The sell-off continued in February Natural Gas last week with the futures market reaching a new low for the year. Like the previous nearby contracts, the February contract is walking down a pair of steep downtrending Gann angles at 3.20 and 3.09 this week.
The swing indicator shows that the main trend is down. The last main top is 3.741. A trader through this price will turn the main trend to up. Without the formation of a support base that could take weeks to build, any rally is likely to be triggered by short-covering, which will likely set up another fresh shorting opportunity.
Fundamentally, forecasts for warmer weather continue to drive prices lower. Falling demand has driven prices to their lowest level in more than two years. With cash prices at the Henry Hub delivery point falling below the psychological $3 level at times last week, there is a strong chance that futures prices will follow suit this week. Higher-than-normal temperatures this winter are curtailing heat and electricity demand which is directly affecting natural gas prices. Weather forecasts call for this trend to continue into January which means prices are likely to remain under pressure into the new year.
The supply/demand picture is being controlled by surging production and extremely high inventory levels. For the week ending December 8, storage operators withdrew 102 billion cubic feet of natural gas from storage according to the Energy Informational Administration (EIA). This figure was above estimates, but below last year's withdrawal and the five-year average withdrawal.
Even after last week's withdrawal, inventories reached the highest level ever recorded at this time of the year. The most noticeable fact is that although withdrawals have been consistently and significantly below the five-year average, the market still remains oversupplied. In other words, while gas has been moving out steadily, there has been plenty available for replacement.
One factor that I mentioned several months ago but is now in a position to become a significant influence on prices is the rig count. In October, Baker Hughes reported that the number of producing rigs totaled 936. Last week it was reported that the number of rigs had fallen to 820. This 116 rig drop placed the latest figure at levels not seen since January 2010. It looks as if a plunge below 800 could mean that producers do not want to see prices under 3.00.
In summary, natural gas prices are expected to continue to work lower as long as demand remains low. Bearish weather forecasts should keep this market under pressure. Oversupply is still the major concern, but this may change if the number of rigs producing continues to decline. The 3.00 price level is a major psychological barrier. Some short traders may decide to close out their positions on the first test of this level. In addition, producers may try to protect natural gas from further deterioration by defending the market with buy orders.
Weather: Warmer-than-usual temperatures are expected to continue for the next two weeks, curtailing demand. This should keep a lid on any rallies. In addition, it should keep downside pressure on prices.
Supply and Demand: Demand is low because of the mild weather and supply remains relatively high. This could begin to shift if the weather turns cold or if the number of producing rigs continues to drop.
Oversold Conditions: At some point this market may run out of sellers or short-traders may decide to begin covering their positions because of limited downside potential.
By. FX Empire
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