Natural Gas Outlook
A two-week short-covering rally triggered a surge in March 2015 Natural Gas futures, but a change in the fundamentals and a strong technical price level ended any hope of a return to prices levels not seen since late June, early May and late February.
March Natural Gas futures jumped a little over 22% from October 27 to November 10 on expectations the colder-than-normal temperatures hitting key demand areas in the East Coast and the Midwest would linger into the start of the official winter season in December. Temperatures may have dropped last week, but the way natural gas came off its high at 4.461, it doesn’t look like speculators believe this year’s winter will equal or exceed last year’s deep freeze.
Traders will have to get used to these sudden, short-term spurts because it looks as if a potentially bullish longer-term forecast for extremely cold, lingering temperatures doesn’t exist at this time. Because of this, the upside potential for the market appears to be limited this winter.
Last year at this time, speculators were able to buy natural gas futures and hold on for the duration of the winter season because the “polar vortex” created a longer-term, seasonal buying opportunity. This year, however, the current longer-term forecasts are predicting periods of intense cold, but nothing to suggest the frigid temperatures would remain for the duration of the winter season.
From a technical perspective, traders are going to have to adapt to short-term trading styles. This means buying on the breaks and on the first report of cold temperatures, and selling at resistance or before the forecast changes back to normal. It other words, it is going to take timing and trading skills to beat the market this year. A buy and hold strategy may cause too much volatility.
Looking at the Weekly March 2015 Natural Gas chart, the main range is 4.91 to 3.648. This created an important retracement zone at 4.279 to 4.428. This zone effectively stopped last week’s rally after natural gas reached a high of 4.461.
A new range has formed between 3.648 and 4.461. This likely means that 4.055 to 3959 will be the next downside target. Because of seasonal buying tendencies and the threat of periodic cold temperatures, buyers may step in when the market is testing this zone. The buying may be strong enough to temporarily shift the momentum back to up.
The technical picture suggests that buyers may show up at 4.055 to 3.959 and sellers at 4.279 to 4.428 throughout the cold weather season. This up and down, sideways trade is likely to continue until there is either an unexpected decrease or increase in available supply.
Crude Oil Outlook
January Crude Oil futures continued to sell-off last week with Brent crude falling to a four-year low below $80 a barrel. A reported slowdown in the Chinese economy helped pressure prices, but the biggest influences on prices were overproduction and the lack of action from the OPEC nations.
U.S. oil production is expected to continue to increase as long as crude oil prices remain above breakeven levels. This price is estimated to be about $70.00 per barrel. Although OPEC nations reportedly need oil priced in the $80 to $100 range in order to balance their budgets, they have not shown any discomfort with prices below $80.00. Conditions could change, however, if oil reached the psychological $70 level.
At $70 per barrel, U.S. oil firms may begin shutting down production. OPEC members may take similar action but this won’t likely be decided until its meeting on November 27.
Technically, the chart pattern is bearish and the market is showing no sign of letting up. Look for consolidation to begin late next week as traders prepare for the OPEC meeting. Counter-trend speculators may begin to show up to support the market in anticipation of a production cut announcement by its members. Profit-taking may also give prices a boost since traders are not likely to be willing to sit in big positions ahead of the OPEC meeting.
XLE (Energy ETF) Outlook
The XLE (Energy ETF) diverged from the major stock indices last week, indicating selling pressure and weakness.
The market nearly completed a 50% retracement of its break from the late June top at $101.52 and the mid-October bottom at $77.51. The resistance that stopped the recent rally at $88.96 came in at $89.52.
The current price action suggests the market may retrace back to $83.24 to $81.88 over the near-term. Prices may consolidate in this area until traders receive more information from the OPEC meeting.
At this time, it looks as if the oil market rather than the stock market is the catalyst behind the price action.