December natural gas closed lower Tuesday as traders elected to join a bearish feeding frenzy and saw no bullish developments on the horizon that would preclude prices working another 20 cents lower. At the closing bell December had fallen 5.4 cents to $3.404 and January had retreated 5.8 cents to $3.542. December crude oil continued its march to the century mark and posted a gain of $1.23 to $99.37/bbl.
“What I see going on along with the open interest is that new shorts are entering the market,” said Eric Bentley, CEO of VKNG Energy LLC in New York. “Some of the cash market traded with a $2 handle Monday, and that has some people confident it will trade down to $3.20.
“There are mild forecasts, and I don’t have a bull horn to hang an argument on. The bears are running loose in the zoo. There’s no reason to think the market won’t make a steady grind lower. I don’t think there is an area where you would catch guys blinking to short-cover. People are piling on and going for the jugular.”
Thursday’s storage report just might be the catalyst that sends prices to $3.20. Jim Ritterbusch of Ritterbusch and Associates is looking for a build in Thursday’s inventory report of 28 Bcf. When compared to last year’s 1 Bcf draw and a 10-year average of a 10 Bcf build, a new storage record seems a near certainty. “While the storage build could deviate from these expectations by some 10 Bcf or more in either direction, the fact that the supply surplus against average levels will be stretching further could prompt some selling. Furthermore, a long-standing supply deficit against last year will flip to a surplus. Given current temperature forecasts, establishment of a record supply would appear to represent a foregone conclusion with the 3.9 Tcf level now in the crosshairs of most traders.
“Chart deterioration is also emboldening the speculative community as the next significant technical support fails to develop until about the $3.22 level, last year’s lows. Although attainment of such a seemingly distant downside possibility would appear a bit of a stretch, a bearish storage figure on Thursday combined with a further extension of mild temperature expectations for a few more days could easily facilitate such a price decline. We had shifted away from a bearish stance late last week and to a cautious bullish view as our downside targets had been achieved. But given the weekend updates to the temperature views, we have switched to a neutral or sidelines stance pending further guidance from temperature updates and the storage numbers later this week.”
Weather forecasts still call for warmth in the six- to 10-day period but with more variability. Commodity Weather Group predicts above- to much-above-normal temperatures east of a line from Montana to eastern New Mexico. “We are seeing more signs of variability [Tuesday] morning that mix in more cooling to the pattern than seen [Monday]. This is not strong or long-lasting cold as the supply is mostly cut off by the Gulf of Alaska low feature,” said Matt Rogers, president of the firm. “But the models are showing more preference to cool the Northeast a bit more in the 6-10 day. And we see a mainly southern branch cooling during the 11-15 day (cooling the Midwest and East Coast to normal, but offering some below normals briefly to Texas and the Southeast). At the end of the 11-15 day, the models are weakening the Gulf of Alaska low, while strengthening a North Atlantic ridge (-NAO). While interesting for possible future colder weather, it may only be temporary like seen this week.”
Consistent with forecasts of warmer temperatures for eastern and Midwest markets, the National Weather Service (NWS) expects heating requirements to be well below normal for important energy markets. For the week ended Nov. 19 NWS predicts that New England will see 125 heating degree days (HDD), or 45 fewer than the norm; and the Mid-Atlantic will have 115 HDD, or 41 fewer than its norm. The Midwest is anticipated to have 142 HDD, or 36 fewer than its norm.
From a technical perspective, all may not be lost when technical support was taken out with Monday’s breach of $3.50. The market continues to be oversold and a rally would not be out of the question. “While Monday’s price action strongly suggests further downside from here, the intraday RSI [relative strength indicator] is oversold,” said Brian LaRose, analyst with United-ICAP.
“This means a relief rally of some kind is possible before the downtrend can continue. Any turn higher will have us looking to the ratio retracements of the move down from $3.978 for resistance. Pause or not, our near-term target for natgas is $3.200-2.956.”
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