Natural Gas Fundamental Forecast – December 6, 2016

Natural gas futures continued its three-week rally on Monday as cooler forecasts continued to raise expectations for increased demand. The market is rapidly approaching two-year highs. The session started slow as last Friday’s technical closing price reversal top cast doubts as to whether this rally would continue this week or correct into a value area due to overbought conditions.

January Natural Gas futures finished the session at $3.654, up 0.218 or +6.34%. The market is up nearly 40% since its November 11 low, putting it in a position to challenge highs not seen since December 2014.

Forecast

Monday’s price action suggests that enough new buyers may have finally arrived to drive this market through a key technical retracement area at $3.592 to $3.850. This zone includes the main top at $3.675. The combination of new buyers and aggressive short-covering could trigger an acceleration to the upside through this area because the charts indicate there is no solid resistance until the $4.330 to $4.441 area.

However, this acceleration and drive to the upside is not likely to take place until the current weather pattern turns into an arctic polar dome, in my opinion. However, traders may be thinking otherwise, especially if aggressive hedge fund buying is behind this current move.

According to MDA Weather Services in Maryland, temperatures should be below-normal over basically the entire country but parts of the Southwest and Florida deep into the third week of December.

Although temperatures are not expected to be too far below normal, the fact that the cold temperatures may linger for two to three weeks is what is getting bullish investors excited. Some traders are even saying that this type of pattern may be just enough to drain the excessive supply.

If traders accept the idea that the cold temperatures will linger for the next two to three weeks then we should be off to the races to the upside. Now that we crossed over $3.592, it’s important that buyers come into support the rally at that level. This may generate the momentum needed to take out the last main top at $3.675 and the retracement level at $3.850.

Given the recent stubbornness of this market to sustain a rally, I think it is going to take a strong combination of aggressive buying and short-covering to launch the next phase of this rally.