Natural Gas Fundamental Analysis – Forecast for the Week of November 28, 2016

Natural gas futures rose to a one-month high last week, as cooler forecasts continue to raise expectations for increased heating fuel demand.

January natural gas futures closed at $3.202, up $0.3520 or +12.35%. The week also ended with the market posting a five-session winning streak that has produced gains of close to 14% over that time period. Over the past two weeks, the market has produced its best gains since the end of 2015.

In other news last week, the U.S. Energy Information Administration reported that supplies fell by 2 billion cubic feet for the week ended November 18. Analysts were looking for an increase of 2 billion cubic feet.

The EIA also reported that total stocks now stand at 4.045 trillion cubic feet, up 39 billion cubic feet from a year ago and 241 billion cubic feet above the five-year average.

Forecast

Technically, the market gapped higher last Monday and was able to hold on to its gains. This indicates that a combination of short-covering and aggressive counter-trend buying is helping to support the market.

The short-term range is $3.675 to $2.722. Its retracement zone at $3.199 to $3.311 is the primary upside target. Trader reaction to this zone will determine the direction of the market this week.

Currently, the market is testing a key 50% level at $3.199. A move over this price will signal the presence of buyers. If they continue to come in to support the market then look for the rally to continue into $3.311. Taking out this level with conviction could trigger an acceleration to the upside.

A failure to sustain a rally over $3.199 will indicate that sellers are regaining control. This could drive the market back to at least $3.088.

The weather continues to indicate that prices are likely to be underpinned by a slight increase in demand, but there is nothing to indicate we should prepare for a long, lingering cold spell. Therefore, I have to conclude that the upside will be limited this week until the weather forecasters put in extremely cold temperatures.

The current forecasts say we should prepare for a cool blast, but not a cold blast. Furthermore, in between each predicted cool blast, we may see the emergence of systems that aren’t very cold and could bring near to slightly lower than normal demand.

Unless temperatures turn cold for a longer period of time, I expected to see limited upside action and perhaps a choppy, two-sided trade.