Natural gas futures have been reeling from the first winter weather rally in early November. This market is fairly dependent on abnormal weather this winter to burn through excess supplies. Otherwise, natural gas prices will probably remain in the lower end of the $2 range. I wrote about this in my last article and I have a feeling we will see another one or two of these weather scares this winter.
The rally in early November didn’t make it past the previous rally high at the 62% retracement. The weather forecast at the time was threatening abnormally cold weather and the market go overly optimistic. The weather turned out to be slightly less severe than expected and prices quickly reversed direction. Rallies to resistance in downtrends are meant to be sold.
The song remains the same for natural gas – more than ample supplies and not much to stimulate extra demand. There are weather scares every year for agriculture commodities and some of the energy commodities. Most of the rallies fizzle, especially if there is not a tight supply picture. Though, every once in a while, there is a major weather event that changes the supply dynamics. These events can sometimes change the trend and lead to multiyear rallies. However, the smart money will typically fade the regular weather rallies.
Prices are now around the $2.45 level, which is near a strong resistance level. I believe that natural gas prices should fundamentally be trading around the low $2 level. There isn’t much on the horizon that will change the fundamental picture. The economy is probably looking a little bit better than a couple months ago, but that doesn’t have much of an impact unless manufacturing gets rolling.
The market should struggle if prices reach the higher end of the $2 – $3 range. Supplies will continue to be more than ample unless we have a prolonged and abnormally cold winter. I would still look to sell any rallies into resistance levels and any minor weather scares.
Few people are talking about this, but the market could sink below $2 if the winter is warmer than normal. That is a real risk. I don’t see production curtailing anytime soon. It might take sub-$2 prices before that happens, as producers will burn off more of the gas instead of shipping it. That is a common practice, but it has also become an environmental issue and that could come to a halt. The bottom line, in my opinion, is that gas supply will continue to flow at this pace as long as we keep pumping out oil at our current pace.
