Natural Gas News: Production Drop Drives Market Bounce as Futures Eye Breakout

June Natural Gas Breaks Out but the Rally Still Needs to Prove Itself

June Nymex Natural Gas confirmed Thursday’s closing price reversal bottom on Friday and pushed through a short-term pivot at $2.749. Production is finally slipping and the market noticed. The bounce is real but conviction is still thin.

Technical Outlook

June natural gas futures confirmed yesterday’s closing price reversal bottom on Friday, fueling a minor breakout over a short-term pivot at $2.749. The move also took out a minor top at $2.808, shifting momentum to the upside. The first leg up from a prolonged move down in terms of price and time is usually short-covering. However, the size of the two-day rally suggests some bottom-pickers may be participating.

More importantly, the market is also in a position to post a weekly closing price reversal bottom to go along with Thursday’s daily closing price reversal bottom. This is an indication that the rally may begin to grow legs, especially since it was fueled by a catalyst.

Seasonally, it’s a little too early for a major bottom, but from a technical perspective the market was hitting a low-priced support area under oversold conditions. So the rally is not too much of a surprise. Speculators could come in to support the rally. This could also scare out weaker shorts. My guess is that aggressive fund buying may try to hit stops above $2.808 and the main top at $2.905.

Taking out tops is one way to spook a weak short and draw the attention of speculators tracking breakouts and reversals from technically oversold areas. It’s these types of traders that could try to drive the market into the 50-day moving average at $2.999.

Not only is the 50-day MA resistance and the trend indicator, but it’s also a potential trigger point for an acceleration to the upside. A breakout over the 50-day MA could attract even more technical buyers, but a move into the 50% level at $3.107 could start to attract renewed selling pressure.

I’m not a big fan of quick reversals because they tend to fade away just as fast. I feel this particular pattern will see the same fate. The best rallies usually come from support bases. I don’t see that pattern here, just a series of lower-tops and lower-bottoms, which is the classic definition of a downtrend. A fast rally and a quick end may actually be a good thing as long as the correction doesn’t take out $2.592. The best pattern for a rally later in late spring or early summer will be an elongated support base and a bullish catalyst.

My short-term outlook isn’t bullish per se unless you call a sharp short-covering rally bullish. The first two days from the low at $2.592 is impressive, but what would be even more impressive would be a surge into the 50-day moving average.

Even if this rally fizzles like the others, the bulls may be happy because it may turn out to be the groundwork for a strong rally later. Chasing the market is a risky proposition because at this time of year, weather could turn it lower quickly. Re-shorting at current price levels also carries risk this close to a multi-year bottom. But taking a bearish position closer to the 50-day MA could prove to be a low-risk trade because it’s a natural lean, provided you get out quickly if you’re wrong.

Ahead of next Monday’s opening, I’m looking for the rally to extend because of Thursday’s closing price reversal bottom and the weekly closing price reversal bottom. They both indicate that the selling pressure got weaker late in the week.

Production Finally Cracking

I’ve been bearish on June Nymex Natural Gas for months because production would not budge. That is starting to change. U.S. Lower 48 output averaged around 109.8 Bcf/d in April, down from 110.4 Bcf/d in March and below the December peak of 110.7 Bcf/d. As May begins, daily output is tracking closer to 108.6 Bcf/d. Producers in West Texas have been dealing with negative Waha Hub prices for months. When you are effectively giving gas away, cutting output is the only rational move. That is what they are doing and the market is starting to price it in.

Storage Surplus Is Shrinking

Supply had been the dominant bearish factor all year. Inventories are still elevated, running roughly 7% above average recently, but that gap is narrowing. Lower output combined with some cooler weather is slowing the pace of injections. It is not a bullish setup. It just removes some of the downside pressure that had been sitting on this market.

LNG Exports Holding the Floor

Flows to U.S. export facilities hit a record 18.8 Bcf/d in April. That is the one number I keep coming back to as the real support underneath this market. Domestic demand is soft and weather is not doing the bulls any favors, but LNG is pulling enough volume out of the system to keep prices from completely falling apart. As long as exports hold near that level and production keeps slipping, the floor holds.

What I’m Watching

LSEG projects total demand in the Lower 48 states, including exports, sliding from 103.2 Bcf/d this week to 100.0 Bcf/d next week and 99.4 Bcf/d the week after. That kind of demand profile puts a ceiling on this rally. The 50-day moving average at $2.999 is the level I want to see tested. A clean push through that opens the door to $3.107 where sellers are likely to come back in. If this rally fizzles before it gets there, $2.592 is the line I don’t want to see taken out.

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