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Natural Gas Analysis for the Week of December 5, 2011

Forecasts of colder temperatures helped give natural gas futures a boost last week. Although supply remains high, increased demand for product led to a decrease in supply last week. On Thursday the Energy Department’s Energy Information Administration reported in its weekly report that natural gas in storage tanks fell by 1 billion cubic feet to 3.851 trillion cubic feet for the week ended November 25. This was the third consecutive drawdown which means the market could see a normal seasonal spike in prices.

January Natural Gas futures were unpinned by the report since traders were looking for an increase of 9 billion to 13 billion cubic feet. Despite the drawdown, the inventory remained 7.3 percent above the five-year average of 3.590 trillion cubic feet, and 1.1 percent above the 2010 level of 3.810 trillion cubic feet.

The mild temperatures in the fall have delayed the normal seasonal uptick in natural gas prices. This curtailed demand, allowing supply to continue to build. Oil producers continue to move gas into storage since it is considered to be a by-product of drilling and costs virtually nothing to move from the field into storage. This trend is likely to continue, however, the greater demand is probably going to offset any new injections of supply.

Natural Gas Price Movements

From a trader’s perspective, the greater demand gives the long-term bearish trader an excuse to lighten up his positions and possibly reset shorts at a higher price. The charts indicate that the closing price reversal bottom at 3.461 has been confirmed. However, the market is still far from changing its main trend to up. A long-term downtrending Gann angle at 4.1620 this week is a potential upside target. If this angle is tested over the near-term, traders should see heavy shorting pressure emerge.

This week, traders should look for more short-covering to drive the market higher. It may start out slow but eventually there is going to be a blow-off rally which may catch short-traders by surprise. Even if the weather turns suddenly colder, traders shouldn’t expect too much of a gain. There are just too many shorts in the market and the fundamentals do not support wild long-side speculation at this time.

Factors Affecting Natural Gas This Week:

Weather:  Seasonally colder temperatures should continue to underpin prices because of increased demand.
Supply and Demand:  There is still plenty of supply available as drillers continue to dump virtually free product on the market. Demand is expected to rise, but no one is certain whether it will be enough to produce a drawdown in inventory. Weekly guesses have been on the high side lately, missing the actual number. As long as this trend continues, bearish traders may continue to liquidate their positions while waiting for higher prices before re-shorting.

Oversold Conditions:  Technical indicators such as stochastics and relative strength have indicated oversold conditions for some time, but this hasn’t scared any of the shorts out of the market. There is an old adage that states “the only thing that cures low prices is high prices.”  The confirmation of the closing price reversal from two weeks ago indicates that the short-covering rally is likely to continue for another 2 weeks.

By. FX Empire

FXEmpire.com is the Forex flagship site of the FX Empire Network. The FX Empire Network provides readers with the most expert and most timely technical analyses, fundamental analyses and news-pieces; this in order to empower them to make for themselves the best possible financial decisions. The FX Empire Network’s other flagship sites include: StocksEmpire.com and CommoditiesEmpire.com.

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