Natural Gas Outlook
The extremely cold weather which blanketed the U.S. made natural gas one hot market. At one time this week, all 48 of the lower states had at least one area below freezing. Unlike last year, it looks like the current cold weather system will not become a lingering event. This is likely to trigger a fresh round of profit-taking, leading to increased volatility.
This week, after early weakness, March Natural Gas futures soared to a new one-week high. One of the catalysts for the rally was the cold weather system blanketing most of the U.S., the other came later in the week when the Energy Information Administration reported that gas stockpiles fell 17 billion cubic feet in the week-ended November 14 to 3.594. This number topped the five-year average decline of 10 billion for the period. Most traders and energy analysts were looking for a drop of about 11 billion.
The EIA also reported the deficit to five-year average inventory levels widened to 6.4 percent from 6.2 percent the previous week. This was its first expansion since March. Supplies were also 5.3 percent below year-earlier estimates. Last week’s number was 5.7 percent. This drop in supply reflected the greater demand caused by the cold weather.
Traders are already estimating that next week’s report is likely to show that supply declined by 150 billion cubic feet. If you recall, the futures market anticipates events so it is possible that this draw down may have already been priced into the market.
From a technical analysis perspective, “spike” moves to the upside seldom survive over the long-run and the current rally is expected to confirm this. Bearish talk is already circulating about next week that the weather system bringing the cold temperatures is going to dissipate.
According to the latest weather forecast from MDA Weather Services, over the next 10-to-15 days temperatures will average a couple of degrees warmer than normal. This news is likely to put a cap on natural gas prices, leading to a short-term break. Based on the volatility and two-sided trading since early November, it looks as if this up and down chart pattern is going to continue.
Late last year and earlier this year, natural gas prices trended. Frequent weather changes this month have already caused a two-sided trade in natural gas with prices surging on below normal temperatures then correcting when the system breaks up. In order to capture the large moves, traders are going to have to forego the long-term outlook and natural gas seasonality and put their focus on the short-term weather patterns.
Technically, the main trend is up, however, March Natural Gas futures are currently straddling a key retracement zone that could limit its gains. This zone is 4.279 to 4.4428.
Since the U.S. is expected to warm next week, short-term traders are likely to take profits after this week’s surge. This is likely to put pressure on the market. Traders should focus on the long side and wait for the market to come back to more favorable price levels.
The best strategy is to look for pull-backs into value area and wait for the cold weather to return. This will be a good strategy to follow until the longer-term weather pattern indicates a prolonged period of cold temperatures.
Crude Oil Outlook
On November 14, March Crude Oil futures reached a low of $73.33 before stabilizing this week. Selling pressure has dried up because of next week’s OPEC meeting. Traders are taking profits and squaring positions giving the illusion of buying.
Next week’s price action is likely to feature even more volatility as traders await OPEC’s plan to fight the weakness in crude oil prices. Traders expect the oil cartel to discuss reducing output. If production cuts are announced then look for a short-covering rally, but don’t expect the trend to change to up.
The best way to approach the Natural Gas market is to watch for pullbacks into retracement zones or value areas then wait for a weather pattern that will support a rally. Recent trading action suggests this market may experience a series of cold temperature related up swings rather than a prolonged rally.
Crude oil traders should let the market establish a support base before exploring the long side of the market. Traders should also wait for a decision about production from OPEC at its November 27 meeting rather than guessing on a direction.