Natural gas prices dropped more than 6% this week. The catatlyst continues to be rising production in the shale space. Last week’s announcement that Chevron was purchasing Anadarko, shows that the big players with powerful leverage are moving into the shale space. Oil margins are driving this phenomenon, and the offshoot is rising natural gas production.
LNG was the outlet for higher production, which led to a decline in inventories, but a drop in Asian natural gas prices do to a warmer than normal winter in China, has led to a backup in gas inventories in the US. This week the EIA reported a larger than expected build. There is no reason to believe that demand in the US will rise, and if production continues to climb, prices will continue to face headwinds.
Natural gas finished the week lower. Prices declined 6.1% for the week, slicing through support near 2.54. Target support is now seen near the 2016 lows at 1.61. Weekly momentum has turned negative as the MACD (moving average convergence divergence) index generated a crossover sell signal. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) crosses below the MACD signal line (the 9-week moving average of the MACD line). The MACD histogram is printing in the red with a downward sloping trajectory which points to lower prices and accelerating negative momentum. The fast stochastic continued to head south. The current reading on the weekly fast stochastic is 7, which is below the oversold trigger level of 20, and could foreshadow a correction.
Traders will now need to wait until the shoulder season is over for demand in the US to pick up. The cooling season begins in June when warm weather begins to cover most of the US. Without LNG demand prices are likely to remain under pressure.
This article was originally posted on FX Empire
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