Natural Gas Fundamental Forecast – December 8, 2016

Despite a rapidly approaching Artic Blast, natural gas futures paused after new buyers refused to drive the market through a key retracement zone and into the psychological $4.00 level.  The rally took the market to its highest its highest level since December 2014, but instead of attracting aggressive buyers, investors took profits while awaiting further clues as to future demand.

January natural gas futures closed at $3.603, down $0.031 or -0.85%. Wednesday’s high was $3.748, slightly below a key resistance level at $3.851. The close took the market back below the October top at $3.675, suggesting that this last surge to the upside was fueled by short-covering rather than aggressive buying.

The price action also suggests that perhaps the forecast for extremely cold temperatures over the next two weeks has already been priced into the market and that investors and speculators may be looking beyond this time period.

Forecast

The technical chart pattern formed on Wednesday suggests the selling may be greater than the buying at current price levels. This is especially important because the selling took place inside a major retracement zone border by $3.593 and $3.851.

This zone is controlling the longer-term direction of the market. We could get extremely bullish on a sustained move over $3.851 and short-term bearish on a sustained move under $3.593.

Breaking through $3.593 will mean that investors are looking for value and are will to wait for their price before re-entering on the long side. Ultimately, however, value will probably be determined by how cold and how long the next weather system lasts. The daily chart indicates the best value area at this time is $3.296 to $3.235.

The market may not pull back into this area today, but you should be aware of it, given the history of the sell-offs and retracements in the natural gas market.

On Thursday, investors will be watching the U.S. Energy Information Administration’s weekly natural gas report for demand clues and whether the current cold snap has helped ease the supply glut.

The EIA is expected to report that storage levels fell by 42 billion cubic feet of gas during the week-ended December 2.

This estimate is raising concerns because it falls short of average declines in the past few years for the same time period. Natural gas stockpiles remain 0.6% above levels from last year and 6.25% above the five-year average.

Trader reaction to $3.593 is likely to control the direction of the market today. In the event the weather moderates and we get another period of normal to below normal demand, then we are likely to pullback to $3.296 to $3.235 before the end of the month.