Natural gas analysts are issuing cautionary warnings to market bulls, still firmly in control and backed by substantial technical strength, as near-term softness is possible after futures crashed through $3.000/MMBtu resistance.
July natural gas futures on the New York Mercantile Exchange (Nymex) spiked Monday to a high of $3.096. The rally stalled by midday, and the prompt-month settled 1.2 cents lower from Friday at $2.906 before bulls pulled July futures back above $3.000 overnight.
NGI's Pat Rau, senior vice president of Research & Analysis warned, "Resistance could lie ahead for natural gas futures, even as July has risen above the top of its 20-day Bollinger Band."
The contract "does have a bit of upside before reaching overbought status as measured by RSI and slow stochastics," he said. Those tools measure the speed of price movements based on past activity.
"Facing that is resistance at the previous reactionary high of $3.16, while secondary resistance sits in the $3.35 range," Rau noted. July's support exists at its 200-day simple moving average of $2.800, followed by the $2.518 low traded on May 31, he said.
Already in control, bulls gained further sway Friday after taking out the 200-day moving average of $2.805, EBW Analytics Group analyst Eli Rubin said.
Technically, strength remains substantial, Rubin noted. However, "A near-term soft patch is possible after testing the $3.00 psychological level."
Even with recent price volatility, an analyst with technical market knowledge told NGI, "I would be bullish because futures took out the 200-day moving average, then corrected lower after testing the falling trendline."
The analyst said that a breakout above the falling trendline is likely since the correction was tested and held at the 200-day moving average as support. "That would be a momentum strategy, which technicals try to capitalize on," the analyst said.
"The risk then is that the market is overbought and has doubled off the lows," he warned. Technicals can highlight points where caution may be warranted, so that point would come if the market fails to take out the trendline," the analyst said.
Meanwhile, Rubin said Commodity Futures Trading Commission’s Commitments of Traders positioning data indicate that the short squeeze that pulled forward Nymex strength has concluded. Shorts added 12,000 positions and longs 3,000 positions for the week ending June 4, he noted.
"During the first four weeks of May, shorts closed a startling 143,000 positions, creating a wave of buying power sending the July contract shooting as high as $3.161 two weeks ago," Rubin said.
Rubin said record June heat, stagnant early June supply, and falling storage surpluses could drive a retesting of the $3.161 May 23 intraday high over the next 7- to 10-days “with substantially improved fundamental support.”
Fundamentally, the analysts agreed the recent rally was based on expectations for a warm summer and production, minimized by cuts since February, which are tightening the market balance.
Rubin said the year-over-year natural gas inventory surplus could drop by 100 Bcf over the next four U.S. Energy Information Administration reports, with record heat possibly continuing into July.
"Nymex gas futures are setting up to shoot higher into mid-summer," he said.
However, "While upside remains the most-likely scenario over the next 30-45 days – particularly in the event of a July heat record – we note long-term concerns into late summer and early fall as production jumps higher and as risks of notable hurricane demand destruction escalate," Rubin cautioned.
