In the wake of yesterday's sub 80 Bcf report from the EIA, spot Nymex Henry Hub natural gas futures rocketed 7.8%. The knee-jerk reaction is not hard to understand. Over the previous five sessions the market ran into technical support at the 76% retracement (Jan-April) at 4.352 and the 62% retracement (Apr-Jun) at 4.340. As such, nearby oscillators suggested the market was indeed oversold and thus, due for a pop.
Be that as it may, bullish momentum stalled yesterday in the low 4.60s. This is key, i.e., either the market is now at the top of the current range or it is ramping up for another run towards $5.
In this vein, it is imperative over the next handful of sessions for the bulls to break out of the current ceiling which analysts at The Schork Report define as the 38% retracement (Apr-Jun) at 4.667 and the 62% retracement (Jan-Apr) at 4.688. Success here clears the path towards the 5.00 mark.
On the other hand, as noted yesterday’s newsletter, if the bulls fail in the 4.60s and the bears retest support in the 4.30s, then the path towards a $3-handle in this market is wide open.
According to yesterday's IP/CU figures, the Fed noted that because of unseasonably warm temperatures in June, capacity utilization rates at Utilities rose by 2.1 points to 82.3%. Nevertheless, this rate was 4.4 points below its 1972–2009 average.
We all know June was hot… and July is even hotter. Thus, the bulls certainly have a lot going for them. Therefore you have to ask, why wouldn’t the market go back to $5? Then again, we all know how cold it was back in January and February… and all the market did back then was sell off.
Bottom line, given the hot temps and the oversold conditions in the market, a rebound through resistance in the high 4.60s, towards 5.00, is not unreasonable. But keep in mind, once the thermometer cools down towards the shoulders (barring hurricanes), the bulls do not have much to lean against.
For example, figures from the Fed show that Metals and Chemical production (huge buyers of gas) is on the rebound, but both still trail their respective long-term averages by a significant amount.
As detailed in today’s issue of The Schork Report, if gas bulls are going to make a run at $5, now is their chance.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.