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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Bulls Willing To Play Waiting Game In NatGas

Natural Gas

With the end of the month coming up and the last full month of winter right around the corner, let’s take a look at the natural gas market this week.

March Natural Gas futures rallied early in the week on forecasts of colder temperatures the last week of January and into early February. Unfortunately for the bullish traders, this idea came and went, leaving them no choice but to lighten up on their long positions while awaiting perhaps the next piece of news that may trigger the final rally for the season.

The bad news is that despite the rally earlier in the week on predictions of cold weather and a bigger weekly drawdown then estimated, natural gas futures are poised to settle lower for the week. The good news is the chart pattern suggests there may still be life in the contract because prices are still holding above a major support zone.

According to the U.S. Energy Information Administration (EIA), natural gas stockpiles shrank by 243 billion cubic feet in the week-ending June 13. Traders were looking for a draw of 229 Bcf. The five-year average draw for this week of the year is only 170 Bcf.

Technical Analysis

(Click to enlarge)

On the Weekly March Natural Gas chart, you can see that four retracement zones have combined to hold the market in a range, creating choppy, two-sided trading conditions.

Starting from the outside and working to the inside, the major support zone is the retracement zone bounded by $3.148 to $2.988. This zone provided support earlier in the month when the market reached a short-term bottom at $3.110.

On the upside, the longer-term retracement zone at $3.537 to $3.789 provided resistance when the market reached a multi-year high at $3.828. The lower level of this zone at $3.537 has repelled the market the last three weeks.

The intermediate range is $2.764 to $3.828. Its retracement zone at $3.296 to $3.170 is currently being tested.

The short-term range is $3.828 to $3.110. Its retracement zone at $3.469 to $3.554 provided resistance earlier in the week.

(Click to enlarge)

The market is trading in almost pendulum-type action inside these zones. The tighter the ranges become, the more volatility we can expect over the near-term.

This week, the market bounced between a pair of 50% levels at $3.469 to $3.296. If it continues inside this range for a couple of more weeks then we can start to anticipate a huge breakout move. By then we should know if the warm weather will continue, or if the cold weather has returned.

The key support and resistance areas are the price clusters. These are formed with 2 or 3 levels land within close proximity of each other.

On the upside, the resistance cluster is $3.537 to $3.554. And on the downside, the support cluster comes in at $3.170 to $3.148. Violations of either one of these clusters will signal that bigger moves are coming.

Conclusion

Supply in January is down 2.4 Bcf from the same period a year ago, according to Platts Analytics. However, total demand is still down compared to last January, but this is largely due to the mild weather. This suggests a very tight supply and demand balance. However, this doesn’t mean much unless the weather turns cold.

Natural gas prices could move higher if cold weather hits key demand areas. Not only will this lead to strong heating and power plant demand, but along with the recent surge in export demand, if it ever does get cold, we could be looking at record withdrawals.

We’re going to start the new week still looking at low to very low natural gas demand over the next 7 days. However, the price action suggests traders are still trying to build a support base in anticipation of colder weather into late January or early February. Buyers are going to continue to underpin the market as long as there is hope for cold weather.

We can continue to expect a choppy, two-sided trade over the near-term even if the forecasts don’t indicate the return of cold temperatures. However, warmer-than-average temperatures are put back into the forecast then I think we cold revisit $2.988 to $2.764.

The chart pattern also suggests that the return of cold temperatures could underpin prices, but it is going to take a lingering Arctic blast to take the market back to $3.789 to $3.828.




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