This guest article was written by James Hyerczyk, financial analyst at FX Empire.
August Natural Gas futures managed to surge to its highest level since the week-ending October 16, 2015 last week, but sellers came in at $2.812 to halt the rally on concerns that the market had advanced too far, too soon. However, buyers came back early this week to reignite the rally, which has thus far amounted to a volatile week of trading.
Traders are showing some resilience however by shrugging off bearish stockpile data as traders continued to focus on the weather and the possibility of strong summer demand. Bullish traders are also overlooking seasonal tendencies that indicate a possible top this time of year.
According to Platts Analytics, the hotter weather has increased power demand – consumption grew about 1.5% month-to-date to nearly 67 billion cubic feet a day, despite expectations that the recent price surge would lead power plants to seek cheaper fuel.
Power generators continue to burn coal and natural gas to meet consumer needs during this unusually hot June despite high stockpiles and production. With weather forecasts calling for a hotter-than-average summer, many traders feel that this usage trend is likely to continue, helping to underpin prices. There is also a general optimism building in the market that a rebalancing is taking place, and this is providing support.
The bearish traders cite the high inventories as one reason why the current rally is unsustainable. Inventories as of June 17 reached 3.1 trillion cubic feet, 25% above levels from a year ago and 28% above the five-year average for the same week, according to the U.S. Energy Information Administration. That puts it on pace to set a record high going into the winter.
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The weekly chart suggests that at current price levels, we could see either a new top form or another extension to the upside.
The main range is $3.223 to $1.990. Its retracement zone at $2.607 to $2.752 is currently being tested. This area is likely to act like a pivot zone so trader reaction to this zone will determine the near-term direction of natural gas prices.
A sustained move over the upper or Fibonacci level at $2.752 will indicate the presence of buyers. This should lead to a test of last week’s high at $2.812. Taking out this high with conviction could trigger an acceleration to the upside with the next target a main top from last September at $2.965.
The failure to overcome the Fib level at $2.752 will signal the presence of sellers. This could trigger a break into the 50% level at $2.607. This level is the trigger point for a possible break into the short-term 50% level at $2.485 and the 61.8% level at $2.407.
A weekly closing price reversal top will also be a sign that the selling is greater than the buying at current price levels. This will occur if buyers take out $2.812 then close below last week’s low at $2.653.
Watch the price action and read the order flow at $2.752 and $2.607 this week. Trader reaction to these levels will tell us if the bulls or the bears are in control. Weather will also be a key determinant of the direction of prices.