As I write on Friday, natural gas is having one of its best days for months and is trading well over six percent above yesterday’s close. That and the fact that yesterday also was a day of gains in gas futures makes it tempting to view this as the start of a long-awaited recovery in a commodity that has lost over half its value since the end of last year. That, however, would be a mistake.
The bounce that we have seen over the last few days also looks sustainable based on the chart. After hitting a low of 2.1590 a couple of weeks ago, nat gas looked like testing that level again before the last two days of gains, and the “higher low” pattern that has come from that is usually seen as a bullish sign. The problem is that technical analysis can only take you so far, and the fundamental conditions that have dragged natural gas down all this year are still there.
That is a systemic, chronic supply problem, while the cause of this jump is a temporary, supply related issue.
To really appreciate the nature of the problem, it is best to take a step back and look at the historical context. As you can see from the EIA chart below, U.S. natural gas marketed production has been increasing sharply since the middle of 2005.
There are two main reasons for that. Fracking has increased the accessibility of natural gas, and infrastructure improvements mean that more of it actually gets to market than was the case in the recent past. Yes,…