Natural Gas Analysis for the Week of January 16, 2012

Despite the previous week’s closing price reversal bottom, March Natural Gas could not attract fresh buyers and the market failed to confirm the potentially bullish chart pattern. Last week’s range also marked the sixth consecutive week of lower-highs and lower-lows, clearly indicating that the natural gas futures contract was in the hands of strong sellers.

Technically, the contract continued to march down a pair of steep downtrending Gann angles dropping at a pace of .08 per week. This week they are at $2.8320 and $2.7150. These angles appear directional in nature, meaning that a close over them would not indicate a change in trend. Even if the contract were to muster enough buying strength to trigger a turnaround, another steep downtrending Gann angle at $3.6850 would likely stop the rally.

Open interest is also decisively on the short-side with large traders leading the way. Of course, speculative interest generated by small traders is on the long-side as many hope to pick the bottom. This strategy hasn’t worked although some technical factors indicate oversold conditions.

 

These buyers seem to be only providing liquidity for new short-sellers. By definition, oversold indicates the absence of sellers, but this isn’t the case with natural gas. There are still plenty of new short-sellers in the market. Until they stop this practice and decide to start covering their positions, the market is likely to continue to work lower.

With producers consistently bringing fresh natural gas into storage, what is going to stop prices from moving lower?  Some analysts cite seasonal factors such as cold weather, but this winter’s average temperatures in natural gas burning areas have been less than normal. Cold weather is hitting the Midwest this week-end, but without a long-lingering, cold-snap, natural gas inventories are likely to continue to rise until usage offsets production.

Last week, I wrote of the fact that the U.S. is running out of natural gas storage space. This item probably served only as a warning since many in the industry still feel they can count on the weather to correct the imbalance. If Mother Nature doesn’t accommodate by sending a blast of cold air, it is likely that the U.S. will near or even reach full-storage capacity later this year as it is very unlikely that producers will stop drilling for oil.

Another way to correct the potential inventory glut is to export this cheap energy source. Those in favor cite the creation of jobs and stimulus to the U.S. economy as two main benefits. Critics believe that this action will lead to higher prices and actually hurt the consumer. With more and more businesses and consumers converting to natural gas, it would seem premature for the U.S. to offer it to Asia and Europe. Intensive cost studies must be completed before the U.S. will attempt to give up its competitive advantage in this industry. In the meantime, inventories are likely to continue to grow.

With production likely to continue and demand to increase only slightly to offset this, the charts indicate that this market is headed toward $2.00. Speculators and hedgers should continue to monitor the weekly storage capacity number which currently sits around 85%. This is an extremely high level for this time of the year. If it continues to grow and finishes above this number at the end of the winter season, then this would be a serious sign that full-capacity may be reached by as early as May.

The number of producing rigs dropped to 791 last week. This is the lowest figure in 2 years, but the news failed to scare any of the short-traders out of the market. This is probably because producers have become more efficient at pumping out natural gas. Nonetheless, it is an indicator to watch.

The price of crude oil is another factor keeping pressure on natural gas. As long as crude oil continues to linger around $100 per barrel, producers are going to continue to drill aggressively. The best thing to happen to natural gas would be if crude oil broke to $50 per barrel. This would definitely lead to a curtailing of drilling activity and less supply being produced.

In conclusion, there are factors that can turn the natural gas market around, but they all seem short-term in nature. The best thing for this market would be a change in the U.S. energy policy if it includes a plan to shift from domestic usage of crude oil to natural gas. This plan is too far off to be a factor at this time.

Factors Affecting Natural Gas This Week:

Weather: Cold temperatures and snow have finally hit the Midwest, but the market could not even nudge higher on the news. All of December and almost half of January saw average to slightly above-average temperatures. It is going to take a long cold snap in order for demand to exceed supply.

Supply and Demand: Producers do not have an incentive at this time to stop delivering natural gas and consumers do not have strong reasons to increase demand. Simply stated supply is still increasing faster than demand.

Oversold Conditions: Oversold is a relative term. As long as there are bottom-pickers, there will be someone there to sell the contract to them. This indicator will become a factor when traders stop trying to pick a bottom.

Rig Count and Crude Oil Prices: The number of producing rigs is at a 2-year low, but efficiency means natural gas prices haven’t been affected yet. Continue to watch for this number to fall. Crude oil prices are due for a correction, but will prices drop far enough to curtail drilling?

By. FX Empire

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