March natural gas futures closed Thursday's session lower, but still in a position to post a gain for the week. I didn't think I'd be writing this because on Monday and Tuesday sellers were dominating the trade and the market was headed towards a key value area I had identified. However, we are in a weather market, hence, the direction of the market can change rather quickly. This seemed to be the reason for the rapid turnaround on Wednesday, December 21.
At the start of the week, the weather services were forecasting above-normal temperatures into early January. This was helping to drive prices lower. The selling came to an abrupt halt on December 21 after updated computer models suggested the predicted stretch of above-normal temperatures could end sooner than expected.
To clarify, as of late Thursday, the U.S. models were still predicting normal to above-normal temperatures. The European model indicated Tuesday afternoon and Wednesday morning that a high pressure ridge over Alaska could send Arctic cold down through the rest of North America. Based on the weak price action on Thursday, it appears that traders are still waiting for the U.S. models to confirm the new prediction.
On Thursday, the U.S. Energy Information Administration (EIA) reported that U.S. natural gas stocks decreased by 209 billion cubic feet for the week-ending December 16. Analysts were forecasting a storage decline of between 197 and 210 billion feet so the actual number fell in the extreme…
March natural gas futures closed Thursday's session lower, but still in a position to post a gain for the week. I didn't think I'd be writing this because on Monday and Tuesday sellers were dominating the trade and the market was headed towards a key value area I had identified. However, we are in a weather market, hence, the direction of the market can change rather quickly. This seemed to be the reason for the rapid turnaround on Wednesday, December 21.
At the start of the week, the weather services were forecasting above-normal temperatures into early January. This was helping to drive prices lower. The selling came to an abrupt halt on December 21 after updated computer models suggested the predicted stretch of above-normal temperatures could end sooner than expected.
To clarify, as of late Thursday, the U.S. models were still predicting normal to above-normal temperatures. The European model indicated Tuesday afternoon and Wednesday morning that a high pressure ridge over Alaska could send Arctic cold down through the rest of North America. Based on the weak price action on Thursday, it appears that traders are still waiting for the U.S. models to confirm the new prediction.
On Thursday, the U.S. Energy Information Administration (EIA) reported that U.S. natural gas stocks decreased by 209 billion cubic feet for the week-ending December 16. Analysts were forecasting a storage decline of between 197 and 210 billion feet so the actual number fell in the extreme upper-end of the range.
Additionally, the 209 Bcf draw was more than twice the five-year average for the week which is around 101 Bcf. It was also well above last year's 32 Bcf figure and more than the previous read of 147 Bcf.
Stockpiles now stand at 5.9% below their levels a year ago but remain 2.2% above the five-year average.
The EIA also reported that U.S. working stocks of natural gas totaled about 3.597 trillion cubic feet. This puts it around 78 Bcf above the five-year average of 3.519 Tcf and 229 Bcf below last year's total for the same period. Working gas totaled 3.823 Tcf for the same period a year ago.
So, you may be asking why the market didn't finish higher on Thursday, given the huge drawdown. The easy answer is that the news was already priced into the market. Everyone in the natural gas industry knew it was cold during the week-ending December 16. There was even a little carryover of the cold temperatures into December 19.
Now that storage is no longer at a record high and starting to trend lower, investors are going to treat the weekly reports as old or stale news. We are in a look-forward market and the weather is what traders will be looking at from now until the end of winter. Not the kind of weather forecast where you stick your head out the door and say it's cold outside, but rather the weather forecast 10 to 14 days out.
If you look at the weekly chart, you'll see the market is trading between several retracement zones. This essentially reflects investor indecision and impending volatility. My assessment is that the market can move either way based on where it is currently trading because the weather can move either way. So all I can give you at this time are target zones if certain events take place.
Technical Analysis
(Click to enlarge)
The main trend is up according to the weekly swing chart. Given the short-term range of $2.764 to $3.703, we were looking for a correction into its retracement or value zone at $3.234 to $3.123. However, this was not to be this week because buyers re-emerged at $3.281.
Nonetheless, $3.234 to $3.123 remains a very important target zone.
The second range is $2.468 to $3.703. Its retracement zone is $3.086 to $2.940. This is another target zone.
If the weather forecasts continue to indicate the warming spell will last into January then we are likely to break back into these retracement zones. Buyers are likely to show up on a test of this zone because they represent value. Even if these zones are tested, there is no guarantee of a rally unless the weather turns frigid in January.
The main range is $4.606 to $2.764. Its retracement zone is $3.537 to $3.789. A sustained move over the 50% level at $3.537 will indicate the presence of buyers. This could generate the upside momentum needed to test the top at $3.703 then the upper or Fibonacci level at $3.789. Taking out the Fib level with conviction will likely lead to an acceleration to the upside.
The second scenario is more likely to take place if the U.S. models agree with the European models and cold weather is put back into the forecast. After this the next key driver of the price action will be the forecast for January.
To keep things simple, going into the week-ending December 30, I think the direction of natural gas prices will be determined by trader reaction to the major 50% level at $3.537. This price is the line in the sand for the bulls and the bears.
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