This week served as a confirmation of range-bound trade in both the crude oil and natural gas market. There is a conflict in the analysis of the fundamental factors affecting the price discovery of both markets that has left some parity in the bull and bear camps.
Crude continues to remain between established converging trend line support and resistance, as does natural gas. Each energy commodity has both bullish and bearish developments that are important yet not strong enough to convince traders that the price is justified in either going substantially higher or lower.
Natural gas fundamentals:
- Colder weather than the norm recently across the Midwest and eastern seaboard (bullish).
- US power plants transitioning away from coal to cheaper and plentiful natural gas (bullish).
- Oversupply (bearish).
- Significantly more capacity available should prices rise (bearish).
The natural gas market has shown some strength in rallying off of the recent mid 1.60 lows, though it has struggled to sustain any bullish prowess above 2.00. The recent unseasonably cold weather has probably been the strongest proponent of higher pricing after a warmer than expected winter. Additionally, there are reports both in the US and globally of many more traditional fuel power sources converting to the cheaper more accessible natural gas fuel source, thus increasing demand.
Conversely, the fact remains that the market is oversupplied as many producers have reached storage capacity and have had to either burn off extra supplies or reduce drilling capacity. Those offline producers are eagerly awaiting even a modest uptick in pricing to re-engage their full production ability, seemingly creating a cap on any rallies.
Crude Oil Fundamentals:
- Much ballyhooed production freeze (bullish).
- Hedge funds now mostly long crude (bullish).
- Production freeze more rhetoric than action, meeting to take place later this month (bearish).
- US production shrinking yet ‘on switch’ looming.
Crude oil continues to show strength following reports of the meeting later this month between OPEC and other major oil producing nations as indications are that there will be some unilaterally agreed upon production freeze. However, we have heard again and again that Iran will not stop its continued ramp up of production until it reaches the pre-sanctions levels of 4 million barrels per day, therefore making it very unlikely that the Saudis will agree to slow down any of their record production levels. The fear of a ‘buy the rumor and sell the fact’ scenario playing out continues to cap the possibility of any real expansive rally past the low 40’s.
Considering that the fundamentals are so conflicted, one can look to the technical support and resistance levels that are presenting rather nicely in this climate.
Natural Gas Technical Levels: see chart in embed below
- Trend line support: 1.915
- Trend line resistance: 2.031
- Pivot Support: 1.834
- Pivot Resistance (should the trend line resistance not hold): 2.087
Crude Oil Technical Levels: see chart in embed below
- Trend line support: 35.75
- Trend line resistance: 41.05
- Pivot Support: 37.52
- Pivot Resistance (should the trend line resistance not hold): 42.49
Disclosure: Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors.