Continuing the seesaw theme of the week that has seen higher and lower days alternate, February natural gas futures on Wednesday settled 6.9 cents lower at $5.833 as traders turned their attention to Thursday’s release of the Energy Information Administration’s (EIA) natural gas storage report for the week ended Dec. 31.
Price movement on the day was pretty tame as the prompt month carved out a high of $5.95 and a low of $5.76. February heating oil and crude futures also recorded losses of 2.82 cents and 52 cents, respectively.
“We have become very oversold on the charts,” said a Washington, DC-based broker. “However, in each of the prior down moves from the highs right up around $10, we got in similar oversold territory. In both cases, we managed to sell off and become oversold, then have a minor little rally and continue down. That sounds pretty textbook of the way a bear market behaves.”
In order to start feeling a little more bullish, the broker said the market would have to erase both gaps lower that were established over the past two weeks. “The bottom of the first gap that we would have to get back above is $6.10, then the next gap we would have to get up to close would be $6.69,” he said. “We would have to at least get up and close that first gap for me to even think that this thing has any sort of chance at a meaningful rally.”
Looking at support lines, the broker said he sees the mid-$5 level on the conservative side, before reaching substantial support in the $5.20 area.
Predicting the storage number, the broker said he believes there will be a withdrawal between 150 and 160 Bcf. The Reuters survey said the industry is calling for a 135 to 140 Bcf pull for the week. “I think we would have to see a much bigger withdrawal than expected to get bulls any sort of lasting ammo because next week’s report will reflect gas demand during the holiday week, where low commercial and industrial demand teamed with warm temperatures should make for a very small withdrawal,” he said. “Likewise, if Thursday’s withdrawal report comes in around 100 Bcf, then I think we could see some real powerful selling coming in.”
While many are paying attention to the storage situation and technical factors, the obvious driver of the market continues to be the weather, or lack thereof. Continued winter mildness in the East continues to put downward pressure on natural gas demand as well as prices.
“No matter what you say, the weather’s in charge,” a knowledgeable end-user said. “They were saying demand from China was propping up oil prices, but China kicked the props out about a month ago, purposely stalling their economy to keep it from overheating. That reversed the price on oil. Then the weather took over and has driven energy down. There’s a total change in the whole fundamental picture. It’s still a demand and supply market where one-degree temperature change has an impact on demand.
“I’m loving it. Fundamentals have finally taken over, and there’s no end in sight to the warm weather,” he said. “Look at the Midwest. It was 64 degrees and 63 degrees Wednesday and Thursday last week. The next 10 days they’re looking at above normal weather. We’re going to have two below normal pulls on storage in a row. I just love it. At the rate we’re going we’re going to end the winter with 1,500 Bcf in storage. They’ll have it full again by June 1, before air conditioning even gets going.”
The end-user added that he can’t currently conceive any way that this market could be propped up. “I love it when the fundamentals take over for a while,” he said. “I’m not against the speculators. In a free market you’re going to have both. I just don’t like to see it one-sided, and I think it’s been too much weighted in the other direction. I like to see a normal balance of market forces.”
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