Natural Gas Fundamental Forecast – October 27, 2016

Natural gas futures hit their lowest level since May 31 as investors continued to liquidate long positions and aggressive bearish traders continued to pressure the market. This has been an extremely bearish weak for the natural gas futures contract with the market taking out four major bottoms since reaching a 22-month high at $3.556 on October 14. These bottoms were $3.366, $3.112, $3.037 and $3.010. The latter was the last major bottom before the strong rally.

December Natural Gas futures finished the session at $3.306, down $0.102 or -3.25%.

Traders continued to react to forecasts for warm weather that are expected to keep heating demand light over the next two weeks while output is expected to rise steadily. The reports calling for warmer temperatures to last into mid-November are the main concern because they have essentially delayed the start of winter for many previously bullish traders.

Now there is a fear in the market that temperatures may stay above normal into at least January. This is an eternity for seasonal traders who are used to building long positions at this time of year for a price surge during the winter.

Forecast

Prices are expected to remain under pressure because the trend is down and because of the downside momentum into the close. However, December Natural Gas futures are rapidly approaching oversold territory and a major retracement zone that may be attractive to aggressive buyers.

Looking at the chart and technical factors, the main range is $2.370 to $3.556. Its retracement zone at $2.963 to $2.823 is the primary downside target for chart-watchers. Some may even consider this to be a value zone, so don’t be surprised if buyers start to show up when this area is tested.

Fundamentally, the outlook is not very good. Gas inventories are expected to rise to 3.94 trillion cubic feet at the end of the injection season in late October and should exceed 4 trillion cubic feet in November.

Currently, inventories are in a position to top last year’s record high of 3.93 tcf. This would put inventories in a position to surpass the all-time high of 4.009 tcf set in November 2015.

Thursday’s U.S. Energy Information Administration’s weekly inventories report is expected to show a build of 71 billion. This would be below last week’s 77 billion build.

Watch the price action on a test of $2.963 to $2.823 since this is a value area. The trend is decisively lower but the market is close to being oversold. A build of less than 71 billion combined with a test of the important price zone could trigger the start of a sizeable short-covering rally.

Don’t be surprised today by a dramatic reversal to the upside after the release of the report at 1430 GMT.

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