Natural Gas Price Fundamental Daily Forecast – Rig Count Drops, Market Gaps Higher

Natural gas futures gapped higher on Monday. Traders were likely responding to the weather and the news of a drop in the number of natural gas rigs.

At 0400 GMT, August natural gas futures are trading $3.017, up $0.066 or +2.24%.

Despite the strong price action, the trend is still down on the daily chart, however, the price action has helped establish a new main bottom at $2.875. We saw that low form on the intraday chart on Thursday when the market sold-off sharply then rebounded after the release of potentially bearish storage data from the U.S. Energy Information Administration.

The short-term range is $3.102 to $2.875. Its technical retracement zone is $2.988 to $3.015. Today’s gap-opening was likely triggered by aggressive short-covering. A sustained move over $3.015 will indicate the short-covering is getting stronger. The trend will change to up on a move through $3.102.

If $2.988 fails as support then look for a retracement of the rally from $2.875. This isn’t necessarily bearish. It may just mean that bullish traders are attempting to build a support base before moving higher.

Typically, the first rally clears out the weakest shorts. New sellers then come in to test the old bottom. If the market is going to move higher over the near-term then buyers will come in to defend the bottom.

Forecast

The gap on Monday could be a reaction to the drop in natural gas rigs from 186 to 183. It’s too early to say if this is a trend, but it is something that should be monitored over the near-term.

This week could bring another smaller than normal build due to hot conditions this week over the West, Central, and Southern U.S. This will further reduce surpluses and drop them to under 190 Bcf.

According to natgasweather.com, “Temperatures will warm back into the upper 80s to 90s late in the week over the southern and eastern U.S. as high pressure returns. It remains hot over the West to West Texas where highs will reach the 90s and 100s, with 110+ for Las Vegas & Phoenix. Overall demand will be light to moderate east of the Plains and High across the West.”

We’re still trying to determine the cause of the gap, but I’d like to default to price action. The way the market moved last Thursday after the EIA report suggests to me that the move was exhaustion. In other words, the market just ran out of short-sellers. So even though we may not have the greatest conditions for a rally, we could still experience one because of the lack of sellers.

I don’t think we’re developing a long-term rally just yet so the best thing to do today is watch the price action and read the order flow at $2.988 to $3.015. I think an upside bias could develop on a sustained move over $3.015 and the downside bias will resume on a sustained move under $2.988.