Bucking this week’s trend in the other energy products, December Natural Gas futures made a new low for the year, closing at 3.821. Technically the market continued to walk down a pair of Gann angles from former tops at 5.283 and 4.871.
This week these resistance lines come in at 3.843 and 3.911. Based on past performance, a penetration of these resistance levels will not be enough to temporarily change the trend which leads one to believe it is going to take a close over both of these angles to trigger the start of even a small short-covering rally.
Fundamentally, the same issue – production – continues to drive the market lower. At this time there doesn’t seem to be any incentive to stop producing natural gas. Additionally, with demand holding steady-to-lower, inventories should continue to grow, leading to even further downside pressure over the near term.
Above average temperatures in the Midwest and East Coast continue to weigh on demand and prices. Typically October is a transition month between the hot and cold months in the U.S. Therefore prices do not fluctuate as much as they do in the summer and winter. So while demand is expected to be steady, the surprise is the continual increase in supply.
Currently natural gas futures are scrapping the bottom near an 11-month low. Although demand is expected to pick up once the cold weather hits the U.S., the winter season are going to begin with inventories at or near triple-digit figures. At this rate, the only way that natural gas storage will show even the slightest decrease will be if the cold weather comes early and temperatures reach low levels for prolonged periods of time.
As long as the storage build remains larger than usual for this time of the year, continue to look for weaker prices. Technically the market is oversold so it can turn higher at anytime because of nervous short-traders, but this rally would like be short-lived and create just another opportunity for traders to reapply short positions. Traders should start to watch for long-term weather forecasts to get an idea of what to expect this winter.
Factors Affecting Natural Gas This Week:
• Supply and Demand – Unless the supply and demand situation changes drastically traders should expect these factors to weigh on prices. Production appears to be out of control so demand will likely be the factor that eventually turns this market higher. This part of the equation will change when the weather changes.
• Economic Factors – Given last week’s rise in risky assets on the prospect of new liquidity measures by the Fed and a slightly better outlook for Europe, one would have expected natural gas to post a bottom and reversal up. This wasn’t the case, however, which most likely means it is going to take a major change in manufacturing production to trigger even the smallest rally.
• Weather – During the current transition between seasons in the U.S. traders shouldn’t expect too much of a change in inventory. There may be some short-covering if newly released long-term weather forecasts call for prolonged cold throughout the Midwest and East, but for the most part fresh buying is not likely to surface until the winter and only if there is a major cold snap. There is just too much supply around at this time so traders shouldn't expect any substantial move in natural gas until the near-triple digit supply declines to more average levels.
By. FX Empire
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