Rig Counts May See Uptick As Oil Surpasses $40

May Natural Gas

While the world was watching the volatile price action in crude oil futures this week, May Natural Gas futures were quietly rising back to nearly $2.00. Now we know that this first rally from any major low is just short-covering and profit-taking, but it's a start especially in a market that has been subject to a boatload of negative news.

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One key piece of news that broke this week that could be supporting higher prices is that natural gas may be on pace to overtake coal as the most popular fuel for electricity generation.

The U.S. Energy Information Administration believes natural gas will provide 33% of generation in 2016, while coal's share will likely fall to 32 percent. This may be like the moment automobile sales exceeded horse carriage sales, or cell phone usage passed land-line usage. Once it makes the move, it never looks back. That would be the first time that natural gas beats coal on an annual basis.

The EIA also said natural gas and coal each contributed one-third of all electricity in 2015. This is significant because it represents a strong trend since coal accounted for half of all U.S. electricity generation between 2000 and 2008.

Helping to support the rise in the use of natural gas is its relatively low price. This can be attributed to the U.S. fracking boom. Additionally, the Obama administration's efforts to implement new regulations on coal-fired power plants have created more uncertainty for the industry, forcing some energy plants to shift to natural gas.

This is more of a longer-term play since we don't expect to see a dramatic shift in demand for years.

Over the short-run, the chart pattern suggests a return to $2.14 to $2.24 is possible, but that renewed hedging pressure is likely to limit any rallies. In addition, a strong bull market is built with a solid support base. Therefore, we're going to need to see support continue to build at or near the $1.73 area before we'll become convinced a strong bottom has formed.

May Crude Oil

May Crude Oil futures reached a new 2016 high this week. The catalyst behind the price surge was optimism that major producers will cut a deal to freeze output next month amid soaring gasoline demand in the United States.

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The Fed may have contributed to the rally in crude when it came out with a dovish monetary policy statement and economic projections. This weakened the U.S. Dollar, making the dollar-denominated crude oil market more attractive.

According to the latest reports, OPEC and non-OPEC producers led by Saudi Arabia and Russia respectively will meet on April 17 in the Qatar capital Doha, increasing the likelihood of the first global supply deal in 15 years.

There are some skeptics out there who believe a deal will not be reached until Iran comes aboard. It said it would not take part in any deal to curb production until its output levels reached 4 million barrels per day. Nonetheless, the market bears seem to be on the defensive.

I still believe the price action is mostly short-covering and very aggressive buying. I don't think the professional investor is chasing this market higher given the size of the supply.

The weekly chart indicates that the market is still in a corrective mode. The main trend is still down although momentum has shifted to the upside. No swing tops have been taken out and the market has just entered a retracement zone that could stop the buying if the hedgers decide to show up.

The main range we are working with was formed by the $51.63 main top from the week-ending November 6 and the $29.85 main bottom from the week-ending January 22.

Its retracement zone is $40.74 to $43.31. This has been the primary upside target for several weeks. Now that we have reached it, we have to watch the price action and order flow for sellers. If hedgers decide to show up then we could see the start of a 2 to 3 week correction.

Now that the mystical $40.00 area has been breached, the rig count may stop falling since a handful of producers are expected to come back on line. The longer we stay above this area, the greater the chance of a rig count uptick.

U.S. producers have been praying for $40.00 crude and they haven't been silent about their intentions. If the rig count begins to increase then this would greatly support our contention that we are in a long-term trading range market.

I don't see crude oil rising much above the upper level of the retracement zone at $43.31. I also think that after the euphoria of the production freeze meeting wears off, this market is headed back to the mid-30's.