Natural gas prices plunged earlier this week in a move that looks like the final liquidation by investors who bet on a summer rally. The selling was strong enough to take out last November’s bottom which means bearish traders wiped out the entire winter rally.
Low demand has been and is expected to keep downside pressure on the market over the near-term with the majority of selling pressure to be on the nearby futures charts. Domestic demand for natural gas over the next two weeks is expected to fall into the moderate range, ending a three-week period of high demand.
Cooler air is expected to seep into the Midwest over the next few days then move slowly to usually high demand areas in the East and South. This should hold temperatures in a comfortable range as well as demand. It should also prevent near-term futures contracts from rally substantially.
On Thursday, the U.S. Energy Information Administration (EIA) reported that U.S. natural gas stocks increased by 20 billion cubic feet for the week-ending July 28. Traders were looking for a reading of about 22 bcf.
The EIA draw may have been greater than the mid-point of the estimates, but it was not enough to get bullish traders excited enough to challenge the huge short position in the market. Besides, the data is stale and most traders are focusing on the two-week weather forecast that doesn’t bode well for bullish investors.
In other news, the EIA said the five-year average for the week is an injection of 44 billion cubic feet, and last year’s storage withdrawal for the week totaled 6 billion cubic feet.
Additionally, stockpiles fell week over week to 8.5% below last year’s level, but they remain 3% above the five-year average.
The EIA reported that U.S. working stocks of natural gas totaled about 3.010 trillion cubic feet, around 87 billion cubic feet above the five-year average of 2.923 trillion cubic feet and 279 billion cubic feet below last year’s total for the same period. Working gas in storage totaled 3.289 trillion cubic feet for the same period a year ago.
Given the current fundamentals, the outlook for nearby futures is bleak, but conditions are different for the deferred futures contracts.
Looking at the long-term monthly chart for September Natural Gas futures and current weather forecasts for August, the chances for a rally are limited and the chances of a change in trend on a rally over $3.600 is nearly impossible.
September Natural Gas Technical Analysis
(Click to enlarge)
The main trend is down according to the monthly chart. The pair of tops at $3.506 and $3.600 proved to be solid resistance for nearly nine months. It also shows the effect of the mild winter. Taking out the February bottom at $2.903 was essentially the kiss of death for bullish traders back in June as investors reacted to reports of a warm, but not hot summer.
The main range is $2.412 to $3.600. Its 50% to 61.8% retracement zone is $3.006 to $2.866. Bullish traders tried for months to hold the market above this zone, waiting for the fundamentals to turn favorable. However, at the end of July the market closed below this zone, perhaps signaling the final liquidation by bullish traders.
The monthly chart indicates there is plenty of room to the downside. We aren’t sure if there will be enough selling pressure to trade all the way down to last year’s low at $2.412, but we are confident that prices will remain under pressure as long as the market remains under the 61.8% level at $2.866.
Overcoming this level will not mean the market is getting ready to turn higher either. It will probably indicate position-squaring or profit-taking, but I don’t think it will be cause by aggressive, counter-trend buyers.
Deferred Futures Outlook
The February 2018 Natural Gas futures contract shows a similar chart pattern, but the fundamentals make this contract more attractive to trade especially if you have a bullish bias, or feel inclined to bet on a cold winter.
According to Reuters, U.S. natural gas storage is expected to end the April to October injection season at a below-normal 3.8 trillion cubic feet (tcf) at the end of October. That compares with a five-year (2012-16) average of 3.9 tcf and falls well short of last year’s record high of 4.0 tcf at the end of the injection season.
February 2018 Natural Gas Technical Analysis
(Click to enlarge)
The main trend is down according to the monthly swing chart. The main range is $2.712 to $3.772. Its retracement zone is $3.242 to $3.117. The market is currently testing this zone.
This chart should be used as a reference chart over the next 6 months. It’s not designed to be a timing chart for buy or sell signals, but it does give the longer-term investor a better look at the potential for natural gas over the long-run.
If the winter heating season begins with natural gas storage below the five-year average then speculative buyers may start to support the market. The strength or weakness of the buying will be determined by trader reaction to the retracement zone at $3.242 to $3.117.
Assuming that the 2016 bottom holds at $2.712, I think momentum will shift to the upside on a sustained move over $3.242. This may form the base for a strong buy later in the year.