Natural Gas Market Forecast for the Week of January 30, 2012

March Natural Gas formed a dramatic closing price reversal bottom last week, setting up the market for a 2 to 3 week rally equal to at least 50 percent of the last break from 3.7410 to 2.2890. This retracement target price is 3.0150. Further upside momentum could drive the market into the 61.8 percent price level at 3.1860. A closing price reversal does not mean the trend has changed, but indicates that selling pressure has subsided.

The key to any closing price reversal bottom is the follow-through rally. A trade through 2.8380 will be needed to confirm the bottom. Without the follow-through, the market is likely to retest the low.

A pair of downtrending Gann angles at 2.5550 and 2.6720 continues to control the short-term direction of the market; however, the market is in a position to crossover to the bullish side of these angles. If this occurs, then traders should look for a further rally into another downtrending Gann angle at 3.0210. Combined with the retracement zone, this angle creates a solid resistance cluster.

It wasn’t the weather or oversold conditions, but a statement by President Obama that sent the natural gas market higher last week. The policy shift by the White House in favor of greater gas development encouraged shorts to cover their positions and new speculators to explore the long side of the market.

“We have a supply of natural gas that can last America nearly 100 years,” Obama said during his Tuesday evening State of the Union address. “And my administration will take every possible action to safely develop this energy.”

This statement turned the market around and signaled a possible long-term bottom if the Obama administration follows through on its promise to provide natural gas producers with incentives to develop uses for the product.

Even with the possible shift in the administration’s energy policy, it may take years to convert the U.S. to total dependency on natural gas. This would include converting homes from oil to gas as well as motor vehicles. So while the industry took a week to celebrate the possible change, the fact remains that consumption cannot keep up with supply and that inventory currently sits near an all-time high.

With winter approaching the half-way point, producers are starting to become concerned that the winter season will end with a record amount of natural gas in storage. If production continues at its current pace, inventories may reach full capacity my May since consumption is expected to drop after winter ends.

The concern that natural gas drillers will continue to produce more gas than is being used was addressed last week when Chesapeake Energy Corp. announced it would cut production of dry gas in 2012 by as much as one-billion cubic feet per day. They were also considering reducing their drilling rig count.

If other producers decide to follow Chesapeake then we may have seen the bottom in natural gas. If another producer decides to pick up the slack then prices could stabilize and form a support base. So while the President’s statement may have been welcome news and an excuse to cover short positions, the real driver of higher prices will be a slash in production.

Factors Affecting Natural Gas This Week:

Weather:  The mild winter has led to low demand which is helping to drive up inventories. At this point, it doesn’t look like cold temperatures can save this market so the focus is shifting toward production controls. 

Supply and Demand:  Chesapeake Energy took the first swing at controlling production or supply, the market is waiting to see if other producers follow. Demand is low and likely to fall as spring approaches.

Oversold Conditions:  Traders seem to notice oversold conditions when the fundamentals turn bullish. In hindsight the market was oversold, but this condition could be taken care of following a 2 to 3 week rally.

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