Natural gas price analysis: Is the rally over?

Charts suggest that natural gas prices may remain under pressure

Natural Gas storage tanks in a petrochemical plant at sunset                                 
Is the natural gas price losing steam? Find out in our price technical analysis – Photo: Shutterstock

Natural gas prices have tumbled from their recent multi-year highs, but are still much above last year’s levels. The price of a commodity is generally a function of supply and demand.

In its November Short-Term Energy Outlook, the US Energy Information Administration (EIA) said the elevated natural gas prices in the past few months reflect the drop in US natural gas inventory levels, which are below the five-year (2016–2020) average. 

The EIA anticipates demand for natural gas to remain high in the upcoming winter season. Additionally, the global demand for US liquefied natural gas (LNG) is also expected to remain robust. Strong demand and insufficient supply could provide a price floor to natural gas prices in the near future.

The EIA forecasts the Henry Hub spot price to average $5.53 per million metric British thermal units (MMBtu) from November through February and then gradually decline through the rest of next year. For 2022, the EIA expects an average price of $3.93/MMBtu.

Will natural gas prices go up during the peak winter phase or will higher levels attract profit-booking by traders? What do the charts suggest? Read our natural gas technical analysis to find out. 

Natural gas price technical analysis: weekly chart

Natural gas price weekly chart
Natural gas price technical analysis weekly chart – Credit:

Natural gas price has risen sharply from a low of $1.52/MMBtu in June 2020 to a high of $6.521/MMBtu in October of this year. This sharp rally pushed the relative strength index (RSI) deep into the overbought territory.

Usually, strong rallies are followed by an equally sharp correction as traders use the high prices to book profits. That seems to be the case now as the price has dipped to the 20-week exponential moving average (EMA). 

During strong uptrends, buyers attempt to defend the 20-week EMA. If the price rebounds off this support, the bulls will again try to resume the uptrend. The $6.50/MMBtu level has proven to be a major resistance for more than a decade.

Therefore, the bears will try to defend it with vigour. If the price turns down from this level, a few days of range-bound action is possible.

However, if buyers thrust and close the price above $6.521/MMBtu, the bullish momentum is likely to pick up. The next leg of the uptrend may reach $7.55/MMBtu.

Contrary to this assumption, if the price slips and sustains below the 20-week EMA, it will suggest the start of a deeper correction.

Natural gas price technical analysis: daily chart

Natural gas price daily chart
Natural gas price technical analysis daily chart – Credit:

Natural gas price formed a bearish head and shoulders (H&S) pattern, which completed on a break and close below the neckline. If the bulls do not push the price back above the neckline quickly, the downward move could accelerate.

The moving averages have completed a bearish crossover and the RSI has dipped into the negative zone, indicating that the bears have the upper hand. 

The first support on the downside is $4.58/MMBtu, but if this level breaks down, traders may rush to the exit, thus creating a panic. That could open the doors for a possible decline to the pattern target at $3.54/MMBtu.

This negative view will invalidate if the price turns up from the current level and breaks above $6. Such a move will indicate aggressive buying at lower levels.

Natural gas: Buy or sell at these levels?

Natural gas technical analysis shows a bearish formation on the daily chart, which indicates a possible drop to $4.58/MMBtu and then to $3.54/MMBtu. The first indication of strength will be a break and close above the neckline of the H&S pattern. The negative view will be invalidated on a break above $6/MMBtu.

The views and opinions expressed in this article are those of the author alone, and do not constitute trading advice. Trading and investing involve substantial risks, therefore you should always do your own research or contact your financial advisor.

US Natural Gas Spot
Daily change
Low: 5.052
High: 5.45

Further reading: BP share-price forecast: Is BP a good stock to buy? 

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