Natural Gas Fundamental Analysis, Week of May 1, 2017

Optimistic investors drove natural gas prices to a three-week high last week amid concerns of a tighter balance between supply and demand heading into the summer demand season.

June natural gas futures finished the week at $3.276, up $0.084 or +2.63%, its highest close since April 6. It was also the highest weekly close in a month. For the month, natural gas futures gained 2.7%. From March to April, the market was up 18%, its biggest two month gain since December.

Last week’s rally came as a surprise to seasonal traders who had been expecting a sideways-to-lower trade since we’ve entered the time of the year when temperatures are not too cold for heating demand and not too hot for air-conditioning demand.

Additionally, the U.S. Energy Information Administration (EIA) also reported last week that natural gas stocks had increased more than expected.

According to the EIA, U.S. natural gas stocks increased 74 billion cubic feet during the week-ended April 21. Analysts had expected a storage injection of 70 Bcf.

The five-year average for the week is an injection of around 57 billion cubic feet, and last year’s storage injection for the week totaled 64 billion cubic feet.

Surprisingly, prices rose despite the fact that the week was characterized by warming over the entire country. This may be an indication that speculators rather than professionals were driving the price action. This will likely be supported by fresh data from the U.S. Commodity Trading Commission which is already showing large long positions being held by hedge and commodity funds.

Forecast

At this time of the year, it looks like we are witnessing a battle between speculators and professionals. The current chart pattern on the daily chart suggests that the short-term direction will be determined by trader reaction to the retracement zone at $3.274 to $3.309.

The longer-term weekly chart suggests the key area to watch is $3.217 to $3.311.

The current price action strongly suggests that investors may not be watching current supply and demand conditions, but may be looking ahead to the summer months and the return of hot temperatures and greater air-conditioning demand.

Last week’s strong rebound from a sell-off early in the week also suggests that speculators may not be willing to wait for the supply/demand situation to line up perfectly and may have viewed last week’s price dip as a chance for bargain buying.

Additionally, perhaps we are witnessing investors not worried about current demand, but rather focused instead on decreasing production and rising exports.

I know I mentioned a lot of “ifs” but I’m writing for speculators and they seem to be running the show at this time.

I’m going to look for an upside bias this week on a sustained move over $3.274 and a downside bias on a sustained move under $3.309.