In the midst of a historically brutal winter, natural gas prices soared, but now that the bitter season is over, prices might have trouble staying afloat. On balance, energy producers and distributors were caught off-guard by unexpected increases in demand this winter, but that doesn't mean there isn't enough natural gas to go around.
It wasn't that long ago that producers were "flaring" off excess natural gas because it was cheaper to burn it than to try to pipe it and sell it. This practice has nearly stopped, except for areas in which there isn't a proper flow of lines to bring the product to market. Accordingly, there appears to be supply coming down the pipe (pun intended).
We won't deny that short-term supply remains relatively tight. For instance, stockpiles are currently reported to be 899 billion cubic feet (bcf). This is considerably beneath the level at this time last year, which was 1,730 bcf. Nonetheless, we believe the market has had plenty of time to price in the new reality. Thus, unless inventory drops further, the path of least resistance in natural gas pricing should be lower.
Thursday's inventory report from the Energy Information Administration pointed toward a slight build in stockpiles. In our opinion, this trend should continue as demand tapers into the warmer months. Naturally, higher supplies will work against the natural gas rally.
Speculators are mixed on the issue. According to the Commodity Futures Trading Commission's Commitments of Traders (CoT) report, large speculators are holding small to moderate net short positions. Small speculators, on the other hand, are currently net long the market in hopes for a continuation of the trend. In our experience, when the large speculators begin to amass a short position in this market, it is typically a sign of a potential reversal. Similarly, the small speculators are known for having shallow pockets and can easily be scared out of positions (which would lead to selling).
Seasonal patterns don't call for a major top until late June, but an intermediate-term high typically forms in late April. In our judgment, prices will likely retreat to the uptrend line near $4.45. Should this support level break, the next support lies at $4.30; failure there could mean disaster leading to a possible decline to under $4.00.
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