March Natural Gas gapped lower on the weekly chart. This is a rare occurrence that often indicates exhaustion in markets that have experienced prolonged moves down in terms of price and time, but since this market followed-through to the downside the rest of the week, it probably means lower prices to follow.
The sharp plunge in natural gas prices pulled the market away from the pair of downtrending Gann angles it had been attached to since June and July 2011. These two angles are now resistance at 2.5360 and 2.6350. Besides filling in the weekly gap, the market will have to regain these two angles to demonstrate any kind of strength.
With the downtrend firmly in place and nothing technically besides a 10-year low to stop it from dropping further, traders have to accept the fact that the trend is their friend and that there is no reason to stand in the way at this time. The bottoming signal that traders should be watching for is a climactic closing price reversal bottom. But what could trigger such an event with the trend so firmly in place?
Last week’s government report showed weak demand and high supply. Even though this was generally expected by analysts, the natural gas market still went down. The reason for the sharp decline was the same also – fracking and an unusually warm winter.
Fracking is a new drilling method that has wreaked havoc on the natural gas market. Huge quantities are being extracted faster than it can be used. This is leading to the bulge in supply. In the meantime, many analysts are looking at the winter as being almost half over and usage lagging behind historical averages. This has resulted in a glut which is threatening to drive storage to full capacity by spring.
Now that this cat has been let out of the bag, it is possible that drillers are stepping up production while there is still storage room. With demand lagging supply by a wide margin, no one is sure what will happen to the excess supply if there is no room to store it.
Technical indicators may indicate that the market is oversold, but the trend is too strong to stop at this time especially if the supply and demand equation supports the weakness.
There may be a few short-term rallies but these are likely to be short-covering triggered by position paring. The long-term outlook will remain bearish as long as the U.S. continues to have no formal energy policy for natural gas. Consumers and businesses are slowly converting to natural gas, but the pace isn’t even close to putting a dent into the overabundance of natural gas available.
One factor that may turn the market is something that is seldom discussed by analysts. This is the futures exchange margin. Traders should watch the natural gas futures markets for signs of increased volatility. Futures exchanges like the New York Mercantile Exchange (NYMEX) don’t like volatility especially if it hurts small traders. In order to rid the market of excessive volatility it often raises margin requirements, or the amount of money needed to hold a futures contract overnight.
If natural gas futures begin to have volatile price swings then look for the NYMEX to raise margins. This will increase the cost to hold short positions, forcing many undercapitalized traders out of the market and potentially driving prices sharply higher. This is a wildcard but traders should be aware of this because unexpected changes often turn markets.
Factors Affecting Natural Gas This Week:
Weather: Winter has finally arrived in the Midwest, but temperatures haven’t remained in single-digits long enough to use up the excess natural gas supply. In fact, temperatures have oscillated between zero and above freezing for several weeks. Winter is almost half over and it looks as if supply is going to continue to outstrip demand.
Supply and Demand: Fracking and the mild winter have wreaked havoc on the supply and demand situation. Storage is nearing capacity and set to have the highest percentage of capacity on record at the end of winter. The solution: stop drilling. This is unlikely however as many producers are probably stepping up production just to fill up storage tanks before they reach capacity.
Oversold Conditions: Not a factor at this time. No one can define what “oversold” means when it comes to the natural gas market. A better term is probably “trending”.
Margin Call Rally: The rush to get natural gas into storage may increase volatility that forces the NYMEX to raise trading margins. This could trigger a massive short-covering rally.
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