Natural Gas Price Fundamental Weekly Forecast – Starts Week Testing Value Zone

Natural gas futures closed lower last week as forecasts of moderating weather, following the current Arctic blast, encouraged speculators to book profits and producers to put on fresh hedges.

February Natural Gas futures settled at $2.795, down $0.158 or -5.35%.

Traders also reacted to last Thursday’s government report that was a downside miss against consensus estimates calling for a 221 Bcf draw.

Last week’s U.S. Energy Information Administration’s weekly storage report showed a draw in supplies of 206 Bcf versus the 5-year average of -99 Bcf. Supplies now stand at 3,126 Bcf, which is -192 Bcf below the 5-year average, and -192 Bcf less than this time last year.

Despite this week’s sell-off, natural gas prices could rebound next week because of the possibility of a record draw for the week-ending January 5. Preliminary data indicates gas inventories may drop by more than 300 billion cubic feet for the week.

Forecast

We have a mixed pattern on the charts. The trend is up according to the daily swing chart, but the trend is down on the weekly chart.

On the upside, both charts indicate the key level to watch is $3.320. A move through this level on the daily chart will reaffirm the uptrend. A trade through this level on the weekly chart will change the main trend to up.

On both the daily and weekly charts, the key area to watch is $2.830 to $2.766. If buyers step in then the market could form a potentially bullish secondary higher bottom. This will be the first sign that speculators may have identified a weather pattern indicating the return of cold temperatures.

This week, the EIA should report a draw of 300+ Bcf. This will be the largest on record and more than 100 Bcf larger than the 5-year average.

The play last week was in the spot market. Spot gas for next-day delivery surged to 60 times the going rate. If it shifts to the futures markets, the February contract could soar. This week’s EIA report could make a very strong bullish statement with the potential to widen the supply deficit versus the five-year average to 10.6 percent from 5.8 percent last week.

Besides trying to anticipate the weather patterns, traders are having a hard time grasping the price action. The problem I see for speculators is buying strength instead of value. This is why I think a pullback into a value zone or support may be more attractive especially to money managers.

Fundamentally, as the physical market tightens, the downside risk should fall, giving the market more upside potential. At some point, money managers may recognize this. Perhaps the buying will start if a support area can be formed between $2.830 and $2.766.