heating oil is used there for home heat than in the Midwest. An estimated 13% of Midwestern distillate refining capacity was off-line through October for planned and unplanned maintenance. That is a strong indication of softer demand as refinery outages have tended to support higher short-term prices until the work is complete.
As demand prospects for home heat soften, natural gas and heating oil futures are testing lows. Natgas support at current levels goes clear bask to April 2012 where heating oil futures were at this same level on August 24 and 26, 2015. Since heating oil has twice tested the low $1.40's in recent months, and stocks are still within the five-year average range, downside potential will be more limited than for natgas near-term. But, as I mentioned above, natural gas has already firmed from its low levels placed earlier this morning and may look to fill the gap from earlier this week sooner rather than later.
Natural gas supplies are much stronger and much more attention grabbing than are those for heating oil so upside potential is likely limited for natgas until a supply scare or major drop in rig counts arises. Expect heating oil supplies to grow once October refinery maintenance is out of the way, especially if early winter is as mild as forecasters are predicting.
It does appear that heating oil and natural gas are at or very near key lows and must breech strong support in order to soften further. If you use either for home heat or operational fuel, at this late date, we recommend you take advantage and book at least a portion of your needs of both winter heating oil and natural gas.
To view the medium-term weather forecast follow this link.