Natural gas futures finished higher last week as new forecasts calling for more winter-like temperatures in late January were enough to encourage a few of the weaker short-sellers to book profits. The inside trading range, which typically suggests investor indecision and impending volatility, also contributed to the short-covering. The inability to take out the previous week’s low is an early indication that traders were reluctant to add to their well-established short positions at current price levels.
Natural Gas Intelligence (NGI), citing NatGasWeather, said, with disagreement between the American and European datasets Friday, guidance presented significant price risks depending on the weekend trends. Translation: Any major shift in the forecast this week is likely to produce a gap opening on Monday.
“Essentially, the latest European model still shows colder air into the northern U.S. January 17-24 for stronger demand, just not nearly as cold/impressive” as the Global Forecast System (GFS), NatGasWeather said.
“At issue is the GFS forecasted numerous frigid cold outbreaks in December that never came to fruition. That makes it risky going into the weekend, because what if the GFS happens to be correct this time and the European model trends colder to better match it?”
U.S. Energy Information Administration Weekly Storage Report
The EIA reported Thursday that domestic supplies of natural gas fell by 44 billion cubic feet (Bcf) for the week-ended January 3. Analysts expected a decline of 51 Bcf.
Total stocks now stand at 3.148 trillion cubic feet (Tcf), up 521 Bcf from a year ago and 74 Bcf above the five-year average, the government said.
Weekly Forecast
Monday’s opening should be watched closely because it could set the tone for the week.
Ahead of the weekend, NatGasWeather said, the current weather pattern showed an “impressive” amount of frigid air over Canada, but the models need to persuade the market that it will push far enough south.
“That’s the weekend risk, because a little further shift south with the cold pool and the pattern will be increasingly bullish. A shift of a few hundred miles north” and the pattern “will quickly revert bearish.”
If the cold weather shifted to the south then look for a gap higher opening. The size of the rally will be determined by how far south the cold weather will travel and whether it hits high demand areas.
Furthermore, there is always the possibility of a huge short-squeeze since the traders are loaded-up on the short side.
If the cold weather stays in Canada then prices are likely to tumble, however, it all depends on trader willingness to continue to short at such low price levels.