Natural Gas Bear Market

By: Conor DouglassFebruary 6th, 2012 10:08AM CST


Natural gas rallied Thursday as the market digested the latest EIA inventory data before taking a breath in Friday’s session. While a case could be made for a technical double-bottom forming in the daily chart, subscribers to that theory face significant fundamental headwinds as production, inventory, and demand data all point to lower prices as we head into the end of peak seasonal demand. The biggest upside risk to the market, as we saw on Jan 23rd and Feb 2nd, is headline-driven short covering.

The first move came after major energy firms (Chesapeake Energy in particular) announced plans to cut back on production. While the news sparked a quick spike in spot and NYMEX prices, it is unlikely that the market will be able to support a sustained correction/bull market. U.S.production has continued its 2011 trend upward at 64.2 Bcf/day in January, 10% higher than January 2011. The drastic production decreasesChesapeake(the second-largest producer) is planning will amount to about 0.5 Bcf/day. IF the cuts actually materialize AND other large producers follow suit it is still unlikely that production will drop to last year’s levels, let alone 5-year averages.

Thursday’s move came off of a 132 Bcf draw on inventories from the previous week. This is not a bullish number as a seasonal draw is expected in the peak winter demand season. The working gas in underground storage is 586 Bcf higher than at this point last year and 601 Bcf above the 5-year average. This surplus supply relative to previous years has also been growing steadily since November.


Chart Source - EIA.gov


Chart Source - EIA.gov

Weak demand due to the unseasonably warm temperatures across the country has been widely reported with natural gas consumption dropping 12% YoY and from the graph below seems to have peaked for the year and entered the slack demand spring season.


Traders should maintain short positions and sell the news with ST resistance at this week’s 2844 high in the March future and second resistance up around 2960 targeting $2.00 within the 6 months.


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Conor Douglass
Conor Douglass
Senior Commodities Broker
Conor has been a commodities broker with RJO Futures since November, 2011. He began his futures career as an intern with the business development department of the Chicago Board of Trade in 2006. After graduating with a BBA in Finance from the University of Notre Dame he worked as a broker on the equity options desk for MF Global where he provided price discovery, sourced liquidity, and executed trades for institutional clients. Conor transitioned back into the futures business in January, 20.... Read More

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