Natural Gas: Price Swoon Ahead?

The natural-gas line in the sand is $4.45 as June futures have been rejected on all recent attempts to move higher. Futures have given up the last three sessions, something that hasn’t happened since March. Thursday’s slide is the worst yet with prices down nearly 7% as of this post.

Time To Get Short
Those not already involved in bearish trade can get short now on bounces. My favored play is short futures while simultaneously selling out-of-the-money puts 1:1.

Inventories
Thursday’s plunge was caused by a larger-than-anticipated build in inventories on the weekly energy report. Stockpiles climbed 43 B cubic feet in the last week, well above the 30 bcf rise that was projected. Total stockpiles have reached 1,777 bcf, according to the EIA. The steep increase suggests demand from utilities -- for electricity and heating -- may be coming in weaker than expected. And they're the two biggest drivers of natural gas, so slack demand here is very bearish for prices. What’s more, with warmer temperatures coming in the weeks ahead, storage injections could climb further.

This week’s number caught most market participants off guard. But for the bears who have stuck with me… we could be getting the breakdown I’ve been forecasting.

Support
Natural-gas prices are finding mild support at the 38.2% Fibonacci level. I’m still expecting lower trade after a brief pause in selling. A key development would be a breach of the 50-day MA (green line). Prices have been above that pivot point since late February when prices were nearly 15% lower than current levels.

On bearish trade, use the Fibonacci levels on the chart above as your profit objectives. The 50% Fib level is 15 cents below current trade. The 61.8% retracement and 100-day MA come in 30 cents under current pricing… trade accordingly.