Natural gas futures continued to fall on the weekly chart. Last week the January contract took out three week’s worth of bottoms to set another contract low. The break in the market was so severe that it allowed prices to catch up with a pair of steep downtrending Gann angles at 4.469 and 4.317 this week.
A decline back under these angles will put the market in an extremely weak position and indicate that the market is likely to continue to fall at a rate of about .08 per week. A break of this magnitude indicates growing pessimism triggered by an overabundance of supply and weak demand.
In addition to continual increases in supply, mild weather conditions are also wreaking havoc on the market. The approaching winter season should lead to increased demand but mild conditions are making this a moot point. With the short-term forecast calling for average-to-above average temperatures, demand is expected to remain below normal. This can only mean lower prices to follow.
With traditional fundamentals pointing toward lower prices and the number of new short positions growing, traders should start to watch for a short-covering rally triggered by oversold conditions. With analysts continuing to use words such as “pessimism”, “supply glut” and “oversupply” as prices reach severe lows; counter-trend traders have to begin to wonder if this market is getting close to turning around because of oversold sentiment.
According to the U.S. Energy Information Administration’s latest figures, stored gas supplies grew by 37 billion cubic feet. With supply on path to exceed last year’s record, this trend is going to have to stop before prices can at least stabilize. This is not likely to occur, however, as long as gas produced as a by-product of shale oil production continues to be virtually free. This means that the demand side of the equation is likely to be the major factor in determining when and how much natural gas prices can rally.
With supply expected to continue to grow and demand not expected to be a factor until the weather turns cold or short traders decide to take profits, look for the trend to continue down. Even if a short-covering rally begins, traders may be better off waiting for the rally to refresh their shorts. There just seems to be more opportunity to the downside at this time.
Factors Affecting Natural Gas This Week:
Weather: Mild weather is expected to keep pressure on the market. A prolonged cold snap in a major natural gas consuming area may only trigger a short-term short-covering rally.
Supply and Demand: Excessive production by shale-oil producers is likely to keep the pressure on prices. As long as this type of production continues to increase and the cost of producing gas remains virtually nothing, look for these companies to continue to dump supply.
Oversold Conditions: This is the wildcard. No one is certain what “oversold conditions” are. Is it a chart level? Is it a number on a technical sentiment gauge? Will it be a hedge fund that just decides to redeploy its funds elsewhere? The best sign of an impending short-covering rally will be a technical closing price reversal bottom.
By. FX Empire
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