Technical indicators appear to support a positive outlook for natural gas prices at least in the short term, but cautious traders could decide to enter the market only when the price moves above key resistance levels, according to technical analysts.
The September New York Mercantile Exchange (Nymex) natural gas futures contract lost steam Tuesday after tearing higher and settling the week’s opening session up 11.2 cents at $2.235/MMBtu. The prompt month contract was down 4.0 cents at around 11:15 a.m. ET. October futures were down 3.7 cents, last eyed at $2.320 after settling up 11.0 cents Monday.
NGI’s Pat Rau, senior vice president of Research & Analysis, said, “Monday’s rally left the September contract just shy of being overbought.” Rau noted the prompt month contract had been trading in a “mini horizontal band” since Aug. 9. The band was marked by a high at $2.301 and a low at $2.097.
Both “offer pretty good levels of technical resistance and support respectively,” Rau said. But September futures’ Monday rally made the $2.30 resistance level – also the top of the current 20-day Bollinger Band – “all the more meaningful.” The Bollinger Band is a technical tool analysts use to determine where prices are high and low relative to each other. It helps assess market volatility and identify potential entry and exit points.
Patterns on other technical charts “confirmed a bullish reversal pattern,” which suggested “potential price increases” when combined with the tightening natural gas supply, FX Empire analyst James Hyerczyk said in a Monday note.
Traders would likely be watching crucial price points including $2.315, according to Hyerczyk. Breaching that “critical threshold” and key resistance level could spark a significant rally, he said. Conversely, a drop below $2.091 support “might trigger a sell-off” and “lead to retesting the recent low at $1.882.”
Natural gas inventories could provide the tipping point for a more substantial move higher or lower. The U.S. Energy Information Administration (EIA) storage report for the week ended Aug. 9 outlined a 6 Bcf withdrawal from Lower 48 storage facilities.
The unusual mid-summer withdrawal – the first in eight years and just the fourth on record – sent September futures higher Thursday in a knee-jerk response. Yet gains were quickly reversed and losses extended into the week’s closing session.
September futures’ inability to sustain the upside following the bullish storage report suggested “near-term technical consolidation may be warranted,” EBW Analytics Group senior analyst Eli Rubin said. But Monday’s rebound came faster than expected, and while key technical resistance at $2.37/MMBtu remained intact, the rebound in gas prices, low injections and falling storage surpluses “suggest natural gas may test higher over the next 30-45 days.”
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Rubin also noted the October futures contract was priced below any realized Henry Hub prices since 2000. NGI’s Daily Cash Market Prices showed the national benchmark Henry Hub moved from $2.100 to $2.120 Monday.
That creates the possibility for “modest room to the upside,” Rubin said.
Yet, the Commodity Futures Trading Commission Commitments of Traders (COT) report Friday showed natural gas speculators covering 10,000 short positions and cutting 8,000 long positions for the week ending Tuesday (Aug. 13).
“Short positioning remains above the early May level – prior to a massive 91,000-contract short squeeze sending gas prices soaring despite a fundamentally oversupplied market,” Rubin said.
The COT data suggested “shorts may be well-hedged,” and the natural gas market may need to “establish better support” before sending prices sharply higher this time around, Rubin said.
