Christmas and New Year's Week usually feature low-volume, low-volatility moves in the energy complex, but this year may be different because of the bear market in crude oil and the weather market in natural gas. Furthermore, the price action in the energy sector is also being influenced by heightened volatility in the U.S. equity markets.
Crude Oil
U.S. West Texas Intermediate and international-bench Brent crude oil futures are in a position to finish the week about 10-percent lower. Volume is expected to be light over the next two weeks, which may lead to further weakness with a few whipsaw moves mixed in due to the thin trading conditions.
Most of the news is bearish, but some traders are trying to build a case for a bottom by introducing the idea that OPEC's production cuts that start next month will be deeper than expected.
According to Reuters, which reviewed a letter from OPEC's secretary-general Mohammad Barkindo, "OPEC plans to release a table detailing output cut quotas for its members and allies such as Russia in an effort to shore up the price of crude."
Barkindo went on to say that in order to reach the proposed cut of 1.2 million barrels per day, the effective reduction for member countries was 3.02 percent. This figure is higher than the initially discussed 2.5 percent as OPEC seeks to accommodate Iran, Libya and Venezuela, which are exempt from any requirement to cut.
This news fueled some light short-covering late in the week, but gains were capped and the markets fell to new lows for the year due to worries over the strength of the global economy heading into next year. Heightened stock market volatility and concerns over a government shutdown also weighed on prices.
Overall pressure, however, is being generated by strong production in the United States, Russia and Saudi Arabia. The Russians and the Saudis will start trimming production on January 1, but the U.S. is likely to continue at its record pace. Until U.S. output is curtailed, there's not a lot of news out there that would be strong enough to shake up the hedge funds enough to jump out of their heavily short positions.
Crude Oil Technical Analysis
U.S. West Texas Intermediate Crude Oil
(Click to enlarge)
The main trend is down according to the weekly swing chart. Since crossing to the weak side of the major retracement zone at $58.94 to $54.82, the February WTI crude oil futures contract has plummeted.
Taking out $46.15 this week is especially bearish since this was the last main bottom before the contract high at $76.40.
If the downside momentum continues under $46.15 then look for a potential acceleration to the downside this week with the contract low at $41.48 the next major downside target.
The best sign of a near-term bottom will be a lower-low, higher-close next week. This chart pattern will not indicate a change in trend is taking place, but it will indicate the buying may be greater than the selling at current price levels. This could lead to the start of a 2 to 3 week counter-trend rally.
Natural Gas
Bullish natural gas traders are finding out during the month of December that weather markets work two ways. While lingering cold snaps in November may have supported the huge spike to the upside, the return of milder temperatures and uncertainty over when the cold weather will return has pressured prices throughout December.
Momentum is currently trending lower and even this week's slightly bullish U.S. Energy Information Administration's weekly storage report couldn't attract enough buyers to shift momentum back to the upside.
This week and perhaps until at least January 3, overall national demand is expected to be low. This should put a cap on any rallies. Some weather services are saying that cold weather could return over the next 9 to 15 days, but it still will not be cold enough to be considered bullish.
February Natural Gas Technical Analysis
(Click to enlarge)
The main trend is up according to the weekly swing chart. However, momentum is trending lower. A trade through $3.111 will change the main trend to down. If this occurs then the strategy will shift to selling rallies rather than buying dips into support.
The main range is $2.904 to $4.849. Its 50% to 61.8% retracement zone is $3.647 to $3.876.
The short-term range is $3.111 to $4.849. Its retracement zone comes in at $3.775 to $3.980.
The retracement levels are new resistance. Trading on the weak side of these retracement levels could fuel an acceleration to the downside next week.
If the cold weather returns then we should start to see some short-covering. However, the chart pattern suggests the next rally will be labored because the resistance levels are layered.
The last 50% level at $3.980 is the potential trigger point for an acceleration to the upside. However, this price is not likely to be overcome until the weather services put a lingering cold pressure dome into the forecast.
By Jim Hyerczyk for Oilprice.com
Fundamental and technical analyst with 30 years experience. More