Patience The Necessary Virtue In The Futures Markets

Natural Gas Outlook

Natural Gas futures are proving to be one of the more interesting markets in early 2015. The first several days of the new year have seen the market drop to a 52-week low while at the same time the high demand areas of the country are getting hit with the coldest weather this winter. 

Although speculators may be trying to bid this market higher, short-sellers have failed to budge on this increased buying. This is a strong indication that the major players are counting on the current overproduction to continue and that the current cold weather snap will not turn into last year's lingering pattern.

At the start of the winter season, working gas in storage was below the five-year average due to the polar vortex weather conditions in the winter of 2013-14. The lack of lingering cold weather during the current winter season has led to below average withdrawals, driving the working gas closer to its five-year average.

The conclusion that can be reached is that after this current cold snap and with continued production levels, prices may slide to the $2.50 to 2.40 price zone. According to the latest government Short-Term Energy Outlook Report published on December 9, "U.S. gas production may advance 5.5 percent this year to a record 74.26 billion cubic feet a day". Since production is expected to increase, natural gas can very easily hit the target zone even before winter is officially over in March.

The strategy for those who do not want to press the market lower at current levels is to wait for short-covering rallies. From time to time, the major players will ease up on the selling pressure in order to allow the market to rally so that they can re-enter at more favorable price levels.

With low prices comes the inevitable breakeven analysis. With prices most likely nearing these levels, more and more companies may decide to shut down production. Prices will rise if this is occurs, triggering profit-taking and short-covering rallies. These moves will also create shorting opportunities as other producers make adjustments and pick up the slack although the rate of the projected inventory increase may slow.

Crude Oil Outlook

Crude oil prices broke below the psychological $50 level earlier in the week before the new price slide stopped at $46.83 for the February futures contract. According to the charts, the next target is $40.00. The good news for short-term trend traders is that the key swing top moved from $79.69 to $58.53. This moved the price level for a change in trend, closer to current price levels. This is also important for short-sellers who chose to exit their positions on buy stop orders rather than at target levels.

While the technical chart pattern may have moved the market closer to a possible change in trend, the fundamentals still indicate further downside pressure is likely. Firstly, OPEC continues to remain stubborn and is not likely to lower production levels. It did, however, agree to cut prices to Europe in an effort to protect market share. Given the current weakening economy in the Euro Zone, this move is not likely to lead to enough increased demand to help put in a bottom.

This week's Energy Information Administration report did nothing to shake the major short-sellers although there was some light profit-taking. The EIA report for the week-ended January 2 showed that U.S. stockpiles of crude oil, refined fuels and other types of petroleum rose 0.9% to 1.149 billion barrels. This is the highest level ever in weekly data dating back to 1990. It is also higher than the previous high level from June 2013.

With U.S. inventory data supporting lower prices, expectations of a bottom this week are minimal. This means that if there is going to be a turnaround in the market, it will likely begin with technical price action or a surprise announcement by OPEC to trim production. The latter will have a major impact on the market immediately. The former will take time to develop.

If you are a chart-watcher then look for a "new low, higher-close formation with better than average volume". This pattern tends to indicate the buying is greater than the selling. A double-bottom or "W" formation is also often indicative of bottoming action. These types of patterns often occur shortly before the announcement of a major news event.