Natural Gas Prices End the Week with a Solid Rebound

While natural gas prices spent Monday through Thursday of this week in the midst of a steep decline, contract for June delivery on the New York Mercantile Exchange traded higher in today’s session. The contract is currently holding near $3.26/MMBtu, a gain of nearly 2.5% over Thursday’s close. At $3.26, however, natural gas prices are down roughly 5% from the prior Friday’s close.

As a result of the decline into Thursday’s $3.16 low, natural gas prices came within reach of key support at the April 25th $3.13 bottom, which was reinforced by the failed test which took place with May 8th’s move to $3.14 for a low. The close proximity of this support area suggested a period of consolidation or rebound could characterize price action heading in to the weekend. This was particularly true as downside momentum appeared to be slowing on Thursday and the Stochastic, a price momentum indicator, had reached oversold territory at the 20 level, warning of an overextended market condition.

In addition, final data released by the CME Group today indicated that open interest declined 17,464 contracts, or 1.1%, during Thursday’s sell-off. This suggests that liquidating longs drove that leg of the sell-off, rather than continued new money entering the market. Moves drive by liquidating longs and short-covering a typically vulnerable to retracement.

All of these factors combined set the stage for a bounce in natural gas prices in today’s session. And, with the Stochastic still well below an overbought level and initial resistance above current prices, the path of least resistance heading into next week is to the upside. An increase in open interest reported for today’s advance would lend added support to the bullish case.

In addition, the forecast over the next week is conducive to higher natural gas prices. According to natgasweather.com, a strong weather system with rain, mountain snow, and severe thunderstorms will track through the Rockies and Midwest the next few days. Cooler temperatures have also spread across the Great Lakes and Northeast, easing warm conditions. The West will now warm as high pressure gains ground, while cooling becomes focused over the east-central US, spilling at times into the Southeast. This will continue to drive stronger than normal national natural gas demand.

First resistance for natural gas prices is at the mid-point of May 16th’s open-close range, near $3.29/MMBtu. This resistance level corresponds to a 50% retracement of the decline from the May 12th high. The next potential resistance is at the 61.8% retracement level at $3.33/MMBtu. A sustained move above this retracement would increase the probabilities of a return to key resistance at the $3.42-$3.43 zone.

On the downside, several layers of support are present on the daily chart, the nearest being Thursday’s low at $3.16. Below this level is the May 8th low at $3.14. Key support is at the April 25th low at $3.125/MMBtu. A break below this level, which corresponds to a 50% retracement of the advance from the February corrective bottom to the early April peak, would confirm a double top reversal pattern at the highs established on April 5th and May 12th. The downside target derived from this pattern is at $2.84/MMBtu. Ahead of this target, the next-lower support on the daily chart is at the mid-March low established at $3.01/MMBtu.

On Thursday, the US Energy Information Administration, in its weekly natural gas inventories report, stated that working gas in storage was 2,369 Bcf as of Friday, May 12, 2017. This represented a net increase of 68 Bcf from the previous week. This build was above the 45 Bcf recorded the week prior and also above consensus estimates of a build at about 61 Bcf. Stocks were 375 Bcf less than last year at this time (-13.7%) and 256 Bcf (+12.1%) above the five-year average of 2,113 Bcf. At 2,369 Bcf, total working gas is within the five-year historical range.

Today at 15:30 ET, the Commodity Futures Trading Commission will release the latest Commitment of Traders report, with data as of the May 16th close. The report released last Friday, with data as of the May 9th close, indicated that large speculators were net long 19,475 natural gas futures contracts. The week prior, as of the May 2nd close, positioning by large speculators shifted from 3,070 contracts on the short side to 20,992 contracts on the long side.

And, according to Reuters, speculators in four major NYMEX and Intercontinental Exchange (ICE) markets added to their bullish bets by 12,300 contracts to 413,685 contracts in the week ended May 9th. This was the ninth time speculators increased their net long positioning in the past ten weeks and represented the highest level of net long positioning since April 2014. Speculators are betting on the prospects for less gas in storage than usual next winter due to low production and rising exports.

Next week, the latest natural gas inventories report will be released on Thursday at 10:30 ET.

June Natural Gas Futures Daily Chart

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Tracy L. Morganthall, CMT, has been a Technical Market Analyst for more than 20 years. She has experience analyzing and producing reports on equities, both domestic and international markets, as well as Forex and commodities. She attended Trenton State College in Trenton, New Jersey, earning a Bachelor's in Finance.