The natural gas market last week began a seasonal countertrend rally higher led by strength in the 2017 and 2018 calendar strips. The 2017 and 18 strips both bottomed out on Friday, March 25th which came 4 days prior to the 2016 strip setting a low on the following Tuesday, the 29th.
The market had become too one-sided with the spot contract falling to a new 18-year low at 1.611. At the same time, the market news was also very bearish including record high production, storage at the second highest level, and winter heading demand rapidly winding down.
The reversal began early last week with short covering when the April contract for a third day in a row was unable to break below 1.610 support, a previous monthly low from August 1998. As support held again, short position holders began to buy back positions which escalated into continued buying into the week's end. Over the 5 days of trade last week, the April contract gained .156 or 9.4% closing higher on a weekly basis for the first time in six weeks.
Outside of a near term cool down in the U.S., nothing has changed on the fundamental side which would suggest a new bull market has begun. As will be shown in an upcoming report, post-El Nino winter price action in natural gas over the following summer is historically bearish. Expectations are for a renewed price break at least back to and likely under early-2016 lows once the current rally ends.
However, countertrend rallies such as the natural gas market is currently in can run much longer than expected and to price levels not expected. Therefore, aggressively selling this market at the present time is probably not the best course of action.
A lower risk way to play end of summer price action would be to buy October or November put options at strike levels back near previous price lows. The October 16 contract recently bottomed out at the 2.050 level and is currently trading at 2.250. This rally could easily lift the October contract higher by another .150-.200 before a final top is set.
Short-sellers may have temporary victories, but the best course of action for trade in natural gas over upcoming weeks will likely be to the upside before a post-summer price decline to new lows unfolds.
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