Natural Gas Futures Outlook – 3rd October 2014

With seasonal demand expected to pick-up in late October/early November, now is the perfect time to take a look at the natural gas futures market.

Weekly November natural gas futures tried to breakout to the upside last week, but failed to attract enough buying interest to complete the move. The strength early in the week was created by a forecast for below-normal temperatures across the high demand areas of the U.S. The rally failed and the market broke when the forecast was changed to normal temperatures.

This type of price action is typical for October because temperatures and weather conditions often shift from bullish to bearish during this time period. Since it is fall in the U.S., this type of temperature fluctuation should be expected because the season is usually neither too hot nor too cold.

Traders refer to this time period and price action as the "shoulder season". This is a seasonal time period when mild temperatures spread across the main gas consuming regions, holding demand steady. It also represents a time when producers replenish supply ahead of the winter season. If producers fall short of expectations and winter conditions appear earlier than normal, the market starts to rally.

Price consolidation, or sideways action typically takes place during the "shoulder season" because speculators support the market on concerns that supplies may not be adequate enough for the upcoming heating season.

This year is no exception. Since bottoming the week-ending August 1, prices have consolidated inside a relatively tight trading range. The catalyst behind this formation is based on the assessment from the U.S. Energy Information Administration which in September reported that stockpiles of power-plant fuel were 13 percent below the five-year average and 11 percent lower than a year earlier.

Since volatility has been low during this consolidation time period, one should expect increased price action once the cold weather is added to the low supply equation. This combination of relatively low supplies combined with the return of normal cold temperatures could be the final catalyst that triggers the start of the winter rally.

Based on the current chart pattern, natural gas will either break out above the recent top at 4.163 or continue to consolidate above the recent bottom at 3.786. This all depends on when the cold weather begins and how long it lasts.

Traders have to be patient because the current consolidation pattern suggests impending volatility. The market may continue to consolidate until normal seasonal demand comes in during late October/early November. Last year's bottom before winter was put in the week-ending November 8. This led to the huge surge in prices during the winter of the Polar Vortex that blanketed much of the Midwest and Northeast U.S. earlier this year.

The current weekly chart pattern suggests the return of cold weather could trigger a fast rally over 4.163 with the first upside target at 4.346. Since this year's seasonal bottom is being formed at a higher price level than last year's bullish campaign. Speculators may even create enough upside momentum to trigger a rally into a higher target at 4.478.

Crude Oil Futures Outlook

After consolidating for two weeks, November crude oil futures broke sharply, taking out the recent bottoms at $90.41 and $89.56. This move reaffirmed the downtrend.

The main reason for the sell-off was oversupply concerns. Traders reacted negatively to news that supplies from Russia, Saudi Arabia and the U.S. are outstripping demand. With U.S. crude oil production at its highest level since 1986 and OPEC production at its highest level in a year, prices are expected to continue to weaken into the end of the year. Additionally, the International Energy Agency recently reduced projections for demand growth this year and in 2015.

Summary

Basically, we are looking at this scenario in the natural gas market. Supply is currently below last year's level for this time of the year. This is why the current bottom is higher than last year's bottom. During this mild weather time period, producers are injecting as much gas into storage as possible. At the same time, the clock is ticking on the start of the winter heating season. If the cold weather hits and the supply is not adequate then prices should rise.

The fundamentals and the technical chart pattern in the crude oil market is decisively bearish. If the supply/demand fundamentals don't change then look for lower prices to follow. At the same time, any rally is likely to be sold. The only factor I can see that can turn oil higher at least over the short-run is a geopolitical event that has a direct effect on supply distribution.