Today's Spotlight Market

Fundamentals are beginning to turn positive for Natural Gas prices, as a lower Gas rig count and signs of increased demand going into fall might be signaling the end to the 4-year old bear market. Some traders will now turn their focus towards Natural Gas demand, especially from power producers, as the rally in cash market prices may force utilities back to using cheaper coal to fuel their electrical generators.

Fundamentals

Natural Gas bulls appear to be in the driver's seat, as prices have rallied to highs not seen since January. Well below normal temperatures are anticipated in the 6 to 10-day forecast for the central portions of the U.S., which has many traders anticipating increased usage of Natural Gas for heating purposes. This expected cold spell has altered the usual seasonal tendencies for Natural Gas prices, which usually decline in the so-called "shoulder season" just prior to the start of the winter draw from storage around November 1st. Anticipation of a massive storage build this summer did not materialize, as larger than expected demand by electricity producers this summer due to high cooling demand offset increased Gas production from shale formations. Low cash market prices for Natural Gas have finally started to curtail production, with the Baker Hughes rig count falling to its lowest levels since 1999. Large speculators continue to hold a net-long position in Natural Gas, and the liquidation of this short position has been a major catalyst in the recent rally. Now that prices have broken out from the 10-month long consolidation phase, we may start to see fresh buying emerge from some trend-following traders, as it appears that the 4-year bear market may finally be at an end.

Technical Notes

Looking at the daily chart for November Natural Gas, we see that the 20-day moving average ("MA") has crossed above the 200-day MA, which is viewed as a bullish signal. However, after the November futures traded above 3.500 for the first time since January 10th, we saw selling pressure emerge, which was most likely hedge selling after prices made 10-month highs. The 14-day RSI is barely crossing above the 70 level, which many technicians consider to be a signal that a market is becoming overbought. Volume has been very heavy during the past few sessions, which may be a combination of short-covering buying and new speculative longs entering the market -- especially smaller speculators who are already net-long the market. The 2012 high of 3.583 looks to be the next resistance level for the November contract, with support found near the 3.200 price level.


Mike Zarembski, Senior Commodity Analyst

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