Natural Gas Sees Some Upside

May Natural Gas futures rose sharply on April 7, putting the market in a position to breakout to the upside on the weekly chart, on increased speculation the severely glutted market has hit a bottom.

The market has been building a support base for several weeks. At first, the rallies were being generated by aggressive short-covering, which is understandable because the market was in a downtrend. However, the buying this week looks as if it was dominated by new longs rather than short-covering and position-squaring.

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While the price action may be suggesting a bottom is forming, the fundamentals are still bearish. The U.S. Energy Information Administration said Thursday stockpiles grew another 12 billion cubic feet last week, a time of year when stockpiles usually fall. They are now 54 percent larger than they usually are at this time of year.

The current price action indicates that speculators could be betting on the possibility of big gains if they can press the upside enough to encourage some of the major short-hedgers to aggressively cover their positions.

Although the weekly EIA report showed another increase in stockpiles, supply appears to be falling from a record pace and consumption could be much higher than usual this April, luring some bullish speculators into the market.

The reason for the increased consumption in April and the market's second-best daily percentage performance of the past two months is the lingering cold weather that continues to effect demand in the Midwest and on the East Coast.

Weather forecasts are calling for colder-than-normal temperatures in major Midwest and East Coast heating areas through mid-April. This could lead to late-season heating demand from areas that would normally be preparing for several months of mild temperatures ahead of the air conditioning season. If this occurs then look for next week's supply and demand report to show below average storage additions.

With weather the primary driver of the price action at this time, investors should brace for the return of above average volatility. Additionally, colder weather should significantly reduce the surplus to the five-year average in April.

Traders, who are speculating that natural gas producers will start massive supply cuts soon because of the recent collapse in prices that took prices to their lowest inflation-adjusted level in its history of trading on the New York Mercantile Exchange, received some additional support on Thursday from analytics firm Platts Bentek. It said in a report that as of April 6, output was at 71 billion cubic feet a day, down 2.7 percent from the record high hit in February.

We estimate that the drawdown will continue as long as temperatures remain below average in key demand areas. Based on current weather forecasts, this is expected until April 15 to 19. Additionally, we support the notion that many producers will grow production this year by 2 percent to 15 percent, despite big spending cuts of $22 billion total among North American independent producers. This assessment is based on a forecast by Energy Aspects.

Our assessment fits nicely with the chart pattern on the May Natural Gas weekly chart. It shows that the market is ripe for a continuation of the current rally, but that gains will be limited by a major retracement zone.

In other words, the weekly chart indicates there is room to the upside to rally. The catalyst behind this move will be the below normal temperatures until April 15 -19. This could bring us into our upside target zone. Once at the zone, sellers are likely to step in to stop the rally because the longer-term fundamentals are still bearish. The selling pressure could be profit-taking by speculative buyers or new short positions.

Technically, the main trend is up according to the weekly swing chart. It turned up when the market crossed the $2.032 main top. The new main bottom is 1.837.

Additional upside pressure is coming from the potentially bullish closing price reversal bottom at $1.731, formed the week-ending March 11. The market also survived a break last week into a key short-term retracement area at $1.882 to $1.846.

All of these factors indicate the presence of buyers.

During the week-ending April 15, we expect to see the rally continue. But this won't take place unless buyers can take out an uptrending angle at $2.0290. This move could create enough upside momentum to drive the market into the next uptrending resistance angle at $2.1310.

The main range is $2.549 to $1.731. Its retracement zone is $2.140 to $2.237. Although crossing to the strong side of the uptrending angle at $2.1310 will put natural gas in a strong position, the market is likely to run into a wall of sellers inside the retracement zone since this is the primary upside objective.

Look for an upside bias the week-ending April 15 on a sustained move over $2.0290. This could drive the market into $2.1310 to $2.140. This area is the first zone to watch for new sellers. If it is overcome then the move could extend into $2.237.