Natural Gas Analysis for the Week of December 12, 2011

Forecasts of warmer temperatures in the U.S. pressured January Natural Gas futures last week. These unseasonal temperatures are expected to continue to keep buyers on the sidelines this week. With weather taking care of the demand side of the equation, traders turned their focus once again on the huge domestic gas supply. The inability to put a dent in supply and the continued injection of product is forcing traders to believe that the market will remain bearish throughout the entire winter season.

Last week’s late sell-off pushed the natural gas market to 3.309 while taking out the closing price reversal bottom that formed the week-ending November 25 at 3.461. The weekly close at 3.317 was also the lowest close in a year.

Technically, the January Natural Gas futures contract caught up to the pair of steep downtrending Gann angles at 3.282 and 3.1960 this week. Latching on to these two angles means the market is expected to continue to fall at a rate of .08 per week. The weekly swing chart indicates that a trade through the last swing top at 3.720 will turn the main trend to up.

Before the bearish weather outlook was released, traders were looking for a strong weekly close because the weekly U.S. Department of Energy report for the week-ending December 2 showed a larger-than-expected draw. Traders were beginning to price in the possibility that demand would increase along with a drop in temperatures.

The massive amount of supply along with below average demand for this time of  year has now convinced traders that unless temperatures turn sharply lower and remain there for some time, demand will never loosen the noose that supply has on prices at this time. The supply/demand situation has grown so bleak that traders are beginning to wonder how long the market will continue to trade lower at its current steady pace before weak longs decide to throw in the towel and send this market sharply lower.

Factors Affecting Natural Gas This Week:

Weather: Unseasonably warm temperatures are expected throughout most of the country, meaning demand is expected to remain under pressure. Although a cold spell is anticipated some time this winter, it is not likely to last long enough to lift the burden of oversupply.
 
Supply and Demand: There is still plenty of supply available as drillers continue to dump virtually free product on the market. Demand rose last week and may rise again this week, however not at a pace that will burn off the excessive supply.

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.”  It is going to take a combination of short-covering and new buying to drive this market through the last swing top at 3.7200 to change the main trend to up.

By. FX Empire

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