Natural Gas News: How High Can the Rally Stretch Before Downtrend Resumes?

May Natural Gas Tries for Third Straight Gain but the Trend Is Still Down

May Nymex Natural Gas is pushing higher for a third straight session after holding support near $2.56 earlier this week. Don’t mistake it for a breakout. Resistance levels are stacked above the market and the fundamental picture hasn’t changed enough to call this a trend shift.

Weather Is Driving the Short-Term Move

Thursday’s push higher came from shifting weather forecasts. Cooler temperatures are expected across much of the eastern two-thirds of the country through around April 20 and that triggered short covering. Then the forecasts flip again. Above-normal warmth is expected across the East and Upper Midwest from April 21 through April 25. That back and forth keeps demand expectations uncertain and limits how far this rally can run.

Fundamentals Haven’t Changed for the Bulls

I keep coming back to production when I look at why this rally feels thin. Output is near record highs and the EIA just raised its production forecast on top of that. Demand is running below last year. The latest storage report showed a build of 59 Bcf, well above the five-year average. Inventories are higher than both last year and the seasonal norm. There is no supply story that favors the bulls right now.

The one supportive factor worth watching is on the global side. Damage to a major LNG export facility in Qatar and Middle East supply disruptions could tighten global supply over time and boost U.S. exports. That’s a longer-term argument. It’s not moving the market today.

Near-Term Bias Stays Weak

Prices may continue to grind higher on short covering but strong production and elevated storage are likely to cap gains. Unless demand improves in a meaningful way this rally is borrowed time.

Technical Outlook

Technically, the main trend is down according to several measures. The short-term range is $2.888 to $2.561. Its 50% level at $2.725 is the first upside target. Overcoming this level will indicate the short-covering is getting stronger with a trend line at $2.830 a second target.

Aggressive counter-trend buyers may jump on this breakout, triggering a further surge into the main top at $2.888 and the 50-day moving average at $2.949.

The intermediate range is $3.488 to $2.561. Its 50% level at $3.025.

Unless there is a major catalyst that impacts supply and demand, we’re going to treat any meaningful opportunity as a shorting opportunity. This is the first leg up after a nearly 3-month decline, so the odds are this rally is being fueled by short-covering. With this chart pattern, the best time to buy is typically the break after the short-covering rally that forms a secondary higher bottom when compared to $2.561.

More Information in our Economic Calendar.