Natural Gas Forecast December 11, 2012, Technical Analysis

The natural gas markets fell relatively hard during the session on Monday, as the warmer than expected temperatures in the northeastern part of the United States are plaguing the bullishness in this marketplace. We now sit just above the $3.40 level at the end of the session, and this of course brings up an interesting proposition. Simply put, I have had the $3.40 level as support for some time now, and still believe it to be a very important level in this marketplace.

The candle for the session on Monday is closing at the very bottom, and as a result this normally means that there will be continued downward pressure. Looking this chart, it appears to me that if we managed to break down the $3.40 level, we will more than likely see a run directly to the $2.80 level before it’s all said and done.

The supply and demand situation in the United States, the world’s largest consumer of natural gas, is simple: There is far more natural gas than demand. This would be true even if the winter was cold in the northeastern part of United States, let alone now that it’s warm. The problem is that the Americans keep finding more and more natural gas, and are about to become a net exporter of energy overall, and natural gas is by far the largest stockpile they have.

While there is other parts of the world are willing to pay three and four times as much for natural gas, the reality is that the supply is going to cause a major glut in the market for the foreseeable future. Because of this, we are a bit cautious about being overly bullish this market, but were willing to accept the fact that over the winter months it could continue to gain.

We now have to rethink this thought process, as the $3.40 level will be a bit of a binary switch in this market. If we managed to crash below it, we have to admit this market is broken and $3.00 will undoubtedly be attempted, and we could head back towards the lows again. Alternately, if we see some type of supportive candle, it’s going to have to be soon if there is a chance for this market to bounce in the near-term.