A breakdown to the January lows at $2.595 to $2.578 will fill in the gap to $2.854 and essentially erase all of the two-week winter storm rally from late January.
The Technical Picture: Resistance Layers Stack Up Against Any Rally Attempts
Helping to guide the market lower is the 61.8% resistance level at $3.284 and more importantly the 50-day moving average, which is capping gains while controlling the downtrend. Even if these levels were taken out by some freak weather occurrence short-covering rally, fresh sellers would likely be waiting with both hands to refresh bearish positions at the 50% level at $3.502 and the 200-day moving average at $3.740.
Storage Deficit Isn’t Insurmountable as Production Roars Back to Life
With demand expected to steadily fall into the end of the month with the exception of a minor blip between February 21 and February 25, the focus will now shift toward production to see how fast it will take to rebuild storage after massive drawdowns the past two weeks of 260 bcf and 249 bcf. As of February 6, natural gas inventories were down 3.6% year-over-year and 5.5% below their 5-year seasonal average. This means that heading into shoulder season next month we could be facing a deficit, but one that is not insurmountable before the summer cooling season begins.
Rig Count Surge to 2.5-Year High Signals Flood of New Supply Coming
The current bearish price action reflects this thought. Additionally, the current projections for higher U.S. natural gas production, provided by the Energy Information Administration (EIA), are bearish. The EIA raised its forecast for 2026 U.S. dry natural gas production to 109.97 bcf/day from last month’s estimate of 108.82 bcf/day. Furthermore, last Friday, Baker Hughes reported that the number of active drilling rigs in the week-ending February 13 rose by 3 to a new 2.5-year high of 133 rigs. This is a whopper of a number considering that in September 2024 they were sitting at a 4.75-year low of 94 rigs.
The Bottom Line: Sell the Rally Days Are Back
Looking ahead, we’re bearish because improving weather and rising temperatures are going to weigh on demand. We also believe that strong production will soon erase the current supply deficit well ahead of the summer cooling season. Now we know that periodic cold spells can occur well into March, but for the most part, we expect gains to be capped and turned into shorting opportunities as we return to “sell the rally” days.
More Information in our Economic Calendar.
