Natural Gas Soars As Crude Enters Bear Market

This week has been the tale of two markets. One being driven lower by a gradual shift in the fundamentals to bearish, the other driven higher by the emergence of a surprise shift in a weather pattern. Crude oil has turned bearish while natural gas is set up for perhaps a test of prices not seen in nearly 4 years later this winter.

Crude Oil

Sellers continued to pound crude oil prices lower this week with the selling driven by rising supply and worries about lower demand. The markets are trading 20 percent off their October highs, putting them in bear market territory. WTI is in a position to finish the week about 4.1 percent lower, while Brent is down about 2.9 percent for the week.

The main downward pressure is coming from rising supply. U.S. production continues to rise due to improvements in shale drilling, while Saudi Arabia and Russia have raised production to meet the short-fall caused by the sanctions against Iran. However, no one was expecting the U.S. to issue eight exemptions from the sanctions. This added extra supply to the market, accelerating the downside pressure.

Adding further to the downside pressure are expectations of lower demand. The U.S. Dollar continues to be supported by rising U.S. interest rates. This is making the dollar a more attractive asset to the detriment of several emerging market currencies. This is helping to make dollar-denominated crude oil too expensive to foreigners, leading to the drop in demand.

The downside momentum is building and the only way to stop prices from falling further is to cut production. We saw earlier in the week what the mere mention of Saudi Arabia and Russia discussing possible production cuts in 2019 can do to prices. So unless the drive toward lower production starts to gain traction, prices are likely to continue to slide.

There is not much the market can do about demand. A weaker U.S. Dollar would definitely help, but that isn't likely to happen unless inflation cools and the Fed stops raising rates. Lower crude prices should impact inflation. Maybe prices will drop low enough for the Fed to sit up and take notice.

Technical Analysis

Daily December West Texas Intermediate Crude Oil

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This week, trading started with a slight change in the bearish pattern. On Monday, the market formed a minor bottom at $62.63 when a short-covering rally led to a test of $64.14. The catalyst behind the move was a report that said Saudi Arabia and Russia were discussing possible production cuts in 2019.

However, the move was short-lived and the downtrend continued through $64.14 as traders reacted to a bearish government inventories report. Throughout the week, sellers chewed through previous bottoms at $63.48, $62.32 and $59.70. If the downside pressure continues then we could see an eventual break into the February 9 bottom at 54.93.

At the end of the week, the nearest resistance is a downtrending angle at $63.22. This angle is dropping $0.50 per day from the $76.72 main top. Next week it starts the week at $62.72 and ends the week at $60.72. Look for the downtrend to continue as long as the market remains under this angle.

For longer-term traders, December WTI crude oil remains under the 200 Day Moving Average which came in at $65.37 on Friday. Look for a bearish tone as long as the market remains under this level.

Forecast

The direction of the December WTI crude oil market next week is likely to be determined by trader reaction to the former bottom at $59.70.

A sustained move under $59.70 will indicate the selling is getting stronger. The daily chart indicates there is plenty of room to the downside with the next major target coming in at $54.93.

A sustained move over $59.70 will signal the presence of buyers. If this move creates enough upside momentum to trigger a meaningful short-covering rally then look for a potential surge into the downtrending angle. Since the main trend is down, sellers are likely to come in on a test of the angle.

Overcoming the downtrending angle and the former bottoms will indicate the buying is getting stronger, but don't get too excited about the upside unless buyers can take out $64.14 then the 200-Day Moving Average.

Monthly Nearby Natural Gas

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Natural gas price gapped higher on Monday and never looked back all week as traders reacted to a surprise shift in the weather forecast. Although Thursday's U.S. Energy Information Administration's weekly report showed a larger than expected storage build, traders shrugged off the report as old news while looking forward to increased demand due to an upcoming cold spell.

Prices are expected to remain underpinned as long as the forecast calling for cold temperatures through November 17-18 remains intact.

All eyes are on November 17-18 because there are new forecasts calling for milder temperatures setting up November 19-22. The December Natural Gas futures contract is also likely to get most of its support from the cash market.

Our first target area at $3.359 to $3.604 is currently being tested. Trader reaction to this zone will determine the near-term direction of the market. If the weather forecasts continue to promote cold temperatures after November 18, prices could soar through this zone. If the forecasts come in as expected then look for this zone to act as resistance.

Due to a storage shortage at the start of the heating season. We're going to maintain an upside bias throughout the winter.