Natural gas prices rose for a second day on Wednesday as short-covering profit taking ahead of tomorrow's EIA storage report helped to firm the market which had fallen back nearly 25% over the past 3 weeks.
A lack of winter-related heating demand, record high U.S. production and weakness in the other energy markets have been come of the factors behind recent selling in natural gas.
Technically, this week's 3.585 low has so far held above the previous 3.541 spot contract low set in late-October which could be the beginning of a bullish "higher low" reversal and could be part of the reason for today's light buying.
But the overall fundamental picture with weather forecasts across 90%+ of the U.S. being above-normal remains bearish.
Weather forecasts can and will change. The primary driver will be storage withdrawals and tomorrow's EIA storage report is expected to be 44 Bcf according to a Dow Jones' analyst survey.
This would be small in comparison to last year's 92 Bcf withdrawal and a 5-year average withdrawal of 44 Bcf. Last week's withdrawal with included the Thanksgiving holiday came in at a very low 22 Bcf, nearly half pre-report expectations.
U.S. dry natural gas production last weekend reached a new all-time daily of 72.8 Bcf per day according to a Bentek and EIA report. Increased production has been another negative factor for the market. But production is something that could soon turn into a bullish factor if shale production begins to fall due to credit problems with the producers.
An estimated 16-18% of the total junk bond debt issued since 2005 has been to energy companies many situated in the shale field plays. If this money begins to dry up as it already is beginning to do, new drilling could quickly grind to a halt.
There is really no way to accurately predict how the recent drop in energy prices and the possibility for a decrease in shale drilling in the U.S. could affect prices longer term. But whatever the eventual outcome, it will likely be supportive for both crude oil and natural gas.
U.S. production for natural gas and crude oil are currently at new record highs. With the on-going credit squeeze, production at least for the next 6-18 months should decline. And it could occur at a much quicker pace than currently expected.
At the present level, natural gas looks to be the bargain of the two.
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