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Natural Gas Analysis for the Week of January 2, 2012

Another round of selling pressure drove the February Natural Gas futures contract to a new low last week. The market also closed under the psychological $3.00 level, indicating that further downside pressure is likely. Since the long-term decline has been consistent and orderly, one has to wonder when the final liquidation phase of this bear market is going to begin. The first sign of a final bottom is usually increased volatility, followed by a sharp acceleration to the downside and then a higher close. Until this chart pattern takes place, one has to conclude that the down trend is going to continue.

Technically, this natural gas contract is walking down a pair of steep downtrending Gann angles at $2.9300 and $3.0380. Last week’s close at $2.989 means the market is currently inside of this range, helping it to form a bearish channel down.

There is no identifiable support level at this time since we are trading in uncharted waters. A close over $3.0380 will be a sign that sentiment may be shifting to the upside, but the market is likely to run into another resistance angle at $3.3410. As long as the contract remains under the swing top at $3.741, the main trend will remain down.

 Natural gas price movements

Mild temperatures and a glut of gas from domestic shale fields are the major factors contributing to the lowest prices in more than two years. The gas that oil companies are selling for profit has been harvested almost cost free. In addition, according to the U.S. Department of Energy, each $1 drop in natural gas prices cuts costs for U.S.-based chemical producers by more than $3.7 billion annually. Because of this huge savings, there is no reason why this practice is not likely to continue into 2012. Combined with below-normal temperatures, steady production of natural gas is likely to contribute to the huge amount of product in inventory. This can only mean lower prices into the first quarter of 2012.

With crude oil prices hovering near $100 per barrel, oil companies are going to continue to drill aggressively. Because of advanced horizontal drilling processes, these oil companies are likely to find more pockets of natural gas which they will bring to market. Unless crude oil drops significantly, natural gas inventories should continue to rise.

No one expected a major cold spell this early in the winter season, but then again the lack of snow and the tendency of prices to hover above the freezing level was not expected either. With the majority of the population holding their thermostats steady, demand has been significantly lower this winter. Even if there is a prolonged sub-zero cold snap in the Midwest or on the East Coast, the excess demand is not likely to put a noticeable dent in the huge stockpiles of natural gas.

At this time, it appears that the only way to end the price slide will be a dramatic shift in our country’s energy policy. This means action by the government to encourage conversion of plants and factories to natural gas use. In addition, instead of putting money and time behind electric cars, automakers will have to shift their long-term plans toward developing automobiles that use natural gas.

In conclusion, the close under the psychological $3.00 price level is likely to attract additional selling pressure. Natural gas prices are expected to continue to fall despite these low prices because of low demand and excessive production. Oil companies have an economic incentive to continue to drill aggressively. Until this benefit is taken away by lower crude oil prices, natural gas supply is expected to rise. Unless there is a major change in the U.S. energy policy, it looks as if low natural gas prices are here to stay.

Factors Affecting Natural Gas This Week:

Weather:  The mild winter is not helping to support natural gas prices at all. Demand is below average because consumers have no reason to turn up the temperature in their homes.

Supply and Demand:  Natural gas supply is expected to hold steady or rise as long as oil companies have an incentive to produce cheap and virtually free product.

Oversold Conditions:  Yes, the market is oversold by conventional measures, however this is theoretical. As long as there are more sellers than buyers, prices will continue to fall, regardless of what the charts are telling traders.


By. FX Empire

FXEmpire.com is the Forex flagship site of the FX Empire Network. The FX Empire Network provides readers with the most expert and most timely technical analyses, fundamental analyses and news-pieces; this in order to empower them to make for themselves the best possible financial decisions.
FXEmpire.com is updated daily with video based Technical Analyses, text based Fundamental Analyses and news-pieces. Our readers receive a review of the past week’s market activity coupled with an outlook for the upcoming week and regular market updates.

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