EC Natural Gas Approaching Key Short-Term Support Level

At 11:30 AM this morning August natural gas prices were down a little over 1% after breaking through support on large volume around 8 AM. Since then, prices have attempted to break back above that support in the $2.69-$2.70 range, finally making it through on a surge of buying just before noon. Though price movements on a weekly basis have been relatively small, this level appears critical to determining whether the uptrend of the last couple months continues or whether at least one more leg lower in prices should be expected in the coming weeks. As seen below, the August contract has bounced off its 30-day moving average each of the last 3 days, and thus far today a recent surge of buying has appeared to bring us right back over that level (as of 12PM the August contract was trading at $2.725). 

(Click on image to enlarge)

natural gas commodity weather

A couple things can become apparent on this chart. First, we observed that back in November the August contract bounced perfectly off of $2.70; that level was resistance in mid-June, turned into support once we broke through it, and then has been providing support through the month of July. A close under $2.70 would be the first since mid June, and a close below the 30-day moving average would be the first since late May, when the initial natural gas rally began. 

Additionally, a number of natural gas traders have been looking at the potential head-and-shoulders formation here (initial high in mid-June, higher high on July 1st, then lower high on July 8th before a reversal lower). This would seem to indicate that any break of the neck-line around $2.70 would portend a more significant move lower as well. 

Should the August contract break support and head lower, we see the 50-day moving average lingering all the way down near $2.55. Back in June, we saw strong support at $2.60 that prices stabilized prices before the next leg up that we also monitored. Meanwhile, should this rally continue into the close with yet another settle above $2.70, we would look at lingering resistance around $2.78, where the 20-day moving average sits which provided some temporary support last week. Given the current supply/demand landscape, which we have written about this week, and the already bullish weather forecasts that the market has appeared to digest, it would be difficult to see a short-term move above this support, especially as prices are still struggling to move above the $2.70 level, but there appears resistance near $2.82 (10-day moving average) and $2.87 (the July 8th high). 

Forecasts today aren't especially helping either. The Southern Oscillation Index remains solidly negative (typically indicative of more El Nino-like conditions in a couple of weeks) while the daily SST anomalies are falling rapidly, seeming to indicate more La Nina-like conditions late Fall. 

natural gas commodity weather

We can't really have it both ways, and one of these two is likely misleading. We wrote a couple weeks ago about the dangers in using the daily Nino 3.4 index due to the noise inherent within it (and the potential for over/understating changes due to buoy placement), so it is possible that this will snap back closer to neutral. However, for now it is keeping some uncertainty within the long-range forecast, which may keep prices relatively glued to the $2.7 mark. As we get added clarity on when the Midwestern heat breaks down and what the ensuing pattern looks like, we would expect a decisive price reaction that could be discerned in our technical analysis. For now, all eyes will be on the 2:30 PM settle in natural gas to see what the charts look like heading into the weekend. 

For more details on the expected implications of this within the natural gas market and daily updates on various weather models and their expected ...

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James Hanshaw 5 years ago Contributor's comment

Good article. I tend to look at other things and this adds to those. I just read news that Cheniere Energy is about to ship #LNG from the US to the Middle East where there is plenty of nat gas. Apparently there has been insufficient investment to exploit that while demand has increased significantly locally. It also shows how competitive US shale gas is.

Jacob Meisel 5 years ago Author's comment

Thank you! The case with #LNG is interesting as in the short-term it is not having too significant a demand impact (EIA estimates.5-.7 bcf/d), but longer-term could with further development and investment. Most analysis I conduct is focused on the near-term in the next few weeks/months of price action, but in what I have done as well it has become clear how comparatively cheap our gas is in comparison to other parts of the world.

James Hanshaw 5 years ago Contributor's comment

#LING export projects in Australia have had troubles getting new orders for some time due to price pressure from the US. Cheniere Energy, LNG, has contracts to deliver to Singapore and Indonesia - both on Australia?s doorstep. LNG, the company, has been my best investment ever - I bought in at $3.42. $LNG