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Despite another increase in crude oil and gasoline supplies, it looks like value-seeking buying was strong enough to turn gasoline prices higher for the week while limiting the downside price action in crude oil.
The relatively powerful rebound rally in unleaded gasoline as it neared the contract low should be noted because it serves as further proof that we are in a trading range and are likely to stay there until OPEC makes its decision on production on December 4.
Profit-taking and short-covering were likely the major drivers of the price action, but there may have been some speculative buying due to technically oversold conditions. Additionally, if you are a contrarian speculator, you may have been driven by statements from the auto club AAA: “Now that oil prices are falling again, pump prices should get even cheaper as we approach the holiday travel season.” These types of statements tend to occur near bottoms because they are based on stale news.
Whatever the reasons, January Gasoline futures are in a position to post a strong enough reversal on the weekly chart to hold the market inside its late August to early November price range. It may even produce enough upside momentum to drive prices back to the mid-point of this range.
Besides the weekly supply and demand news from the U.S. Energy Information Administration, speculators should note that the August bottom occurred at the time of the meltdown in China’s financial markets and the top occurred with the release of the stronger-than-expected U.S. Non-Farm Payrolls report.
This suggests that the market is being supported by the flood of cash into the market from the People’s Bank of China and capped by the stronger U.S. dollar, which was driven higher after the strong jobs data put a December Fed interest rate hike back on the table.
Also, if you go back to late August, I mentioned that the selling in crude oil may have been related to margin calls in the stock market. In hindsight, this may well have been the case because the market appears to have bottomed once stocks stopped going down. This goes to show that sometimes the price action isn’t being manipulated by simple supply and demand information, but other outside influences.
Technically, the main trend is down according to the daily swing chart. It will turn up when $1.4516 is taken out. In the meantime, momentum may be shifting to the upside, at least temporarily, because of the possibility of a secondary higher bottom at $1.1962.
The short-term range is $1.1763 to $1.4516. Its mid-point is $1.3140. Once again, a higher close on the weekly chart could create enough momentum to trigger a follow-through move to the upside, but gains are likely to be limited by the mid-point.
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January Natural Gas popped higher early this week on a bullish weather report which called for colder temperatures in the last two weeks of November. The move was likely triggered by weak short-sellers who used the news as an excuse to book profits.
The stronger short sellers seized the opportunity and upped their positions when the market reached $2.600. These short-sellers remain emboldened, which the dictionary defines as “the courage or confidence to do something or to behave in a certain way.” Synonyms include fortify and make brave. These sellers refuse to budge in their conviction to push this market lower. They are going to continue to assert pressure until proven otherwise. And with supply headed to record levels, they have no reason to relinquish their position.
According to the EIA, producers added 15 billion cubic feet of natural gas to storage in the week-ended November 13. This was 2 Bcf below the estimate, but that amount is too low to make a difference to the big players. This small miss could be attributed to slightly larger demand or smaller supply than expected.
Although supply increased, traders made a move that could reduce the glut that could build up in future months. This could be bullish for deferred futures contracts. The addition of more gas pushed stockpiles to an unprecedented 4 trillion cubic feet in storage. These high levels encouraged traders to push more gas into the spot market. So while prices are likely to continue to fall over the near-term, supply may be reduced in the future.
Cold weather is expected to eventually return to the U.S. which would help reduce the glut on the spot market, but because of El Nino weather conditions, winter seems to have been delayed.
There is no clean way to play the long side if trading the near-buy futures contracts. Gains are likely to be limited and prices are expected to continue to feel pressure as long as the well-capitalized commodity funds remain short. However, if you are a contrarian trader and are looking for an opportunity on the long side, you may want to look at a spread position to help limit exposure. This would entail being short a nearby futures contract and long a deferred futures contract.
This type of trade is likely to be successful as long as temperatures remain mild and traders continue to push natural gas into the spot market.