November natural gas futures continued its slide last week, closing sharply lower and showing no indication that a bottom is even in sight. Production is high and last week’s larger-than-expected increase in U.S. gas inventories demonstrated that demand is not even able to keep up.
Late last week, the news that gas inventories rose 111 billion cubic feet versus guesses of 102 bcf was a clear signal that even seasoned analysts are not in touch with the true supply and demand picture. The current supply situation is being described as “massive” for this time of the year.
Weather is playing a key role. In the summer, the periods of heat that extended throughout the Midwest and the East Coast drew down supplies because of the high amount of electricity used to cool homes; however, this has been offset by the mild weather this fall for the same regions. Seasonally, the reported storage build was larger than usual.
Traders are also worried about the weakening economy and its projected affect on the supply/demand situation. Even though the gross domestic product reportedly rose 1.3% in the second quarter, higher than the preliminary estimate of 1.0%, traders seem unfazed, indicating that this was old news and that a slowdown is being factored in for the future.
At this point the market is obviously overloaded with short positions, so the first rally from this bottom is likely to be short-covering. It is going to take time to build a meaningful support base. Until this occurs, any strong up moves are likely to be panic-driven short-covering rallies that are not likely to last very long.
Technically, the trend is decisively lower and not in a position to change to up. Oversold conditions make this market ripe for a closing price reversal bottom that could signal that a bottom is in. Major resistance drops down to 3.746 and 3.817 this week.
Factors Affecting Natural Gas This Week:
• Weather – Mild weather means little or no demand since households are neither heating nor cooling. Unless a prolonged cold snap hits major population regions, expect the weather to be a bearish influence.
• Supply and Demand – Production is booming and the number of rigs producing is high. Demand is slowing just like the economy. More supply than demand means lower prices.
• U.S. Drilling Rigs - The number of rigs producing gas remains high at over 900. Until this number begins to trend lower and falls below 800, look for it to have a bearish influence on prices.
• Technical Analysis – Oversold conditions and an excessive amount of short positions make this market ripe for a short-covering rally. While not likely to be trend changing, it could be strong enough to knock out a sizeable amount of shorts, helping to begin the base-building process.
By. FX Empire
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