Natural Gas Fundamental Forecast – December 5, 2016

Natural gas futures finished lower on Friday, posting a technical closing price reversal top. This doesn’t mean the trend is getting ready to turn down, but it does indicate that the selling is greater than the buying at current price levels. Basically, the chart pattern is indicating that previous longs have decided to take a breather and book profits after a spectacular rally since November 9.

January Natural Gas futures closed at $3.436, down $0.069 or -1.97%.

The current chart pattern may also be indicating that buyers are reluctant to buy strength this close to major resistance levels at $3.592, $3.675 and $3.850, given the current weather pattern. Traders have been driving the market higher on expectations of colder temperatures so now that the cold temperatures have arrived, investors are asking for more. This may be the classic case of news being already priced into the market.

Forecast

Let’s look at the weather first. According to naturalgas.com, “a polar blast will invade the west-central U.S. the next few days with lows dropping into the single digits to teens, locally below zero.”

“The eastern U.S. will warm early this week as weak high pressure builds in, although it will cool rapidly late in the week as polar arrives. A milder break will follow into the eastern U.S. next weekend into early the following week as cold reloads over the Northwest.”

“Overall, natural gas demand will be slightly tighter than normal the next few days due to the milder east, but then increasing well above normal by mid-week as cold air gains ground.”

I believe the market may be having trouble rallying because the cold blasts are intermittent and too sporadic. Traders know the cold is coming, after all, it is winter, but the pattern suggests rapidly moving cold weather from West to East with normal temperatures in between.

I think in order to get this market moving sharply higher once again, traders are going to have to see a forecast of a lingering arctic cold dome, or something that suggests the cold weather will stick around for more than a couple of days.

This periodic pattern likely means demand will wax and wane with the temperatures. This is hardly the pattern investors want to see because it doesn’t help reduce the near-record storage by very much or fast enough.

So unless we see the forecast change, whereby, a long-lingering cold system is predicted, we may just move in a range.

From a technical and trading perspective, this market may have to move lower before moving higher in “sling-shot” type motion. I’d like to see a short-term break in order to shake out some of the weaker longs and allow the major buyers to load-up on the next dip in prices. I think this type of price action may be necessary to create the momentum needed to drive through the major resistance later this winter.