As was suggested a month ago, the market started getting a round of year-end short covering into the end of December. Prices continued rallying into last week on a more supportive weather regime, reports of lower U.S. production out of the EIA, a move out of grossly oversold market conditions, and a stronger technical pattern on the charts.
This is actually a fairly constructive chart from a purely technical view only. The nine (9) day moving average has now crossed over the 30 day moving, prices have breached the 100 day moving average, and the $2.40-$2.44 potential "pivot" area. We are skeptical of any sustained price strength beyond the $2.50ish area with storage levels now projecting to be around 2,000 bcf or greater at the end of March. We should expect severe weakness heading into the Feb contract expiration in two weeks, barring any extreme cold snaps in the forecast. For the time being, the market has found some mojo on the upside.
We do believe that a return to $2.75-$3.00 by mid-2016 is likely, assuming that more robust production declines occur in the first half of the year and start significantly working off the year-over-year storage surplus.
Can natural gas prices still go down? Though it's not currently likely to drop down into the $1.60-$1.70 range, it is still a possibility if February and March revert back to sustained mild temperatures.
Crude Oil Continues to Fall; Selling has Reached "Panic" Levels
Crude oil seems to have no downside at present as prices keep falling. After consolidating during the back half of December, either side of the $37.75 prior support - now resistance. Prices have been pummeled over the last four trading sessions with prompt month contract moving lower by nearly $6.00 since the closing price of $37.04 on the last trading day of 2015.
Yesterday, prices broke below the major support formed by the $32.40 low of December 2008. This leaves a vacuum on the charts if this support level is indeed now breaking, there is literally nothing on the charts below this level to predict the next technical support or the ultimate downside target.
We have no clue from here where the ultimate bottom might be if the $32.40 support is giving way. I'm sure that the $30.00 level is now support as a psychological level, and the $27.50 and $25.00 major option strike prices sit as technical support below there. The selling has now reached "panic" levels and it will stop when it stops.
The only bright spot that we can possibly see is the market is getting close in time cycle terms to enter the seasonal period when the market starts moving higher int 2Q from a seasonally biased basis. But, does the seasonal bias high begin from today's low are from a low that is $2 to $10 lower?
Now that talk of trade down to $20 to $25 is now entering the "mainstream" of conversation, we wouldn't be surprised at all to see prices turn on a dime and bead back up soon as the contrarian point of view seems to always win out when "everyone" is so completely bearish and the average Joe Schmo on the street knows what is happening with any commodity price.
Recording Breaking Weather Once Again
Well, it is official. According to NOAA/NWS, the 4Q of 2015 was the mildest on record in 121 years of record keeping for the country as a whole. Note from the graph that it was particularly mild to historical in the East, which bodes for even less “normal” gas demand on a population gas-weighted average.
Throw out October and it was almost as bearish to normal with November and December in aggregate being the second mildest (second to 1999 and tied with 2001) over the last 30 years looked at. These mild temps have represented a tremendous amount of “lost” gas demand. We would guesstimate 250ish bcf over those three months alone.
The forecast going forward is more supportive, but not nearly cold enough to begin to offset lost load in Oct – Dec.