Natural Gas Corner - Market Review - Is This Rally The Real Deal Or Just Another Head Fake?

Natural gas prices have spiked higher over the past 3 days as the July 15 contract has gained .301 or 11.6% so far on the week.

Bullish factors have been hotter short term weather forecasts, the potential for a second monthly drop in shale gas production and new fund buying.  Last week's double bottom on the charts between the late-April low and last Thursday's price low has also brought in technical buying.  The inability for the market to drop to a new price low following a very bearish EIA weekly storage report was actually a bullish technical indicator.

On the bearish side, the market remains well supplied with production dropping slightly in May to an average of 72.8 Bcf per day,  down from a record high of 73.8 Bcf reached in late-April.  May production was 10.5 Bcf per day of 16.5% above the 5-year average.

There have been widely varying predictions as to when total production will be affected by the drop in the natural gas rig count which is currently 222, just above the all-time low of 217 reached in April.  Production decreases may be coming sooner than many including the  EIA expected earlier in the year and could become a bullish factor over the upcoming 6 months.

Storage injections also remain a bearish factor with the first 9 injections of the current season each surpassing the 5-year average.  Injections since the first week of April have totaled 772 Bcf, 38% higher than the 5-year average.  Last week's 132 Bcf injection was the highest in more than a decade.  This week's storage report is expected to show another strong number estimated at 109 Bcf, in-line with last year but again well above the 5-year average injection of 89 Bcf.

The next few days will be technically important in helping determine underlying strength following the recent move higher in the market.  If prices close firm into Friday's close, it would be a bullish technical signal for the market which could bring even more fund buying.

But if the market slumps back lower over the next few days of trade, particularly following release of the EIA weekly storage report tomorrow, bulls could once again be put back on the defensive.