Natural Gas Shows Signs of Base Formation: Recovery Ahead?

The recent surge in momentum observed in the natural gas market could indicate the beginning of a potential recovery after a prolonged period of weakness. However, it is important to note that the decline experienced over the past year suggests that any upward movement in prices might be accompanied by setbacks, rather than a continuous rise. One of the factors contributing to the recent boost in natural gas prices is the reduced gas exports from Canada, primarily caused by wildfires in Alberta and other western provinces. Additionally, the decrease in wind power generation last week led to higher utilization of natural gas for electricity production, further supporting the prices.

Furthermore, the decline in drilling activity due to oversupply conditions and stricter credit conditions makes it less likely for natural gas prices to experience a significant further decline. The United States Energy Information Administration's Short-term Energy Outlook anticipates that the U.S. natural gas spot price will increase towards 3.71 by December.

Natural Gas Daily Chart

From a technical analysis perspective, natural gas is currently attempting to surpass a crucial resistance level at the April high of 2.52, which aligns with the upper boundary of the Ichimoku channel on the daily charts. A successful breakout above this level could potentially pave the way for further upward movement toward the March high of 3.03. However, it should be noted that overcoming this level might prove challenging, at least initially.

On the whole, the downward pressure on natural gas prices seems to be diminishing, as suggested by the color-coded candlestick charts that utilize trending and momentum indicators. Moreover, market diversity has been at exceptionally low levels, indicating a potential shift in market dynamics. These observations are consistent with the analysis presented in the articles titled “Natural Gas Price Setup: Downward Pressure is Abating,” published on April 11, and “Natural Gas Price Rebound Could Extend; What's Next for Crude Oil？” published on May 18.

Natural Gas Monthly Chart

To maintain the short-term upward pressure, it is crucial for natural gas prices to remain above the support level established in early May at 2.03. A decline below this support level would increase the risk of a renewed downward movement in prices.

Note: The color-coded chart mentioned in the article is designed to visually represent the prevailing trend in natural gas prices. Blue candles indicate a bullish phase, red candles indicate a bearish phase and grey candles represent consolidation phases that can occur within both bullish and bearish trends, sometimes appearing towards the end of a trend. It should be noted that the candle color is not predictive and may change in the subsequent bar. False patterns can also occur around the 200-period moving average, support/resistance levels, and in sideways or choppy markets. The author does not guarantee the accuracy of the information provided, and past performance should not be considered indicative of future performance. Users should exercise caution and make their own decisions when using this information, as they assume any associated risks.

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