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Natural Gas Prices Bleed Lower

Overcapacity and Oversupply Pressure Gas Prices to the Downside

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The rapid expansion in the natural gas industry fueled by cheap borrowing over the last few years is coming to a screeching halt as prices falter amid a production glut. Even though the drill rig count has contracted sharply, production remains high as oversupply negatively impacts pricing.

Further Room for Gas to Fall

While market participants are captivated by the massive price swings in the oil market, natural gas prices are also trading at multi-year lows as the industry faces many of the same challenges. Along with the shale revolution for oil, came shale gas which has also been discovered in abundance via horizontal drilling. Prices for gas have not proved nearly as volatile but the conditions remain the same with oversupply reaching a critical mass. The rig count has not dropped as steeply as witnessed in the oil market, however, the number of horizontal drill rigs is down 25% from 2014 highs. With most companies failing to break even at these prices, they have begun to increase output, wreaking havoc on prices as seasonal heating needs dissipate. Gas prices have been forecast by some to reach $2/mmBTU if production is maintained.

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Fischer Clarifies Yellen Comments

Vice Chairman of the Federal Reserve Stanley Fischer in comments yesterday sought to assuage market sentiment after the FOMC Statement in the prior week sent the dollar tumbling and commodities soaring. Fischer confirmed that a rate hike in 2015 was “warranted” but that policy changes would not occur before the Federal Reserve was confident that inflation was improving. He did underline that the Federal Reserve would remain data dependent in its decision making, but pointed out that “simple rules cannot replace judgment.” Should inflation data due later today confirm that disinflation has subsided this could prove to be a clue about the future of interest rate policies. Meanwhile, the dollar continues to weaken against peers, adding momentum to commodity prices with gold prices looking to retest resistance at $1191.

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China Manufacturing Miss

The recent weakening in Chinese data was confirmed overnight with a reading of the manufacturing indices which fell into contractionary territory for the first time in 11-months. The HSBC Manufacturing PMI printed at 49.2 on expectations of 50.6, highlighting the headwinds facing Chinese policymakers as they seek to meet ambitious growth targets. The employment component of the index fell to the lowest level since 2009, adding further to woes. Augmenting the challenges faced by the Central Planners was the tremendous drop in rail freight volumes which shrunk 9.10% year over year. These data points have seen heightened expectations that a reserve ratio requirement cut for banks is going to be announced imminently. The intention is to spur lending as the economy contends with the lowest growth in decades.

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EURGBP Equidistant Channel Technical Setup

As was highlighted in the previous week, EURGBP continues to gain ground after the Euro rebounded from multi-year lows on renewed optimism Greece might be able to strike a deal with the European Commission. The channel setup in the pair has been forming since the March 11th and shows signs of continuing unless data points from either region beat or miss estimates by a wide margin. Inflation data due from the UK today is likely to show that annualized inflation slowed, but month over month figures might be in the process of rebounding. Trend following strategies should be practiced, with long positions initiated at the bottom of the channel to be closed at the top of the channel. Any move outside the channel lines should be treated as a breakout with expectations for increased momentum and volatility.

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