Natural Gas Futures Rise to a 2-Year High. Risk of a Correction Looms

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Natural gas futures have been on a medium-term bullish rally since early 2016 after the price fell to a 17-year low of 1.639 in February this year.

Following the break of an 8-year falling trend line and a quick retest of this trend line at 2.65 in October this year, natural gas futures are poised to push higher over the longer term, but this comes at a risk of a near-term correction to the downside, targeting $3.00 a key resistance level that was broken making it a prime level for prices to establish support ahead of further gains.

On Thursday, the U.S. Energy Information Administration reported that the U.S. natural gas stocks decreased by 42 billion cubic feet for the week ending December 2. The data matched analysts’ expectations. Inventories fell by 50 billion in the previous week. Natural gas stockpiles are estimated to remain above 1.3% from a year ago and 6.9% above the 5-year average.

EIA Weekly Natural Gas Storage Report – December 8th 2016 (Source: EIA.gov)
EIA Weekly Natural Gas Storage Report – December 8th, 2016 (Source: EIA.gov)

Natural gas futures were trending higher ahead of the EIA’s report, rising to $3.54 mmBtu and briefly rising to $3.68 mmBtu. The 52-week high for natural gas is at 3.75 which posted on Wednesday. Experts believe that further gains could come as the winter sets in, increasing demand for natural gas heating over the coming weeks. Natural gas futures for January delivery closed at $3.71 mmBtu on Thursday. The current gains in the futures prices are likely to continue with the support of the seasonality behind the current trend.

Natural Gas futures – Technical Outlook

The chart below shows the weekly outlook for natural gas futures. Price has been trending higher after breaking above the previous resistance at $3.00. The current momentum led gains are likely to consolidate near the 52-week high of $3.75.

Natural Gas Futures price chart (January’17 contract)
Natural Gas Futures price chart (January’17 contract)

With the January contracts due for expiry around December 27th, traders will be looking to the new contract months. Also, around the same time, the cold weather blast is expected to fade, which will mean that traders will be focusing on the demand areas from the U.S. Midwest, mid-Atlantic and the Northeast regions.

The natural gas futures currently pricing in a near-term bullish demand side, this confidence could come under question as a new contract month opens in a few week’s time.

From a technical perspective, for further upside in natural gas futures to continue, the price will need to correct back to the $3.00 handle, in order to establish support at this level. To the upside, price action is seen currently trading in the multi-year resistance zone of $3.80 – $3.60, which previously held out as support during the second half of 2014.

Natural Gas Futures – Daily Chart, Technical Outlook
Natural Gas Futures – Daily Chart, Technical Outlook

Given the current pace of gains, the momentum is likely to slow down into this region, although if price manages to breakout above $3.80, further upside could be seen coming.

However, if NG futures price action goes to plan, expect to see a reversal over the coming week or two near the $3.80 – $3.60 region, which could potentially see a near-term decline back to $3.00. The pitchfork plotted on the daily chart can confirm the bearish view, when prices break below the median line. Short-term traders could look towards selling NG futures on a retest back to $3.60 resistance targeting the downside to $3.00 where support is more likely to be established.

Following a reversal near the $3.00 handle, Natural gas futures could potentially look at another leg higher, and following a breakout above $3.60 – $3.80 resistance, further gains could be seen coming towards $4.60 handle.

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