June Natural Gas futures are in a position to post a strong gain for the week following a spike to the upside on May 11, following a smaller storage injection than forecast.
Since reaching a top at $3.422 the week-ending April 7, the market has straddled the middle of its December to March price range with traders hoping for a catalyst to trigger a move that would create some volatility. No one likes a choppy, two-sided trade.
The April to early May price action was typical for this time of year, however, because it’s not hot for increased demand from increased air-conditioner usage, and not too cool for heating demand. This low demand tends to support an increase in supply which weighs on prices and usually drives them lower into the start of the summer.
This year has been a little different from others. Although a lid may have been placed on the market the last five weeks, a floor has also been in place because of relatively low production.
Since the start of the year, U.S. production has remained at its lowest level in three years, averaging just 70.8 billion cubic feet per day during the past 30 days. That compares with 72.0 Bcf during the same period in 2016, 73.4 Bcf in 2015 and 67.9 Bcf in 2014.
In addition to the lower production, bullish traders have also been encouraged by stronger exports, particularly to Mexico. Data from the U.S. Energy Information Administration indicates that U.S. exports were expected to reach 7.3 Bcf the week-ended May 12, up 18 percent from a year earlier.
Although the market is showing signs of life this week, we have yet to determine if Thursday’s move was short-covering by bearish investors caught on the wrong side of a surprise report, or bullish investors chasing a market higher.
We know from the Commodity Futures Trading Commission that the money managers are long the market, we just don’t know if they were willing participants in Thursday’s rally given that they had the opportunity to accumulate huge long positions when the market was testing support the last three weeks.
I tend to think that the commodity and hedge fund money managers are more interested in buying support then a potential breakout to the upside on May 11. Therefore, I think natural gas still has some work to do on the downside before setting up for a rally at the start of summer.
Meteorologists are predicting this summer will be slightly warmer than normal but not quite as hot as last year, sparking expectations that power generators will use a little more gas than usual to air conditioners running.
While on paper this may sound like the market will have limited upside potential this summer, but keep in mind that coupling this forecast with expectations for lower production and increased exports, we could see only a small rise in inventories going into next winter’s heating season.
By some accounts, analysts are predicting that a mild summer combined with stagnant output and rising exports, may increase inventories by only 1.6 trillion cubic feet during the April – October injection season. This would be much lower than the five-year average of 2.1 Tcf. And this would be bullish news for natural gas later in the year.
We’re bullish longer-term and likely to get even more bullish if we get a summer like last year. Over the short-run, however, we expect natural gas to continue to trade in a choppy, two-sided manner with a slight bias to the upside.
I think it’s too early to chase this market higher so buying on dips is still the preferred entry method. Keep in mind that the money managers are long massive positions so all it is going to take is a little bearish news to chase them out of the market.
With the market is vulnerable to increased volatility and susceptible to violent breaks, I think the safe trade is to wait for a pullback into support in anticipation of the return of summer weather.
(Click to enlarge)
Despite the wild swings in the market, the main trend is down according to the weekly chart. The current price action suggests momentum has shifted to the upside.
The main trend will turn up on a trade through $3.422. Taking out this level with conviction could trigger a breakout to the upside with the next potential targets coming in at $3.541 and $3.617.
A trade through $3.125 will signal a resumption of the downtrend.
The main range is $3.617 to $2.817. Its 50% to 61.8% zone is $3.217 to $3.311. You can see that the market has been straddling this zone for weeks as investors ride out the spring weather season.
Holding above $3.311 will give natural gas an upside bias. Falling below $3.120 will give the market a downside bias.
This is the zone we’ll be watching for our next signal.