Will Natural Gas Run Away to the Upside Anytime Soon?

• Another new short-term high
• Higher highs and higher lows since late March- working towards filling a gap
• The trend is your friend, and it has shifted from bearish to bullish

With most eyes in the market focused on the wild ride in crude oil these days, the volatile natural gas market has been bubbling on the upside. The price of the energy commodity had been in bearish mode since reaching a lower high in November 2019 compared to the previous year. At the start of the peak season of demand late last year, the price of nearby NYMEX natural gas futures rose to a peak of $2.905 per MMBtu compared to $4.929 at the same time in 2018. The lower level was because of higher stockpiles in storage going into the winter months.

Natural gas spent the period from November through late March doing nothing but falling. The price reached a low of $1.519 during the week of March 23, the lowest level for the energy commodity since 1995. The quarter-of-a-century low came a few weeks before crude oil fell into negative territory for the first time. The cure for low prices in the world of commodities is low prices. Debt-laden natural gas producers have been cutting back on production activity as they sit on the edge of bankruptcy in the wake of the global pandemic and falling demand. Last week, I wrote,  “I do not expect the price to run away on the upside but buying on dips and taking profits on rallies could be the optimal approach to the energy commodity over the coming weeks and months.” Since I wrote that piece, the price of nearby natural gas futures made a higher high in a continuation of a pattern that began with the twenty-five-year low in March and early April. The United States Natural Gas Fund (UNG) follows the price of NYMEX futures higher and lower. The UGAZ and DGAZ bullish and bearish leveraged products magnify the price action in the energy commodity.

Another new short-term high

On a week-on-week basis, the price of natural gas posted a loss, but that did not prevent the energy commodity from rising to a new and higher high.

(Source: CQG)

As the daily chart illustrates, June natural gas futures on NYMEX rose to a high of $2.162 per MMBtu on Tuesday, May 5, which was the highest level since January on both June futures and the continuous contract. The price reversed at the new high and fell over the following three sessions. The Energy Information Administration reported the first triple-digit injection into storage on May 7, which pushed the price towards the $1.80 level. The EIA said that inventories rose by 109 billion cubic feet for the week ending on May 1.

The correction from the most recent high sent price momentum and relative strength indicators were below neutral territory at the end of last week. Wide daily ranges pushed the daily historical volatility measure to over 66%. Meanwhile, open interest at 1.197 million contracts on May 7 moved marginally lower than on May 1 when it stood at 1.2 million.

Higher highs and higher lows since late March- Working towards filling a gap

The daily chart shows that the price trend in the June contract has been higher since April 2 when the price fell to a low of $1.649 per MMBtu. Since then, there have been two successive higher lows at $1.705 on April 16, the day natural gas put in a bullish reversal, and at $1.765 on April 27. The April 27 low stands as the first line of defense on the downside for the emerging bullish trading pattern.

On the upside, natural gas has made three successive higher highs since early April. The April 8 high of $2.007 gave way to the April 21 peak of $2.10. On April 20 and 21, natural gas rose to new short-term highs when the price of crude oil hit the lowest price in modern history. Last week, the price rose to another new high of $2.162 per MMBtu.

Above the latest peak, there are two levels to watch on the upside.

(Source: CQG)

As the weekly chart highlights, the first level that is likely to stand as technical resistance is the 2020 high of $2.2550 per MMBtu from mid-January. Above there, a gap on the weekly chart from $2.724 to $2.753 per MMBtu is a technical target on the upside. Price action tends to fill voids on charts over time.

The trend is your friend, and it has shifted from bearish to bullish

Natural gas spent five months making lower lows and lower highs, which took the price of the energy commodity to a twenty-five-year low. The bearish price pattern gave way to a bullish trend over the past six weeks.

The declines in the prices of both oil and gas have caused production to decline, and that trend is likely to continue with the price of nearby NYMEX crude oil futures below $30 per barrel and natural gas under $2 per MMBtu. At the same time, debt-laden energy companies are in a heap of trouble, with many facing bankruptcies.

I do not expect the price of natural gas to run away on the upside anytime soon. However, the shift in the trading pattern could mean that buying corrections and taking profits at higher highs could be the best approach over the coming weeks and months.

The trend is always your best friend in markets, and so long as natural gas can remain above its first level of technical support at $1.765, the price action in the energy commodity remains bullish.

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The United States Natural Gas Fund L.P. (UNG) was trading at $12.27 per share on Tuesday morning, down $0.52 (-4.07%). Year-to-date, UNG has declined -47.38%, versus a 9.75% rise in the benchmark S&P 500 index during the same period.

UNG currently has an ETF Daily News SMART Grade of F (Strong Sell), and is ranked #66 of 112 ETFs in the Commodity ETFs category.