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Bounces in natural gas prices met by pressure amid bearish technicals

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Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

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Bounces in natural gas prices met by pressure amid bearish technicals

Naturalgas prices have been fairly range bound in recent weeks as support from movingaverages has been opposed by pressure from a bearish flag continuation pattern.Technicals may add pressure to prices over the next week or two.

"Thespot contract has lost some of its momentum as volatility and directionalconviction have eased noticeably over the last few weeks," EnergyManagement Institute principal Dominick Chirichella said. "From atechnical perspective the market appears to be working its way to a breakout ofthe triangular pattern possibly as early as this week."

Junenatural gas futures spent the week's opening session Monday, May 9, nearunchanged and holding to the middle of the technical trading range bound by$2.04/MMBtu at the low end and $2.17/MMBtu at the upside. The contract toppedthe session at $2.126/MMBtu and touched a low of $2.080/MMBtu before ending 0.3cent lower at $2.098/MMBtu.

EarlyTuesday, May 10, June futures were once again attempting to move higher,reaching $2.173/MMBtu and trading last up 4.8 cents at $2.146/MMBtu.

Junenatural gas futures have been buoyant after trade in early May tested and heldat key support from the 50-day moving average around $2.03/MMBtu. The averagehas turned around to the upside and will offer support near $2.06/MMBtu on May10.

The50-day moving average has been a positive influence on the continuation chartas well, with the market having held above the average since late March. Itcurrently offers support near $1.94/MMBtu.

TheJune natural gas futures contract early May 10 made an attack at the$2.15/MMBtu level, which is a "supportive force, but recent rally attemptshave lacked upside follow through," Zaner analysts said.

Itremains to be seen whether the moving averages can maintain the upside trend innatural gas in the weeks to come.

Abearish engulfing day reversal pattern was made in the June futures on thecandlestick chart on April 25 and will offer resistance at $2.304/MMBtu.

Thereversal has kept pressure on prices because it was formed as the market testedand held at the top of a bearish flag continuation pattern drawn off the March7 and April 18 lows and the March 18 high. The pattern will offer support andresistance on May 10 at $2.06/MMBtu and $2.29/MMBtu, respectively.

Althoughit is a mildly bullish indicator that the market closed on May 9 above thepivot swing number, Zaner analysts said momentum studies that are trendinglower at mid-range could accelerate a price break if support levels are broken.

Themarket is in the middle of consolidation and FX Empire analyst ChristopherLewis said there will probably be selling pressure above, especially close tothe $2.20/MMBtu level.

"Closerto the $2.20 level should be a nice selling opportunity for short-term chartsmore than anything else," Lewis said. "If we can break down below the$2.00 level, and then it will be easier to sell for a longer amount of time."

Themarket's short-term trend is negative as the close remains below the 9-daymoving average, but it could take on a defensive posture with the daily closingprice reversal down, Zaner said.

So-called"smart money" traders however, appear to expect the bearish flagpattern to hold, as they made the largest addition to their net short positionin nearly one year last week.

Datafrom the U.S. Commodity Futures Trading Commission's "Commitments ofTraders" report showed that traders classified as noncommercials added25,038 contracts to their net short to reach 141,490 contracts in the weekended May 3. It was the largestincrease since a gain of 35,191 contracts in the week ended June 2,2015.

Anotherpotential negative influence will be the decline in open interest, which hasfallen 75,136 contracts since a peak was made on April 18. Prices advanced 16.1cents between those two dates, but the contraction in open interest signalsthat traders have been exiting during the rally rather than joining it.

Market prices and includedindustry data are current as of the time of publication and are subject tochange. For more detailed market data, including powerand naturalgas index prices, as well as forwardsand futures,visit our Commodities Pages.