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Natural Gas Analysis for the Week of December 26, 2011

The downtrend continued in the Natural Gas futures market as the February contract reached a new low at $3.100. The trade was slow last week, partly because of light volume due to pre-holiday trading and because the market was nearing the psychologically important $3.000 level.

Buying or short-covering wasn’t particularly strong, but based on the pace of the trading; it looked as if selling pressure was light. This was probably because new short traders were scared out of fear the market would quickly reverse to the upside at any time.

The main reason for last week’s decline was once again attributed to abundant supply and unseasonably warm temperatures. These two factors should limit the upside potential of the market also. With winter seemingly delayed, downside pressure should remain on the market until the forecasts start to call for extremely low temperatures or long cold snaps.

Besides the lack of demand, the market has also been negatively affected by regular injections of gas from U.S. shale-gas fields. U.S. EIA statistics show that inventories are currently 11.9% more than the five-year average for this time of year.

Traders should look for natural gas prices to continue to fall this week since the latest weather forecast shows no signs of lingering cold temperatures on the horizon. Once $3.00 is pierced, weak long traders are likely to exit in droves, sending the market sharply lower. Consecutive closes under this level should allow short-traders to establish resistance at this price.

Technically, prices are following a pair of steep Gann angles down. These angles come in at 3.010 and 3.1180 respectively. They also indicate that the market may reach the $2.50 level within the next 6 to 8 weeks. Even though the main trend is down and is showing almost no sign of turning around at this time, I should mention that the main trend will turn up on the weekly chart following a rally through the last main top at $3.741.

Factors Affecting Natural Gas This Week:

Weather: There is nothing in the forecasts that suggest there is going to be a lingering cold snap that could drive up demand for product.

Supply and Demand: Cheap natural gas is being delivered and demand is almost non-existent, leaving inventories at historically high levels.

Oversold Conditions: Yes, the market is oversold, but that’s a relative term. The fundamentals support the downtrend and that is likely to continue until the strongest short is forced out of the market.

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  • brek on December 27 2011 said:
    If I had an natural gas well, I would shut it down. Why give it away?

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