Volatility returned to the natural gas market during Monday's trade but the result was quite different than last week as late-day selling gave back roughly 60% of last week's gains.
The June 15 contract gapped higher on the open topping out at a 2.935 in Sunday's overnight session.
By today's end, the June contract has fallen back toward the lower-2.800 level.
The market may have gotten a little ahead of itself over the past 2 weeks after gaining over 15%. Fundamental factors including storage injections, summer weather forecasts and record high production continue to raise many questions about the viability of the recent price rise.
But there are supportive factors including strong power generator demand and near term weather forecasts which suggest continued warm temperatures in the eastern U.S.
Last week's storage injection of 75 Bcf was the first in 5 weeks to be near the 5-year average. The previous 4 weekly storage injections had been historically large surpassing the 5-year average by 85%. An early start to summer cooling demand is exactly what is needed to turn the market trend back higher.
The technical picture for natural gas has also improved with bullish 10 and 40 day moving average alignment along with bullish trend following indexes.
A final note on the hedge funds which were record long over 488,000 contracts in February 2014, the exact week the market topped. The funds last week had a 64,000+ contract position, the lowest net long futures position since May 2012. The funds bought the high and sold out at a multi-year low. As a contrarian indicator, this is actually quite bullish.
Near term, natural gas prices will likely set back in retest of underling buying interest following a 2-week rally. Whether or not new lows are set will depend on weather-related cooling demand versus storage injections.
It is going to be an interesting summer for the natural gas market.
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