Warm Weather Cools Natural Gas
Today's Idea
Large inventories and record high production continue to weigh heavily on the Natural Gas market. Many bulls were holding out hope that the winter months would be colder than initially forecast, and they got their wish earlier this month. However, much of the country will see warmer weather in the New Year, dashing those hopes. Technically, a breakout from consolidation would suggest prices could test levels well south of the $4 level. Some traders may possibly wish to consider entering into a bear put spread, buying the Feb 4 puts and selling the Feb 3.75 puts for a debit of 0.070, or $700. The trade risks the initial debit for a potential profit of $1,800 if the Feb futures close below 3.75 at expiration.
Fundamentals
Natural Gas futures have been trading sideways for the past week and a half, after falling back from 4-month highs made earlier this month. Many traders are now looking past the cold December and have focused on the New Year, which is expected to bring higher than average temperatures. Inventory levels are expected to drop once again this week to 3.368 trillion cubic feet, almost 500 billion cubic feet off record highs made in the first week of November. Some traders may disregard this data in light of the warmer weather and record Natural Gas production. Unlike Crude Oil, Natural Gas does not enjoy the inverse relationship with the US Dollar, so outside markets will probably not help support prices. Commodity funds have also soured on Natural Gas, reducing their net long position by 35%. Colder than expected weather could change the market outlook, but it does not appear that will happen, at least according to forecasts.
Technical Notes
Turning to the chart, we see the Feb Nat Gas contract trading in a narrowing consolidation pattern. This could translate into a triangle pattern on the daily chart. A downward breakout from the triangle suggests that prices could make a run at the 3.75 support level. The lower edge of the pattern coincides with the 50-day moving average, making a downward breakout particularly bearish.
Rob Kurzatkowski, Senior Commodity Analyst
