Natural Gas Fundamental Forecast – October 28, 2016

Natural gas futures posted an inside move and higher close on Thursday after failing to follow-through to the downside after Thursday’s sharp sell-off. This usually indicates investor indecision and impending volatility. In this case, however, it may be indicating that the market is getting ready to go through a transition period due to oversold conditions. This could be the first sign of a shift in momentum from down to up.

December Natural Gas futures closed at $3.068 on Thursday, up $0.032 or 1.05%.

Adding further to the possibility that we may be forming a short-term bottom was Thursday’s price action. The market ebbed and flowed between gains and losses throughout the session on steady volume. The heavy liquidating selling pressure that we saw all week seemed to be taking a breather. And buyers seemed to be a little more willing to stick their toe in the water in an effort to test support.

Both sellers and buyers also appeared to be unfazed by another build in inventory, seemingly indicating that traders were still holding on to hopes for a return of steady-to-higher demand once winter starts.

According to the U.S. Energy Information Administration, storage levels grew by 73 billion cubic feet, slightly higher than the 72 billion average forecast.

Forecast

With natural gas prices holding steady on Thursday, one can’t help but wonder if this means the selling wave is over. Conventional oversold indicators and oscillators have placed the market in the window for a possible bottom, but this is likely to trigger a short-covering rally due to profit-taking and not necessarily strong buying. It may also attract aggressive counter-trend buyers.

The best rallies start with the formation of a support base and given the recent sharp break it’s going to take about 5 to 7 trading sessions to establish a strong enough bottom to support a good rally.

According to the charts, the best value area is $2.963 to $2.823. It’s a pretty wide zone which will give investors plenty of room to build a solid support base if they so choose to do.

If there is a cold weather scare and a short-covering rally does begin then based on the $3.556 to $2.972 range, we could see a retracement all the way back to $3.264 to $3.333. But since the main trend is down, this area is likely to attract new short-sellers.

The next couple of weeks are critical for traders still holding onto hopes for a bull market this winter. Given the current forecast for warm temperatures until at least mid-November, we have to expect to see record storage levels sooner-rather-than-later.

I suspect that investors have accepted the possibility of the record storage numbers, but are more focused on the weather at this time. Traders will be watching the forecasts closely because they want to know if there is still the possibility of a normal winter this year. If the forecasts start to call for more seasonal temperatures then natural gas could form a support base. If the forecast postpones the start of winter into January then I see almost no chance of a rally in November.