June natural gas futures have rallied more than 40% in May, with the move higher over the past week putting technical indicators even further into overbought territory.
The June New York Mercantile Exchange (Nymex) contract settled at $2.751/MMBtu Monday, putting the contract up 42% since May 1. For the prompt-month price series, this is up about 61% over the past month.
“The June contract has been in a steep upward sloping channel for most of May and eventually, traders will look to take some money off the table, especially considering June is clearly overbought when looking at traditional indicators,” said NGI’s Pat Rau, director of Strategy and Research.
Rau pointed to the relative strength index, slow stochastics and moving average convergence/divergence technicals. In addition, June is trading atop its 20-day Bollinger Band, continuing the contract’s push past the technical level.
“It appeared as though the rally might stall on Friday when June peaked at $2.654, stopping just short of taking out the major 200-day simple moving average of $2.66, Rau said. “But on Monday morning, June was already trading above $2.70.”
If June futures can hold the $2.66 level, now acting as major support, the contract would face its next major resistance at the $2.891 reactionary high posted in early January, Rau said.
As of early Tuesday, June futures were down several cents but holding at around $2.685.
Natural gas cash prices have also rallied over the past month with the onset of summer-like heat in southern regions, a rebound in liquefied natural gas exports and continued production restraint via cuts and maintenance. NGI’s Henry Hub spot price averaged $2.595 on May 20, up by 60% since the start of May and 79% from a month earlier.
Friday’s Commodity Futures Trading Commission Commitments of Traders (COT) report showed professional speculators reduced natural gas net short positioning for the week ending Tuesday, May 14, continuing a rapid drawdown of short bets.
Speculators reduced 31,000 short positions in the week by buying contracts to cover the positions, according to EBW Analytics Group analyst Eli Rubin. “Over the past month, shorts have covered 115,000 positions, providing the primary fuel for skyrocketing Nymex gas,” he said.
Traders have not been adding new bullish positions – instead long positions have declined over the past two weeks, Rubin said. “Eventually, the rally will run out of fuel to the upside” but with short positions still in place above previous short squeezes in January and October.
“Overwhelming technical momentum suggests continued upside in the interim,” he said.
R.J. O’Brien analyst Tom Pawlicki agreed, saying COT data may start to reflect more neutral positioning as the market takes on a “more steady trend that is built on the bullish fundamentals.
“Short-covering is usually successful in creating strong and impulsive moves such as the one seen in the last three weeks, but it is not always successful in boosting a market in the long run,” Pawlicki said.
