Natural gas starts the week under pressure on August 31 and is trading below Friday’s support zone despite a sharp deterioration in the geopolitical backdrop in the Middle East. Over the weekend, the U.S. carried out strikes on Iranian missile installations near the Strait of Hormuz for the first time in more than a month, after which Iran responded with missile launches targeting U.S. facilities in the region.
At the same time, there were reports of new threats to shipping and a sharp decline in the number of vessels passing through Hormuz. For U.S. natural gas, this is a potentially bullish factor through LNG: any further restriction on Qatari or other Middle Eastern supplies would increase the value of U.S. exports. However, the market reaction remains restrained for now because there has been no direct reduction in U.S. LNG flows, while domestic supply remains very high.
Storage picture remains supportive
The latest EIA report continues to provide fundamental support. For the week ended August 21, inventories increased by only 15 Bcf to 3.184 Tcf, compared with expectations for a build of around 19-21 Bcf. Inventories are now 30 Bcf below year-ago levels, although they are still 167 Bcf above the five-year average.
A particularly strong signal remains the South Central region, where a 19 Bcf withdrawal was recorded, including 20 Bcf from salt caverns. This shows that strong power burn and LNG feedgas demand continue to limit the pace of injections even with record production. The next EIA report is due on September 3, and the market will be especially sensitive to whether the series of relatively small weekly injections continues.
Record production caps upside
The main constraint on further upside is now supply. According to BNEF estimates, Lower 48 production over the weekend was around 114.2 Bcf/d, an exceptionally high level, while exports were around 19 Bcf/d. This materially changes the balance compared with previous weeks: even strong LNG demand and hotter weather have less impact if production continues to rise.
In addition, after the failed test of $3.00, the market remains technically vulnerable. As long as the price stays below this level, sellers retain control, with the next targets at $2.84 and then $2.79-2.80. A breakout above resistance in the $2.93-2.95 area would bring NATGAS quotes back toward $3.00, increasing the chances of a breakout above that level and further gains.
$3.00 remains strong barrier
For bullish momentum to return, the market would need either another significant reduction in flows through Hormuz with a real impact on LNG supplies or another strong EIA report. Without this, as I warned in Natural gas fails at $3.00 as selling pressure returns, rebounds toward $2.93-2.95 may once again encounter selling, while a break below $2.80 would increase the risk of a move toward $2.75-2.70.
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