Natural Gas Recovers As Oil Bulls Hope For A Short Covering Rally

Weekly September Natural Gas Recap

September natural gas futures jumped over 4 percent on Thursday after a government report showed a smaller-than-expected inventory increase. The rally caught the mostly short market by surprise, causing short-sellers to scramble to get out of their positions.

According to the U.S. Energy Information Administration (EIA), U.S. natural gas stocks increased by 78 billion cubic feet for the week-ending June 9. Analysts were expecting a storage injection of 89 billion cubic feet.

Additionally, the five-year average for the week is an injection of 87 billion cubic feet, and last year's storage injection for the week totaled 68 billion cubic feet. Last week's report showed natural gas inventories rose by 106 billion cubic feet in the week-ending June 2.

The EIA also reported that U.S. working stocks of natural gas totaled about 2.709 trillion cubic feet, around 228 billion cubic feet above the five-year average of 2.481 trillion cubic feet and 322 billion cubic feet below last year's total for the same period. Working gas in storage totaled 3.031 trillion cubic feet for the same period a year ago.

Weekly September Natural Gas Forecast

The large number of shorts in the market suggests that Thursday's rally was driven by short-covering. I don't think that shorts flipped the switch to long this quickly based on the EIA report. We'll be watching Friday's action to see if the short-covering continues. We'll also be curious to see how this particular move affected the Commodity Futures Trading Commission report.

Typically, in a weak market, the first leg up from a bottom is all short-covering. The next break, or test of the recent bottom is the one to watch. If it attracts buyers then a support base will form or the rally will continue. I'm not confident that buyers will just suddenly appear at $3.080 on Friday when they could've bought all they wanted near $2.930 on Wednesday.

Usually investors will buy strength when they have strong fundamentals and momentum on their side. It also takes a lot of buying power to drive out stubborn shorts. So not only will we be watching the price action, but also the order flow.

Fundamentally, demand for next week is expected to be moderate largely due to expected higher temperatures in the eastern half of the United States into the weekend. Cooler temperatures are expected across the northern and east central regions beginning early in the week.

The key to a sustainable rally will be the bullish traders' ability to drive out the shorts with enough conviction to convince momentum traders to shift their bias to the upside.

Weekly September Natural Gas Technical Analysis

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The main trend is down according to the weekly swing chart. The market is far from turning the main trend to up, but it is in the window of time for a potentially bullish closing price reversal bottom. A close over $3.056 will form this chart pattern.

In order to confirm the chart pattern, there is going to have to be a follow-through rally next week. If this occurs then we could see a 2 to 3 week rally with $3.214 to $3.283 the minimum upside target.

If $2.922 fails as support then look for the selling to extend into the main bottom at $2.903. Taking out this level will reaffirm the downtrend and likely create enough downside momentum to challenge the next main bottom at $2.800.

Weekly September WTI Crude Oil Recap

September crude oil hit a six-week low on Thursday, pressured by the persistent global supply glut and doubts about OPEC's ability to implement agreed production cuts.

In other news, the U.S. government's Energy Information Administration raised its prediction for domestic output growth in 2017 to 460,000 bpd from a predicted decline of 80,000 bpd in December.

The International Energy Agency said it expects oil supplies next year to outpace demand despite consumption hitting 100 million bpd for the first time.

Crude oil prices are in a position to close lower for the week with most of the loss coming in response to Wednesday's bearish U.S. Energy Information Administration (EIA) weekly inventories report. On this report alone, prices fell nearly 4 percent.

According to the EIA, U.S. stockpiles fell by 1.7 million barrels, less than the expected decline of 2.7 million barrels. The EIA also reported that gasoline stockpiles rose by 2.1 million barrels in the week through June 9, versus expectations for a 457,000 barrel drop.

Weekly September WTI Crude Oil Forecast

Barring any surprise news which would likely cause a short-covering rally, crude oil is bearish from both a short-term and long-term standpoint.

Short-term, production growth in Libya and Nigeria and continued rig additions in the U.S. are complicating OPEC's plan to cut production, trim the global supply glut and stabilize prices. This is raising doubts over the success of OPEC's strategy.

Longer-term, the numbers are looking bearish. Earlier this week, the EIA raised its prediction for domestic output growth in 2017 to 460,000 bpd from a predicted decline of 80,000 bpd in December. This suggests the global supply glut will persist for a while.

Additionally, the International Energy Agency says it expects oil supplies next year to outpace demand despite consumption hitting 100 million bpd for the first time.

Weekly September WTI Crude Oil Technical Analysis

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The main trend is down according to the weekly swing chart. The market is not in a position to change the trend to up. However, taking out the last main bottom at $44.76 will signal a resumption of the downtrend.

If $44.76 is taken out with conviction then look for a possible acceleration to the downside with the April 5, 2016 main bottom at $42.18 the next target. We could see a technical bounce on the initial test of this level because of oversold conditions. However, if it fails as support then look for the selling pressure to resume. This could trigger another spike to the downside.