Natural Gas Futures Likely to Carve Out a Higher Low

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The steady decline in natural gas futures prices since late January coincides with the seasonal pattern in the natural gas futures prices. However, this time around, prices are likely to post a higher low, which could indicate a potential renewal of the uptrend over the coming months.

Weekly Natural Gas Inventory Report

Yesterday, the US Energy Information Administration released the weekly Natural gas inventory report. The official data on the stockpiles showed that supplies of natural gas fell by 114 billion cubic feet for the week ending February 10. It was smaller than the forecasts of 126 billion cubic feet.

The EIA’s data showed that total natural gas stocks were at 2.445 billion cubic feet, down 303 billion cubic feet from a year before. However, the EIA said that the current stocks were above the five-year average at 87 billion cubic feet. Following the report, Natural gas futures for March delivery fell sharply and extended the declines breaking below the $3.00 handle.

For the week ending February 10, natural gas rigs increased to 149, from 145 recorded in the previous week. So far, the total number of active rigs increased by 47 in the past year but was still seen to be over 90% lower compared to the peak registered in 2008. The natural gas rig count is expected to be released later today and could post near term risks for natural gas prices.

The current declines mark the 38.2% retracement level, measuring from $1.676 lows from 6th March 2016 and the $3.879 highs from December 25th, 2016. Adding some validation to the current declines is the bearish divergence seen on the Stochastics oscillator which coincided with the doji candlestick near the $3.80 handle and as noted previously in the natural gas futures commentary in December.

Natural gas futures (Weekly chart). Declines based off bearish divergence
Natural gas futures (Weekly chart). Declines based off bearish divergence

Traders will now have to wait and watch if support will hold at the current $3.00 level. It is ideal to watch for a reversal candlestick pattern, preferably on the weekly or daily chart time frame which could validate the end to the current correction, which is already, as noted at 38.2% of the rally from $1.676 to $3.879.

Technical Outlook for Natural Gas Futures

It is quite possible that Natural gas futures could remain range bound at the current levels well into late February where there is a strong possibility that a new higher low could be formed, keeping in trend with the seasonality. A reversal off the $3.00 handle coinciding with the timing could see prices potentially rising on a steady pace in the coming weeks. However, there is some chance that natural gas prices will continue to decline especially if the support level at $3.00 is breached on a weekly basis. In this instance, natural gas prices are likely to slip towards $2.650, which see a retest of the breakout from the long term rising pitchfork.

In the event that prices post a reversal off the $3.00 support handle, natural gas futures could be looking to target the previous highs near $3.80 and potentially target the unfilled gap on the weekly chart. Watch for a potential hidden bullish divergence near the current support level of $3.00 that could validate this bias to the upside.

Natural gas futures (Weekly chart). Potential hidden bullish divergence near $300 support.
Natural gas futures (Weekly chart). Potential hidden bullish divergence near $300 support.

The seasonal chart for the natural gas futures below shows the tendency for NG futures prices to bounce off during February/March before prices start to post a steadily rally into late April.

Natural Gas futures seasonal chart (Source: Seasonalcharts.com)
Natural Gas futures seasonal chart (Source: Seasonalcharts.com)

Last but not the least; traders will need to pay attention to the contract expiry as the March natural gas futures contracts expire on 23/02 leaving April futures contracts the most ideal futures contracts to trade.

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