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…