Natural Gas Corrects After Last Week’s Powerful Rally – Whats Next?

Natural gas tumbled on Monday on profit taking by traders, after NG reached the highest levels since June 2015. Supported by news from the demand side, natural gas closed higher in every single session last week and rallied over 12%.

Bullish sentiment was partly buoyed by weather forecasts that have predicted unseasonably warm weather in most parts of the U.S from October 12th to 21st, which is anticipated to increase air-conditioning usage and boost natural gas demand for power generation as a result.

The U.S Energy Information Administration on Thursday reported that net supplies of the commodity added 80 billion cubic feet (bcf) for the week ended September 30th, topping analysts’ forecasts for a rise of 69 bcf. Total natural gas stocks in storage rose to 3.68 trillion cubic feet (Tcf), up 74 bcf from a year ago and 205 bcf above the five-year average.

Another possible factor behind the recent rise rise in natural gas can be found in the report from the World Energy Council which has forecast that global per capita demand for energy would continue rising and peak in 2030. The findings are part of a larger report on energy production and consumption, which was released ahead of the 23rd World Energy Congress in Istanbul. The report predicts that technological innovation and government policies will have a significant impact on the demand for energy including transport fuels, heating and electricity.

In a separate report by the U.S EIA, natural gas production and consumption in the U.S were reported to have increased in 2015. According to the EIA’s 2015 Natural Gas Annual Report, the market for natural gas continues to grow as the U.S. currently produces and consumes more gas than ever before.

Domestic production reached 27.1 Tcf, a 4.5 percent increase above 2014 levels, while total demand increased 2.8 percent to 25.1 Tcf in 2015. Net imports also continued their steady downward trend as higher imports were offset by higher exports, the report said.

Another factor contributing to the short term pull-back in natural gas today can be attributed to Hurricane Matthew. The category-1 hurricane had been expected to cause massive disruptions to the areas under its coverage with potential effects on Natural Gas production, supply and transportation, helping push natural gas futures up on Friday, before the hurricane made landfall in the US, over the weekend. The hurricane did  cause  significant power outages which reduced demand by power plants for NG. However, the damage caused was significantly lower than expected and the supply side seems to bee unaffected for the most part. The markets have subsequently cooled off somewhat.

Natural Gas Technical Analysis

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Fig: Natural Gas D1 Technical Chart

As can be observed from the daily chart, natural gas prices pulled back after failing to break out of the 38.2% retracement on Friday. Bullish sentiment that fueled the commodity for five trading days in a row pushed the market into the overbought zone and  sellers stepped in to cool the market, as indicated in the stochastic chart. The %D line and the %K lines have caught up with each other and whether the market corrects much further from here or continues the up-move after a brief correction remains to be seen.  With the two MAs placed below the price action, currently prices are expected to re-attempt a test of the 38.2% resistance at the 3.210 level.

Trade suggestion

Buy Stop at 3.210, Take profit at 3.330,  Stop loss at 3.000

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