Nat Gas: Volatility Expected Amid Colder Forecasts, EIA Data
Natural gas futures are edging higher early Thursday as bullish speculators hope to add to yesterday’s solid gains. The market is being supported by forecasts calling for extended cold temperatures into early February and a jump in projected demand for the next two weeks.
At 09:40 GMT, March natural gas futures are trading $4.097, up $0.061 or +1.51%.
Prices were drifting sideways to higher until Wednesday as weather models provided little clarity over early February temperatures. Although the market was being underpinned by sustained cold and strong demand throughout January, the earlier forecasts this week lacked conviction as to what was in store for the first 10 days of February.
However, Wednesday’s midday forecasts showed a dramatic shift with the European model adding nearly 20 gas-weighted degree days to the outlook. According to Natural Gas Intelligence (NGI), “Although the American Global Forecast System remains colder, the about-face from the European model emboldened gas bulls in the final days of the February Nymex contract. Options expired on Wednesday, while contract expiration is set for Thursday.”
“Heading into February’s contract expiration period, natural gas prices have exploded higher,” said Bespoke Weather Services. “This move effectively prices in the colder change in modeling, but the question now is whether or not there will be additional ‘panic buying’ into expiration, given what happened last February.”
Energy Information Administration Weekly Storage Report
The EIA is scheduled to release its weekly storage report at 15:30 GMT on Thursday, with a wide range of withdrawal estimates preceding it.
NGI said a Bloomberg survey of eight analysts produced a range of withdrawal projections from 198 Bcf to 225 Bcf, with a median pull of 215 Bcf. The Wall Street Journal poll results averaged 215 Bcf as well, though the range of estimates was tighter. Reuters polled 17 analysts, whose estimates were as steep as 230 Bcf with a median draw of 216 Bcf. NGI modeled a 198 Bcf pull.
Last year, the EIA recorded a 137 Bcf withdrawal from storage in the similar week, while the five-year average draw is 161 Bcf.
Inventories as of January 14 stood at 2,180 Bcf, which is 226 below last year and 33 Bcf above the five-year average, according to the EIA.
I don’t expect the EIA report to have too much of an effect on prices unless there is a big miss to the downside. Furthermore, the focus for traders appears to remain on the February 1-10 and the February 8-11 weather forecasts.
Technically, today’s direction will likely be determined by trader reaction to $3.964. Near-term, the direction will likely be determined by trader reaction to the retracement zone at 3.964 to $4.378.
We’re looking for a bearish tone on a sustained move under $3.964 and a bullish tone to develop on a sustained move over this level.
Holding inside $3.964 – $4.378 will indicate a neutral tone, while a sustained breakout over $4.378 could trigger an acceleration to the upside.