January Natural Gas futures finished lower for the week despite news from the U.S. Energy Information Administration that natural gas inventories rose less-than-expected last week. The move to 3.463 put the market at a 13-week low and showed no sign of a let up, meaning traders should look for lower prices to continue this week.
Although traders initially reacted to the news that U.S. natural gas storage rose by only 19 billion cubic feet versus estimates of 25 billion cubic feet, traders decided to focus on the total U.S. natural gas in storage. This figure rose to a record 3.850 trillion cubic feet taking out the previous high set in November 2010 at 3.831.
Another interesting stat showed that stocks were 14 billion cubic feet higher than last year at this time. This means it is going to take a prolonged cold snap just to burn up enough gas to take us back to last year's inventory levels. This is only a comparison to a year ago. The five-year average stats showed a much bleaker outlook for prices.
Seasonally, natural gas stocks are 224 billion cubic feet above the five-year average of 3.626 trillion cubic feet. If one looks at from the perspective of the largest users of the product, the East Coast Region is 58 billion cubic feet above its five-year average. Once again until this area of the nation turns cold, usage is expected to be average to below average which means fresh injections are likely to continue to drive up supply.
Speaking of weather, mild temperatures continue to dominate most of the natural gas consuming areas, limiting its usage. Even if temperatures return to normal on the East Coast, the demand may not be there to exceed the weekly supply injection.
From a supply side, crude oil drillers are still producing a virtually free natural gas by-product and selling it at the market almost as fast as they find it. Since they incur almost no cost to take it from underground to the market, it makes no difference to them what they sell it at. This is only going to change if some natural gas firms decide to shut down or national legislature is enacted to change the course of the supply and demand situation. And which politician is going to introduce any legislature that drives up energy costs during this economy.
Traders should continue to look for lower prices, but as always be on the look out for a wicked reversal bottom and short-covering rally. The trick to trading this market at current levels is to avoid getting caught too big at a low price. The market can be unforgiving if it decides to reverse to the upside for even a short-period of time.
Technically, the market is expected to follow the Gann angles lower on the weekly chart. These come in at 3.522 and 3.436 this week. Even if the market retraces 50% of the last break from 4.962 to 3.463, the midpoint at 4.213 is likely to present another shorting opportunity.
Weather: Mild temperatures in heavy natural gas usage areas are likely to keep a lid on demand. Even if the weather turns cold, it is going to take a long-term cold streak to burn off the excess gas in storage.
Supply and Demand: Without cold weather, where is the demand? Supply is expected to continue to rise since the gas being produced is a free by-product of oil drilling.
Oversold Conditions: This is the wildcard this week. Traders can see that shorts are beginning to pile on but at some level someone is going to decide that the potential on the downside is not worth giving up decent profits. This will trigger a massive short-covering rally. Also hedge funds facing exposure to bad positions in other commodity or equity markets may liquidate natural gas positions just to raise cash. These are just a couple of reasons why the market can rally from current levels.
By. FX Empire
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