Those traders who have been bearish on natural gas have enjoyed the upper hand for going on 11 months now, but the relentlessly lower price action has run into substantial opposition since April.

Those who are bullish of NG are convinced that NatGas has become too cheap relative to other energy and it is merely a question of time before it surges materially higher. The argument between bullish and bearish forces has evolved into a consolidation on the charts, a tightening triangular formation that looks set to resolve very shortly. Either way it does resolve there is likely a high percentage move in the near future for natural gas. 

Slightly less gas than expected this week  

The EIA reported an injection of 94 bcf yesterday, Thursday, June 25, which was about seven bcf below consensus estimates. The initial reaction off that news at 10:30 ET was a quick spike higher for NatGas, but the jump higher was fleeting. The NYMEX August NG contract began the day in the $3.90s. Immediately after the EIA report it jumped to as high as $4.10 very briefly before being sent back down to the opening price in the $3.90s. From there it ground its way back northward, regaining the $4.00 level just after lunch on its way to a last trade of $4.03, up about 13 cents or 3.3%. 

The day’s action is clearly visible in this 60-day, 30-min version courtesy of Stockcharts.com. 

The net result of the action is that NatGas bears were denied the consolidation breakdown they have worked so hard to achieve over the past several weeks of bearish salesmanship on televised media. Their relentless posturing and very vocal warnings that NatGas is overly plentiful, will remain that way for a long time and will go lower in price notwithstanding, neither NatGas nor the exchange traded fund (ETF) UNG have printed a new low for eight weeks running. Below is a one-year chart for UNG as evidence.

UNG, which tracks the near-active NYMEX contract price of natural gas, last made a new low April 29 at $12.69. Since then support has tended to form at slightly higher levels with nearly the entire month of June finding support forming at or just under $14.00.   

Technically speaking, with the triangular consolidation continuing to tighten, it sets up the obvious trade of going long at near $14 with a very tight trailing stop just below in the $13.50s. Should UNG break the consolidation by moving lower it could travel a good deal before establishing a new support level.   A tight stop is warranted given the circumstances. 

Investors with a technical bent will believe it is the same story should UNG break out of the consolidation convincingly to the upside. Either way, NatGas and UNG is setting up for a high percentage move, one way or the other in other words. 

Frankly, we at Got Gold Report are a little disappointed by the action in NG yesterday and I think it shows that some of the NatGas frenzy of several weeks ago has already bled off to other markets. The seven-bcf smaller than anticipated injection into storage announced by the EIA yesterday would have garnered a much more violent upside reaction if it had occurred several weeks ago. 

The fact that the reaction was more “ordinary” Thursday suggests that bulls have become more careful, having seen three separate breakout attempts reversed in this consolidation - at least so far. It also suggests that NatGas bears have become emboldened, willing to sell NG at progressively lower levels and perhaps they are less quick to pull the “cover trigger” on rallies.

So, the consolidation triangle has tightened down nearly as far as it can go and NG is probably about to show us which way the next definition move will be. 

Favorable season just ahead   

Normally the month of September (which coincides with the peak of hurricane season) is one of the most likely months to look for a reversal higher and many NatGas veterans probably expect that this year will see a similar rally event come September. We saw major reversals higher which began in September in 2007, 2006 and 2004 as examples.

In 2005 the reversal that year actually began a little earlier, in June. Helped along by an active hurricane season, including hurricanes Katrina and Rita, that NG rally was a big one too – from the $6.30s per MMBtu to the $14.50s, or over 130% in four months.

The year 2002 was the last time we witnessed a major rally following a “death plunge” of NG (our name for a plunge of more than 70% in price). There were actually two separate big-percentage reversal rallies that year. The first began in February with natural gas marking its low at $2.04 then snapping up to $3.70, or more than 80% higher in three months. The second move began that year in August with gas bottoming at $2.64 before shooting up to around $9.20 in nine months, a short-murdering 248% move. 

In case the point isn’t obvious, big percentage moves for natural gas happen. While it is more common for the bigger moves to get started in September (seasonally), the gaseous high percentage game could ignite and has ignited most any time of the year. 

In a year that is anything but normal, we can’t rule out another surprise short strangling power spike literally any day or week now.

On the bearish side of the ledger the amount of gas currently in storage is at or near record levels for this annual time period according to the Energy Information Administration and injections into storage the past five weeks have all been over 100 billion cubic feet. A combination of robust production from prolific new gas plays in Texas and Louisiana and decreased demand from industry have contributed to the unusually large surplus. In addition, liquefied natural gas (LNG) imports have also increased to 1.2 billion cubic feet per day (bcfd), up from 0.9 bcfd a year ago. 

Countering those bearish factoids, Baker Hughes said that the number of drilling rigs operating on land stood at 692 for the week ending June 19. A year ago there were 1,267 drilling in the same period, so the rig utilization rate has nearly been cut in half. With only around 700 rigs turning, unless there is a surge in the rig count, production is set to decline sooner or later.

While we believe that the visible fundamentals remain more bearish than bullish very short term, we also cannot ignore the signs that they will not stay that way forever. Our thesis is that the NatGas market will look forward and discount the coming production decline in advance well before it begins to show up in the production figures.

While NatGas is definitely not going to zero, it is certainly possible that it hasn’t yet cut its ultimate nadir in this historic, more than 75% plunge in prices. At the same time, however, NG has not printed a new low for eight weeks. That and the recent performance of NatGas producers relative to NG have to be unnerving to NatGas bears.

Whether long or short the NatGas trade, understand that trailing stops for both sides are tightening up closer and closer to the trading action and so are the Big Money buy and sell stops. A convincing breakout either way could be explosive very short term.

With September now merely three months away, should NG break lower here a veritable legion of investors will likely be willing to take a chance on a reversal following soon after. Don’t be surprised if NatGas can’t sustain any further moves lower for very long in other words.

The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a net long position in iShares Silver Trust, net long natural gas ETF UNG, long Timberline Resources (TLR), long Paragon Minerals (PGR.V), long Forum Uranium (FDC.V), long Natcore, (NXT.V), long Odyssey Resources (ODX.V), long Radius Gold (RDU.V), long Columbus Gold (CGT.V), long SDS as a Big Market hedge and currently holds various other long positions in mining and exploration companies. To contact Gene use LLCCMAN (at) AOL (dotcom).