US NATURAL GAS: BURNING UP (c) Leo Haviland July 23, 2012

Focus on natural gas days coverage levels for end October 2012 (around the close of inventory build season) and end March 2013 (approximate end of draw period) in the context of price history. Assume normal weather and relatively lofty petroleum prices. What does this perspective reveal? This not only indicates that April 2012’s 190 was a major low and that major support exists around 220/240 (NYMEX nearest futures continuation). It also justifies a challenge on significant resistance around 317/330. An ascent above that range sometime in the next several months will be difficult but not surprising.

However, days coverage probably will have to sustain a decline in its excess relative to its long run average (1990-2011) to around three days or fewer for natural gas to significantly challenge major resistance looming around 400. The sustained reduction in days coverage to such levels likely will occur eventually, even if it does not occur by the end of March 2013.

However, the duration of about three months from 4/19/12 to date is about that of the 2010 and 2011 spring rallies. This time element warns that one should be cautious about declaring a further big upward move lies in store for the very near term, especially given the proximity of the 317/337 resistance.

But the 2009/early 2010 period teaches an important lesson for natural gas. It strongly suggests that elimination of containment fears, when followed by a dramatic reduction in days coverage, can help to propel natural gas prices much higher (and perhaps quite quickly). Inventory prospects several months out, not just the current (or very near term), matter.

So from the inventory days coverage standpoint, and particularly when read relative to the 2009 context and its eventual price rally from 241, what follows? This huge reduction in oversupply from March 2012 to October 2012 strongly indicates that there was a major low in April 2012 (not a mere interim bottom), that prices will not easily (if at all) come back to that level, and that a major bull move from that April 2012 low (not a mere interim rally) is underway.

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Natural Gas- Burning Up (7-23-12)
Natural Gas Chart (NYMEX nearest futures)(7-23-12)