No quick relief for bloated Natural Gas supplies!
Fundamentals
Though overshadowed by Oil, another member of the energy complex, Natural Gas, continues to slump, with prices hovering near 6-year lows. The nearby March and April contracts briefly fell below the $4 per 10,000MMBTU level for the first time since 2002, as supplies in storage remain well above the 5-year average. Last Thursday's release of the weekly EIA gas storage figures surprised nearly every analyst when it was reported that a mere 24 billion cubic feet (bcf) of gas was removed from storage last week. This was well below the average pre-report guesstimate of a 54 bcf draw, and also well below the 5-year average of a 155 bcf draw. Total gas in storage now totals 1.996 trillion cubic feet, or 8.4% above the 5-year average. Natural Gas has been a victim of increased production at a time when both industrial and consumer demand has declined. The U.S. Department of Energy is predicting just over a 5% decline in industrial demand for gas in 2009 at the same time production increases. The old trading adage that the "cure for high prices is high prices" also tends to work in reverse, with low prices forcing major gas producers to cut back on expenditures for bringing new production on-line and postponing investment in future exploration. This could make having adequate supplies available more vulnerable to potential supply shocks like hurricane damage or extreme temperatures later this year. This does not even include an increase in demand once the economy begins its recovery and industrial demand begins to ramp-up. Though judging by all we hear and read in the news these days, that event may never happen. However, should demand begin to increase and new supplies begin to lag, Gas bulls may break out of their pens and become difficult to reign back in!
Technicals
Looking at the daily chart for April Natural Gas, we notice prices have fallen by over 2/3rds from the highs made in July. The brief attempt at a rally two weeks ago failed to find new buyers, despite a brief close above the 20-day moving average. The 14-day RSI has fallen well into oversold territory with a reading of 26.42. The Commitment of Traders report shows large speculators adding to their already large short position in Natural Gas as of February 17th. Small speculators are net long Natural Gas, averaging down their position as prices fall in an attempt to pick a bottom. This market is a classic example on the psychology of these two types of investors, with large speculators tending to be trend followers and small speculators tending to try to pick tops or bottoms in a market. The next support point for April Gas looks to be near the 3.80 area, with resistance found at the February 9th highs of 4.922.
Mike Zarembski, Senior Commodity Analyst
