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Natural Gas Analysis for the Week of November 7, 2011

Natural gas continues to base while attempting to form its final bottom according to the January futures contract. Last week’s action produced a higher-top and a higher-bottom compared to the previous week, however the close was lower. The weak close has put the market in a position to decline further, setting up the possibility of a break through the recent bottom at 3.870.

Based on the last range from 4.962 to 3.870, the retracement zone at 4.416 to 4.545 is the next likely upside target, but the market has to break through a minor top at 4.143 first. Even after accomplishing this, downtrending Gann angle resistance at 4.322 could stop the rally. The good thing is typically a wide support base leads to a strong rally. This will not necessarily mean new buyers are entering the market, but will most likely mean short-traders are covering their positions.

Last week’s bigger-than-expected rise in U.S. gas storage was the main reason for the weak natural gas futures close last week. On Thursday, the U.S. Energy Information Administration reported that 78 billion cubic feet of natural gas were added or injected to storage during the week-ended October 28. This was bigger than the estimates by analysts and represented an increase greater than two times the size of the five-year average.

Although the report was extremely negative, traders took it in stride and the result yielded a muted reaction. This could be a sign that the market is currently oversaturated with short-positions. It would have been better, however, if the market had reversed course and closed higher for the week. As it stands, the report still indicates that production is surpassing demand.

At this time, bargain hunters appear to be the only traders supporting the market. The forecast for higher temperatures continues to keep many of the seasonal buyers on the sidelines. Unusual events continue to affect the supply and demand situation, but what remains true is that the large inventory injections the market is experiencing at this time are highly unusual. The fact that winter is coming to the U.S. may be the reason for the market’s basing formation, but until an actual cold snap hits the nation, the market should continue to tread water between 3.000 and 5.000.

Factors Affecting Natural Gas This Week:

Weather:  Traders are still waiting for the cold weather to start. Mild temperatures in the Midwest and on the East Coast are keeping a lid on demand as well as prices. Even the cold snap which hit the Eastern U.S. a little more than a week ago could not trigger a rise in prices. Since the ice and snow caused power outages, many traders believe this was the reason for the drop in demand and the rise in prices.

Supply and Demand: Increased production continues to drive up supply, pressuring prices. As long as this trend continues, shorts will continue to press the market lower or at least stop any rallies. The one indicator to watch for a possible sign of a bottom is the number of rigs in production. This figure remains high. Unless there is a dramatic shift or shutdown, this fundamental should remain a bearish factor.

Oversold Conditions:  With the downside apparently limited, short-trader gains have also been limited. This makes the market ripe for a short-covering rally. It will not indicate a change in trend, however, and is likely to set up an opportunity for bearish traders to re-short the market.

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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