Natural Gas Price Fundamental Weekly Forecast – Hedge Fund Specs Cut Bullish Bets, Ripe for Short-covering Rally

Natural gas futures plummeted last week with the price action driven expectations of warmer weather after the current winter storm on the East Coast passes and a surprise build in storage.

January natural gas futures settled at $2.772, down $0.289 or -9.44%.

Despite below freezing temperatures this week-end as far south as northern Florida, traders were looking ahead to forecasts after December 15 which call for mild temperatures for this time of year.

More than half of the 9.44% loss last week was attributed to a government report which showed a surprise build in U.S. supplies in storage the week-ending December 1.

According to the U.S. Energy Information Administration (EIA), weekly natural gas storage in the U.S. rose by 2 billion cubic feet (bcf) last week. Traders were looking for a withdrawal of 5 to 9 bcf.

That compared with a drop of 33 bcf in the preceding week, a fall of 42 bcf a year earlier and a five-year average decline of 69 bcf.

The EIA also said total natural gas in storage currently stands at 3.695 trillion cubic feet (tcf). That figure is 264 bcf, or around 6.6%, lower than levels at this time a year ago and 36 bcf, or roughly 1%, below the five-year average for this time of year.

In other news, U.S. natural gas speculators cut their net long positions for a third week in a row on expectations supplies will be adequate this winter with storage near normal levels, output at record highs and forecasts for another warm winter.

Speculators in four major New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE) markets reduced their bullish bets by 50,966 contracts to 121,563 in the week to December 5, the U.S. Commodity futures Trading Commission said on Friday.

That was the first time speculators cut their net long positions for three weeks in a row since October.

Forecast

The weekly chart shows that the trend is down and momentum could take natural gas prices to the bottom from the week-ending February 26, 2016 at $2.720. I’m not sure what’s under this price, but I suspect bargain-hunters will step in if this price is broken. Due to extremely oversold conditions, any buying is likely to be fueled by short-covering.

If this forecast is correct then the warm weather from the West should move into the Midwest then East Coast sometime after next Thursday, or December 15. This is what is driving prices lower. After the 15^th, demand is likely to drop to normal to below normal.

Now that the speculators have been blown out of the market, it may be time to start looking at the long side again, but I don’t suggest trying to pick a bottom. Aggressive buyers should watch for signs of a short-term bottom like a lower-low, higher close, or a support base that forms a “W”. These patterns will indicate that the selling has stopped and that perhaps a few hedge funds are rebuilding long positions.