Natural Gas Rises To Overbought Territory

Source: CQG

The long-term quarterly chart shows that relative strength has risen from an oversold reading in earlier in 2020 and was approaching neutral territory on Aug. 21. However, price momentum remained in an oversold condition but was attempting to cross higher after the recent rally.

The monthly and quarterly charts leave plenty of room for a challenge of the late 2019 high at $2.905 and the $3 per MMBtu levels as the peak season of demand that starts in November approaches.

Time will tell if Warren Buffett’s timing in natural gas was impeccable in the natural gas market. As the price was hitting a quarter-of-a-century low in late June, the Oracle (NYSE:ORCL) of Omaha was likely negotiating the purchase of the transmission and pipeline assets of Dominion Energy (NYSE:D), which Berkshire Hathaway (NYSE:BRKb) bought for $10 billion.

Buffett is a value investor. Buying natural gas assets when the price of the energy commodity was at its lowest level since 1995 and shares of all energy-related companies continued to lag the stock market could turn out to be a shrewd move. In the world of commodities, the cure for low prices is the low price, as production tends to decline, leading to falling inventories and rising prices. Stockpiles of natural gas remained at an elevated level with 21.4% more in storage in mid-August 2020 than at the same time in 2019 and 15.1% more than the five-year average, production dropping. According to Baker Hughes , only 69 natural gas rigs were operating in the U.S. as of Aug. 21 compared to 162 last year at the same time.

After reaching the lowest price of this century, Buffett stepped up to the plate and made a significant investment in natural gas assets. Since the start of the global pandemic, he sold his interest in airline stocks and recently sold shares in some of the leading banks and financial institutions. He purchased the natural gas transmission and pipeline assets and shares of Barrick (NYSE:GOLD), a gold mining producer. The falling dollar, rising deficits because of the stimulus, and uncertainty in markets across all asset classes have pushed Buffett to make his last two sizeable investments in commodity production or related businesses. Buffet’s actions could be a blessing for the raw materials asset class.

When it comes to the natural gas market, the first level to watch on the downside is the Aug. 12 low at $2.085 on the September futures contract. Below there, $1.781, $1.641, and $1.583 stand as technical support levels. On the continuous futures contract, $2 is a critical psychological level, with support at $1.605 and $1.432, the late June low.

On the upside, the early May high of $2.499 on the September contract is the first target for the energy commodity. Above there, the November 2019 peak at $2.905 is critical technical resistance. As we move closer to the 2020/2021 peak season of demand that begins in November, the chances of a rally increase. The uncertainty of the weather during the winter months tends to support the price of natural gas in November and December, which is the time of the year where the price displays seasonal strength.

Meanwhile, inventories are at a level that could cap rallies over the coming weeks and months as there is plenty of natural gas in storage across the United States to meet all requirements for the coming winter season. I would not be surprised to see another downside correction before the seasonal strength in October and November. The short-term overbought position of the market is a warning sign that it may be too early to be bullish for the price of natural gas. However, the bullish reversal on Friday makes the picture cloudy. Natural gas is always a market that is full of surprises for market participants.