During all the chaos of the response to coronavirus, there has been one area of logic and sanity. Surprisingly enough, given its deserved reputation for massive volatility, the market in natural gas futures has resisted the temptation to follow the stock market and oil futures in overreacting massively to every bit of coronavirus-related news or data. It has, on the whole, moved logically based on long-term supply and demand factors, rather than the latest headlines.
Sure, natty did fall as stocks collapsed, beginning in late February, but that was a continuation of a downward trend that had started in November and that was being driven by oversupply and weak demand that had nothing to do with the pandemic. Similarly, it bottomed out in late March, at roughly the same time as stocks and oil, but the rebound in NG didn't continue and accelerate past any logical endpoint as stocks did. There was no equivalent of insane speculation on bankrupt stocks here, and volatility has been reducing sharply for a while.
Natural gas, however, looks poised for a big move soon.
As you can see from the chart, NG has been trading in a decreasing range since that March low, forming a steep wedge pattern. A breakout from that is inevitable before long and when it comes, a big move in percentage terms looks certain.
Obviously, the most important question for traders is which side will give…will there be a breakout higher or a breakdown lower?
It is impossible…
During all the chaos of the response to coronavirus, there has been one area of logic and sanity. Surprisingly enough, given its deserved reputation for massive volatility, the market in natural gas futures has resisted the temptation to follow the stock market and oil futures in overreacting massively to every bit of coronavirus-related news or data. It has, on the whole, moved logically based on long-term supply and demand factors, rather than the latest headlines.
Sure, natty did fall as stocks collapsed, beginning in late February, but that was a continuation of a downward trend that had started in November and that was being driven by oversupply and weak demand that had nothing to do with the pandemic. Similarly, it bottomed out in late March, at roughly the same time as stocks and oil, but the rebound in NG didn't continue and accelerate past any logical endpoint as stocks did. There was no equivalent of insane speculation on bankrupt stocks here, and volatility has been reducing sharply for a while.
Natural gas, however, looks poised for a big move soon.
As you can see from the chart, NG has been trading in a decreasing range since that March low, forming a steep wedge pattern. A breakout from that is inevitable before long and when it comes, a big move in percentage terms looks certain.
Obviously, the most important question for traders is which side will give…will there be a breakout higher or a breakdown lower?
It is impossible to say for sure at this point, but on balance, I favor a move higher over the next few weeks.
We are poised close to the upper trend line right now, which in itself makes a break higher the more likely scenario. The fact that the lows have been achieved by sudden, short-lived moves down while the highs are more about sustained buying is also a bullish sign, but really, the technical picture isn't the story.
From a fundamental perspective, both supply and demand are beginning to hint at a bullish environment. On the supply side, natural gas output remains elevated, but the effect of rig closures in response to the shutdown of the economy and the collapse of oil prices will be felt soon.
Demand is picking up as states reopen, but the very real risk of a second wave of coronavirus cases is tempering the market's response. What will count though, is how those states respond should we see a spike in cases, and so far, the indication is that they won't change course. Many have already seen an increase in cases and even deaths, but the feel that a return to some sort of normality is overdue, even if there is a price to pay.
The other big influence on demand for natural gas is the weather. I am not about to tell you that I can accurately predict something that has baffled even experts for centuries, but if there is a trend in recent patterns, it is towards the extreme. Given that, some serious heat waves that would increase electricity and therefore natural gas demand in the summer are at least possible.
So, natty shows a technical setup that could exaggerate the next move, the prospect of falling supply, and a good chance of increasing demand. That sounds like a "buy? To me, although I will be waiting for a confirmed breakout before wading in.
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