Natural Gas: The Big Sell Off
By Editorial Dept - Jul 11, 2014, 2:03 PM CDT
This week, August Natural Gas futures posted its biggest one day drop since mid-February. The sell-off basically erased all of 2014 gains. Bearish speculators sold heavily on the notion that the uneven U.S. heat pattern this summer will weigh on demand for the power-plant fuel.
Although the weather has a short-term fundamental influence on the market, the recent price action clearly suggests that natural gas is in the hands of some strong short-sellers. This is because the market is taking a hit from both the demand and supply side of the equation.
The short-term demand outlook looks bearish for the rest of the month. In the East, seasonally normal temperatures are expected to return from July 12 through July 21. The Midwest is expected to experience normal to cooler temperatures during the same time period. With weather forecasters confident that these areas are not expected to see any sustained heat across the major gas-consuming regions of the U.S., prices are expected to continue to feel selling pressure.
On the supply side, a record string of storage injections has alleviated the fear that the U.S. won’t have enough gas for next winter’s heating season. Gas supplies have expanded by more than 100 billion cubic feet for eight consecutive weeks. This new record according to government statistics pushed U.S. inventories up to 1.929 trillion cubic feet in the week-ended June 27. This is only 29 percent below the five-year average for the period,…
This week, August Natural Gas futures posted its biggest one day drop since mid-February. The sell-off basically erased all of 2014 gains. Bearish speculators sold heavily on the notion that the uneven U.S. heat pattern this summer will weigh on demand for the power-plant fuel.
Although the weather has a short-term fundamental influence on the market, the recent price action clearly suggests that natural gas is in the hands of some strong short-sellers. This is because the market is taking a hit from both the demand and supply side of the equation.
The short-term demand outlook looks bearish for the rest of the month. In the East, seasonally normal temperatures are expected to return from July 12 through July 21. The Midwest is expected to experience normal to cooler temperatures during the same time period. With weather forecasters confident that these areas are not expected to see any sustained heat across the major gas-consuming regions of the U.S., prices are expected to continue to feel selling pressure.
On the supply side, a record string of storage injections has alleviated the fear that the U.S. won’t have enough gas for next winter’s heating season. Gas supplies have expanded by more than 100 billion cubic feet for eight consecutive weeks. This new record according to government statistics pushed U.S. inventories up to 1.929 trillion cubic feet in the week-ended June 27. This is only 29 percent below the five-year average for the period, according to the EIA.
With the recent sharp sell-off, bullish traders have conceded that the bearish traders won this round of the summer weather market. However, it is only July and traders still have to face the possibility that the hot weather or perhaps even a hurricane could drive prices back up later in the summer.
Trading conditions could get particularly interesting because August Natural Gas futures have reached a critical support point on the intermediate term weekly charts. As of July 10, the futures contract was trading inside the 50% to 62% retracement zone of the November 2013 to February 2014 trading range. To bullish traders, this zone represents value. To bearish traders, it may mean an area to take profits.
Aggressive speculators should start to watch the price action inside this zone to see if there are buyers showing up to stop the slide. The key area to watch is 4.24 to 4.09. This area represents the best value at this time.
These traders may have a different outlook for the weather since they are likely to be from the professional side of the market and may have access to different weather models. So while short-term traders may be reacting to current temperature predictions, speculative buyers may be looking 30, 60 or even 90 days out. This could change the dynamic of the current market conditions, but the selling pressure must stop before one can even consider the long side of the market. It is not suggested that one just jump in and bottom-pick. It would be like kicking a rolling soccer ball. Let the market stop going down first then consider the long side once you can determine your risk.
Recently, data showed that money managers cut their net-long positions in the natural gas market by 15 percent. This could be a sign that the recent break has taken out the last of the buyers. If you are a contrary investor and prefer to buy value then now may be the time to start watching natural gas futures for a possible bottom.
The price seems right, there are still a good six to eight weeks to go for potential summer weather issues and a good percentage of the weaker buyers have decided to abandon the long side of the market. This may be the time to start watching for bottoming action and the start of speculator-driven rally.
