Natural Gas Fundamental Forecast – October 24, 2016

Natural gas prices fell sharply as investors continued to react to the warm weather pattern that is hurting demand. Short-sellers are getting pretty close to driving out all of the weak longs that played the weather market a little too soon earlier in the month. December Natural Gas futures closed at $3.361, down $0.064 or -1.87%.

The unseasonably warm temperatures across key areas of the U.S. have hurt demand this fall because fewer consumers needed to turn up the heat in their homes. At the same time, producers have continued to inject supply into storage.

Although the injections have been below average for this time of year because producers have reduced output, the supply has still grown because of the lower demand. This has dampened the bullish outlook, but there is still time to make up for the warm weather.

Forecast

As I’ve mentioned several times previously, I believe the foundation has been laid for a strong bull market later in the year, about the time of the official start of winter. I also mentioned that the recent rallies were way ahead of schedule and that waiting for a pullback into a value zone may be the best strategy.

Based on the $3.112 to 3.556 range, we identified $3.334 to $3.282 as the best value zone. We came close to this zone on Friday, but buyers came in at $3.337 to stop the price slide. If the selling doesn’t continue into this zone then we’re looking for the start of a short-covering rally that could take the market back to $3.447 to $3.472 over the near-term.

We still think it’s too early for the market to start its next bullish leg up so chasing the market higher at this point is not suggested. We’d still rather wait for a pull-back into our support zone which we think represents the best value.

This week’s price action is expected to be influenced by the weather once again. According to MDA Weather Services, the weather will be warmer than normal across most of the continental US. October 26 through November 4. This news should help limit gains and perhaps set up the next shorting opportunity if the market rallies into the $3.447 to $3.472 resistance area.

I have to admit that I’m a little concerned about the longer-term outlook for prices. Although the foundation is there for a rally, we’re not likely to see another support base form until the weather guys put some cold into the November forecast. Early reports suggest that November temperatures are expected to be above normal and some forecasts are even showing December will come in mild.

I’m looking for renewed selling pressure if $3.447 to $3.472 is tested and for some speculative buying to come in on a test of $3.334 to $3.282.