Nat Gas Spikes Higher on Surprise Weather Shift, Thin Trade

Natural gas futures are up nearly 4% to their highest level since February 3 on Tuesday on forecasts for cooler temperatures and higher heating demand next week than previously expected.

Besides the news, thin trading conditions may have also contributed to the spike in prices after last week’s Commodity Futures Trading Commission (CFTC) report showed a huge reduction in long futures and options positions.

At 14:43 GMT, May natural gas futures are trading $5.097, up $0.163 or +3.30%. The United States Natural Gas Fund ETF (UNG) is at $17.81, up $0.37 or +2.12%.

According to Reuters, the U.S. market also gained support from a 7% jump in European gas prices that should keep demand for U.S. liquefied natural gas (LNG) exports at record highs as Europe looks for other suppliers to replace Russian fuel after Russia’s invasion of Ukraine.

Short-Term Weather Outlook

According to NatGasWeather for March 22-29:  Mild to warm conditions rule most of the U.S. with highs of 40s to 60s across the northern US and 60s to 80s over the southern US.

The slightly cooler exception is with a strong spring storm exiting the Plains and tracking into the east-central US with rain, snow, severe thunderstorms, and highs of 40s-50s. But with little subfreezing air anywhere in the US the next 4-days, national demand will be light.

A colder weather system with lows of 20s-30s is expected into the Midwest & Northeast Saturday-Monday with lows of 10s-30s for stronger demand.

Near-Term Outlook

With the winter heating season coming to an end and the spring shoulder season about to begin, U.S. gas speculators last week cut their net long and options positions on the NYMEX and Intercontinental Exchange for a sixth week in a row to their lowest level since June 2020, according to the U.S. Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report.

That demand decline cut interest in trading gas, causing total U.S. gas futures volume on the NYMEX to drop to 183,230 contracts on March 18, the lowest since December 2015. The compares with a daily average of 378,160 contracts traded over the past year.

The relatively low volume created thin trading conditions which speculative bulls took advantage of on Tuesday, fueling a strong short-covering rally.

“National demand will increase this weekend into next week as colder weather systems out of southern Canada advance into the northern U.S.,”

Tuesday’s short-covering rally is being fueled by a combination of thin volume and a shift in the short-term weather pattern. These factors are not likely to drive prices higher over the long-run. Therefore, bearish traders will be looking for a new shorting opportunity.