A durable run higher for natural gas futures could take longer as technical indicators suggest bullish strength butting against fundamental pressures.
June natural gas futures on the New York Mercantile Exchange (Nymex) slipped 4.9 cents Friday (May 10) to settle at $2.252/MMBtu. On Monday, the prompt-month contract renewed the upside, surging 12.9 cents to settle at $2.381. Concurrently, July futures gained 10.3 cents to $2.587.
June futures “have been trading in a nice little upward sloping channel since breaking out of its descending triangle pattern last week,” said NGI’s Pat Rau, director of Strategy and Research. The upper part of the 20-Day Bollinger Band failed to contain the high end of the trading range for seven consecutive sessions, Rau noted.
“If June futures can break and hold above $2.39, the next resistance would be at $2.49, the 38.2% Fibonacci retracement of its previous one-year high and low,” Rau said.
The move could be challenging, as the prompt-month contract faces strong resistance at its previous reactionary high of $2.392 on March 5, Rau said.The 200-day moving average at $2.68 would be the next resistance area.
Further, the streak may be in jeopardy and June futures could test major support at $2.10 – the breakout of its descending triangle, Rau said. He pointed to the relative strength index and slow stochastics, which are charts that help gauge volatility to determine over- or undervalued market conditions. The charts showed the contract firmly in overbought territory.
EBW Analytics Group senior analyst Eli Rubin said the recent strength in June futures was supported by Freeport LNG returning to full capacity, a slowdown in pipeline maintenance and a technical outlook inviting “algorithmic buying” driving a short squeeze leading to prices as high as $2.344.
“The bullish combination of higher-than-anticipated liquefied natural gas demand, subdued production, and strong power burns meriting upside bullish revisions was partially confirmed by Henry Hub spot prices reaching as high as $2.16 Friday – a three-month high,” Rubin said.
He added that the rapid surge in Nymex futures indicated medium-term upside potential into the summer season. However, he suggested that without a new source of short-term buying, it is possible the recent rally may languish short-term.
“It may remain too soon for a durable run higher as production pushes higher this week on ebbing pipeline maintenance,” Rubin said. Additionally, even after the run higher, “further upside likely awaits into summer as the weather backdrop flips supportive and storage surpluses begin to fall away rapidly,” Rubin said.
In the meantime, weather outlooks suggested a lack of near-term support.
NatGasWeather said models showed light demand expected for the upcoming two weeks. Later, in the first two weeks of June, heat is expected to slowly build over the southern half of the country. Temperatures are forecast in the 90s and seen gradually gaining in coverage, increasing cooling-degree days and helping to erode natural gas inventory surpluses.
The U.S. Energy Information Administration (EIA) reported utilities injected 79 Bcf of natural gas into storage for the week ended May 3. The increase lifted inventories to 2,484 Bcf, keeping stocks well above the year-earlier level of 2,048 Bcf and the five-year average of 1,842 Bcf. But the surplus to the five-year average decreased by two percentage points from the prior EIA result to 33%.
Looking ahead to the next EIA inventory report, analysts are generally expecting another build roughly on par with recent history. NGI modeled a 79 Bcf injection for the week ending May 10. The five-year average for the comparable week was a build of 90 Bcf.
NatGasWeather said surpluses would have the opportunity to decrease further if the first half of June proves hot enough over the southern half of the country, “which recent weather data currently suggests.
“We continue to view bulls as in charge unless bears are able to drop prices back towards $2.10,” the firm said.
The Commodity Futures Trading Commission’s Commitments of Traders report indicated a surge of 50,000 net long positions for the week ending Tuesday, May 7.
The primary catalyst for speculator buying activity, however, was short-covering. Shorts covered more than 65,000 contracts while longs pared back exposure by 15,000 positions, Rubin said.
