Natural Gas Prices Forecast: ‘Oversold’ Conditions Challenging Traders

Market Conditions:  Volatility and Uncertainty

US natural gas prices are experiencing volatility early Tuesday, marked by a recent decline following a holiday-induced gain. This fluctuation signals traders’ efforts to pinpoint a market bottom amidst technical oversold indicators. Concurrently, fundamental constraints, like limited control over production and external policies, add to the market’s unpredictability.

At 14:22 GMT, Natural Gas Futures are trading $1.593, down $0.016 or -0.99%.

Technical Analysis: Establishing a Bottom

Tuesday’s early price action in US natural gas indicates a potential bottoming out. The market is currently oversold, a technical term describing a situation where, over a 14-day period, prices drop significantly. However, true oversold conditions arise only when selling pressure eases, particularly when hedge funds halt their long position liquidations.

Fundamental Factors: Limited Control and External Influences

Natural gas producers face limited influence over key factors. Government policies, currently curtailing LNG exports, and unpredictable weather patterns contribute significantly to market behavior. The US and Europe are experiencing surplus swells, primarily due to mild weather impacting demand.

Weather Forecasts and Demand

According to NatGasWeather, light demand is expected for the remainder of the workweek due to warmer temperatures across the interior US. Forecasts from Feb 26 to March 4 show variations, with the EC model predicting light demand and the GFS model anticipating colder conditions, potentially affecting demand.

Investment Trends: Hedge Fund Activities

Hedge funds have shown increased bearishness towards US natural gas, with positions indicating expectations for price declines. Records reveal significant selling in recent weeks, culminating in a substantial reduction in long positions. This pessimism is rooted in historical failures to accurately predict market turning points and is exacerbated by higher than average gas inventories in North America and Europe.

Short-Term Forecast

US Natural Gas’ future direction hinges on a delicate balance between technically oversold conditions and fundamental factors like government policies, weather conditions, and investment trends. With the current low price levels and the potential for a squeeze on short positions, traders should monitor these factors closely to make informed decisions. The uncertainty in weather forecasts adds another layer of complexity, suggesting a cautious approach in the short term.

Technical Analysis

Natural gas price continue to probe the downside looking for a seemingly elusive bottom. Although conventional technical indicators suggest oversold conditions, as a trader, you cannot interpret this as a buy signal until there is confirmation of a bottom. There is a greater chance of that occurring, once the hedge funds stop selling.

We’re not looking at a price level per se, but rather a bullish shift in sentiment. The simplest sign of a bottom will be a change in the pattern. However, the most robust signal would be a lower-lower and a higher-close, or the classic closing price reversal bottom.

We’ve already seen the lower-lower today, currently at $1.522, now all we need is a close over $1.609 to set the wheels in motion for a short-term bottom.