August natural gas futures have tumbled below technical support levels this week, setting the market up for a potential bounce.
The August New York Mercantile Exchange (Nymex) contract settled at $2.478/MMBtu Monday, down 12.3 cents from the day before and off 21% from a six-month high of $3.129 on June 11. In early trading Tuesday, August futures added to their losses, down 3.6 cents to $2.442.
“The inability to hold key support at $2.50, while not necessarily indicative of severe immediate-term downside, is a glaring indicator of the lack of bullish market appetite,” EBW Analytics Group analyst Eli Rubin said.
The sell-off has put the August contract well into oversold territory, and with the volatility in markets recently, many speculators probably do not want to have open short positions ahead of the four-day holiday weekend, said NGI’s Pat Rau, senior vice president of Research & Analysis.
Slow stochastics for August are less than 10, “which is about as oversold as it gets,” Rau said. Stochastics can help determine market direction as they measure the speed of price movements and are typically more helpful in sideways or choppy markets.
Meanwhile, the moving average convergence divergence (MACD) indicator – used to reveal changes in momentum – has approached its five-year low, he said.
“Things are pointing to a technical rebound here in the coming days, especially considering the August contract has fallen five consecutive days ahead of a short weekend,” Rau said.
Traders should be watching the $2.36 technical levels because it was the low price that the August contract tested several times in March and April, according to Rau. If weakness for August continues, the prompt month faces secondary support in the $2.20 area. To the upside, initial resistance exists at $2.60, he said.
In terms of market positioning, professional speculators reduced their natural gas net short positioning for the week ending Tuesday, June 25, according to data from Nymex and Friday’s Commodity Futures Trading Commission’s (CFTC) Commitments of Traders report.
Speculators shed 22,719 short positions in the week by buying contracts to cover positions, according to StoneX Financial Inc.’s Thomas Saal, senior vice president of energy, who tallies CFTC and Nymex data. The traders also reduced their long positions by 9,380 contracts, for a net shift long of 13,339 positions.
For Nymex holdings only, Mobius Risk Group analysts said the trend showed a nominal move in the opposite direction.
Nymex net long positioning shed the equivalent of 38.8 Bcf to 334.2 Bcf through June 25, according to Mobius. “Prospects for reduced industrial demand during a holiday week and slightly cooler temperatures for the northern third of the Lower 48 U.S. in the first week of July supported the modest increase in net selling activity,” the firm said.
