Natural Gas Fundamental Forecast – December 7, 2016

Natural gas futures rallied early in the session on Tuesday to a two-year high, but buying was scarce near the high and the market ended slightly lower for the session. Traders were reacting to the colder weather forecasts and rising demand expectations on the early move. However, concerns over value or perhaps a new weather forecast encouraged long investors to pare positions before the end of the session. The price action suggests that perhaps short-covering rather than new buying was behind the price surge.

January Natural Gas futures closed the session at $3.634, down $0.020 or -0.55%. Prices have surged nearly 41% since November 11, sending prices to their highest levels since December 2014. After taking out the October high, prices retreated.

Currently, the market is trading inside a major technical retracement zone. Trader reaction to this zone will determine the near-term direction of the market.

Forecast

Traders shied away from buying strength on Tuesday as natural gas prices hit a two-year high. Although buyers were able to take out the October top at $3.675, it did so without much fanfare. In other words, the buying dried up and weak longs used the move as an excuse to book profits.

On the chart, the main range is $4.686 to $2.500. Its 50% to 61.8% retracement zone is $3.592 to $3.850. Technical traders often use this zone to determine the strength of a market. In this case, the market will remain strong as long as buyers can defend $3.592. The buying is likely to get stronger if $3.850 is taken out with conviction.

If $3.592 fails and selling volume increases then look out to the downside.

Besides the weather which may already be priced into the market, investors are also worried about the stockpiles. Currently, stockpiles are still at record highs for this time of year. This may be the main reason why the rally appears to be stalling.

Demand is still a question mark. Traders are saying that coal has become a cheaper alternative for power plants with gas at these prices. This will slow down the rate at which the excessive supply is being used up.

Traders are expecting Thursday’s U.S. Energy Information Administration inventories report to show that during the week-ending December 2, storage drew down to nearly 20% below averages for this time of year.

Natural gas could be in for a correction into the weekly report. This is normal. The magnitude of the drop will likely be determined by the next weather forecast. Currently, private weather forecasters are calling for below-average temperatures over much of the country into the third week of December.