Natural Gas Fundamental Forecast – October 26, 2016

Natural gas futures fell the most in one day since July amid concerns that the warmer-than-average weather in the Midwest will curtail demand for the heating fuel. The sell-off since October 14 has wiped out all of the month’s earlier gains and the market is now trading below the September 30 close at $3.132.

December Natural Gas futures finished the session at $3.138, down $0.181 or -5.45%.

Forecast

Unless there is a short-covering rally triggered by aggressive bottom-picking and profit-taking due to oversold conditions, support for natural gas prices could continue to erode. All it is going to take is a fresh round of aggressive selling and sell stops under $3.112 to trigger a break into the next two support levels at $3.037 and $3.010.

The catalyst behind the selling pressure is the unseasonably warm temperatures for this time of year. Also driving the liquidation of long positions is the news that temperatures will probably be above normal in the central U.S. from October 29 through November 7. Temperatures in the Northeast will be closer to average for this time of year, but this is not likely to put a dent in the supply.

Weather forecasters essentially took out cold temperatures for the early part of winter, saying that the November through January time period will be warmer than usual across the country. This was a blow to the bulls because many had built long positions in anticipation of perhaps an early start to winter in November.

The huge sell-off on Tuesday represents a dramatic shift in the trading strategy of many investors especially the hedge funds. Yesterday’s break suggests that they have been blown out of the market, choosing to lick their wounds and move on. Some may even be short.

With the exception of periodic short-covering rallies, it looks as if we are going to be going into the winter with a substantial amount of gas in storage. If the long-term forecast proves to be valid then we could be facing a glut in storage, going into next year.

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