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Bottom Fishing: Natural Gas Prices Could Rally

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Price channel

Natural gas futures contracts for November delivery recovered from the key support of $2 per MMBtu (British thermal units in millions) on October 27, 2015. Prices are following the long-term downward trend due to oversupply concerns. However, weather and inventory were crucial in driving natural prices lately.

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Support and resistance

The long-term bearish momentum could cause natural gas prices to fall. The next support for natural gas prices could be seen at $2 per MMBtu. Prices tested this level in April 2012. In contrast, harsh winter and bottom fishing[1. Investing at low prices caused by economic factors] could drive natural gas prices higher. Natural gas prices could see resistance at $3 per MMBtu. Prices tested this level in April 2015.

The EIA (U.S. Energy Information Administration) estimates that gas prices could average around $2.8 per MMBtu in 2015 and $3.1 per MMBtu in 2016. Goldman Sachs (GS) estimates that gas prices could average around $2.7 per MMBtu in 4Q15. Bank of America Merrill Lynch (BAML) forecast that gas prices could average around $2.9 per MMBtu in 2015. Natural gas prices are also below the 20-day, 50-day, and 100-day moving averages. This suggests pessimistic sentiments in the natural gas market.

The catastrophic fall in the natural gas prices could impact oil and gas producers Cimarex Energy (XEC), Ultra Petroleum (UPL), Gulfport Energy (GPOR), and Comstock Resources (CRK). These stocks’ natural gas production mixes are more than 49% of their total production. Also, these stocks account for 5.4% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

The volatility in the energy market could also impact the Velocity Shares 3x Inverse Natural Gas ETN (DGAZ) and the iShares US Oil Equipment & Services ETF (IEZ).

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