Nearby Natural Gas futures fell sharply lower last week, briefly piercing the low for the year at 3.917 while reaching 3.901 before settling the week at 3.941. The poor outlook for the U.S. economy was the main reason for the weakness. Traders pushed prices lower as supply continued to grow and expectations for a drop in demand continued to grow.
Although the market has reached a perceived extreme low, there doesn't appear to be any panic selling or capitulation. This typically means the market is being driven by the true forces of supply and demand rather than aggressive speculation.
Over the past month the only factor driving this market higher was a quick short-covering rally to 4.581 because of an excessive heat problem in the Midwest and East Coast. Since this top was posted in mid to late July, the market has gone straight down. Unless there is a hurricane scare in the Gulf of Mexico or a return of the heat, expectations are for a sideways-to-lower trade over the near-term.
• Weather. As the hurricane season reaches its peak, natural gas traders will be watching more closely for increased activity in the Gulf of Mexico. Although only about 7% of natural gas production comes from this region, any production shutdowns or storage threats could trigger a short-covering rally.
• Supply and demand will continue to be the main price driver. Perceptions of a slowdown in the economy will keep downside pressure on prices. Last week another larger-than-expected injection into inventory pushed price below $4.00. More of the same this week could keep the market pinned under this level.
• A general sell-off in equities and commodities is another factor that could drive natural gas prices lower.
• Oversold technical conditions may underpin the market or even trigger a short-covering rally. Even if this occurs, the downtrend is expected to remain intact. A strong rally is likely to give traders another opportunity to short the market.
By. FX Empire
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