In today’s Article, we will try to understand the fundamental reasons behind the gas price fall, the expected downside from these levels, & more importantly, the expected reversal points.
There’s one commodity that everyone is trying to bottom-fish in every fall – Natural Gas! & rightly so! After all, the commodity has fallen from $10 to $2.5 dollars in the last 1 year, and in terms of rupees, it has seen a correction from Rs. 700 to Rs. 190. Generally when a stock, commodity or any index falls this sharply, there is always a subconscious wish in every traders mind, to be the first one to capture a reversal. Many traders tried the same with Natural Gas, and burnt their fingers not once, twice, but multiple times in this southward journey of the commodity.
For predicting the potential reversal points for the commodity at hand – Natural Gas, we will use charts and a few technical analysis indicators, as they happen to be our best tools for weighing in on future probabilities. Also, the views that we are sharing are more from a medium-term perspective.
First, let us quickly understand a few important fundamental reasons behind the fall in Natural Gas prices in the last 1 year from $10 to currently $2.3.
- Warm weather conditions during winter in Europe & the US, led to lower consumption of Natural Gas for heating, leading to the piling up of Natural Gas in storage.
- Russia was one of the largest producers of Natural Gas. Consequently, the prices had soared after it invaded Ukraine on the 24th of February last year (2022). But that crisis seems to be behind us, at least for the time being.
- Reports say that the US is producing a surplus of about 4 billion cubic feet of Natural Gas a day, out of a total daily supply of 100 billion cubic feet. For these prices to stabilize, producers have to cut their output to bring back the balance in Demand & Supply.
- Analysts also expect Demand & Supply to come to a balance over the next 1 year & it is still too early for the prices to reverse from these levels immediately.
So what does an Investor who wishes to buy shares of Natural Gas producers do? Or what position should a Trader who wants to bet on a Natural Gas reversal take?
Has the time to buy this commodity finally come?
To answer this question, we will take the help of higher time frame charts of Natural Gas. First, let us look at the international Natural Gas prices. As it can be seen on the International charts, the price of Natural Gas has fallen from a high $10 in August 2022, to about $2.3 in February 2023. Big red candles on the monthly charts continue to show increasing selling pressure month after month. Just below this chart, we have added an indicator called RSI (A.K.A. Relative Strength Index), which is an indicator used to gauge of how oversold or overbought a commodity is. In the case of Natural Gas, the current running RSI on the monthly time frame is 39, which is way above the oversold levels of 30. In fact, an RSI level below 40 indicates a strong downtrend in the underlying commodity. Also, prices have not yet touched the lower Bollinger Band & are pointing towards a possible down move to a range of $1.95 to $1.92 in the short-term.
On the weekly chart there is a “piercing pattern” candlestick support around the range of $1.45 to $1.50, and the weekly lower Bollinger Band is at $1.70. Weekly RSI has entered into an oversold territory (below 30), & prices can bounce back after hitting 1.70 dollar levels in the short-term.
To summarize, although the overall gas prices have fallen rapidly, one can expect some more downsides before seeing a reversal. Yes, the bottom is definitely in sight, but buying just about right now, would be jumping in impulsively, and a little too early. Rather, an astute trader would do well by watching important bullish candle reversal signals in this range of $1.5 to $1.9 on international charts. Any evidence of a reversal via a bullish candlestick pattern, at the lower end of the Bollinger Band in an oversold territory, will be a high conviction trade setup for the commodity. On the Indian charts, the same levels translate to a price band of about 170 to 140 on MCX.
We will come with an update as well, once we spot them on the price charts!
So friends, We hope that the reasons behind this fall in Natural Gas prices have been made clear to you.
