Natural Gas Fundamental Forecast – December 2, 2016

January Natural Gas futures are trading higher early Friday after soaring to their highest level since October 21 on Thursday. The catalyst behind the rally was the U.S. Energy Information Administration’s weekly report that showed supplies of the heating fuel fell by 50 billion cubic feet for the week-ended November 25. This came out almost exactly as forecast by analysts. However, traders reacted with a strong response on the idea that back-to-back weekly drawdowns represent a bullish trend.

Total stocks now stand at 3.995 trillion cubic feet, up 24 billion cubic feet from a year ago and 235 billion cubic feet above the five-year average. Looking at it another way, that’s about 0.6% above levels from last year and 6.25% above the five-year average.

Expectations of colder weather are also behind the price increase. After struggling through an unusually warm October-November time period, followed by cooler temperatures, new forecasts show colder temperatures spreading across most of the country starting next week. This is helping to reduce worries that a glut of supply will continue to pressure prices.

Traders should note the change in the price action and volatility with the mention of “colder” temperatures as opposed to “cooler” temperatures. This usually brings in the headline readers and the speculators so make sure you are prepared for the start of a volatile trading period.

Forecast

The forecast for cold weather has gotten the market more excited after a steady move of higher-tops and higher-bottoms on professional buying the past few weeks. Thursday’s price action suggests the return of smaller specs, but we won’t be sure until we see the latest Commitment of Traders report.

After professional traders laid the groundwork for the rally by driving out the weak longs during most of November, the market is currently in strong hands so I expect the rally to continue as long as there is cold weather in the forecast.

From now on until the end of winter, bullish trend traders will be playing for long, lingering cold fronts to control the price action. They will also want to see the downtrend in weekly supply continue. Forecasts for cooler or warmer temperatures will produce wild swings so investors should continue to monitor the weather going out at least a week on a day-to-day basis.

For the December 1 to 7 period, natgasweather.com is predicting that a “weather system with rain, snow and slightly cooler than normal temperatures will sweep across the eastern U.S. the next few days to bring a minor surge in natural gas demand.”

“Weather systems will also sweep across the west-central U.S. with rain and snow, but with a bit colder Canadian air early next week. High pressure will return over the eastern U.S. after the week-end cold blast to bring a return to above normal temperatures and lighter than normal demand.”

“A stronger cold blast will advance into the Midwest and eastern U.S. late next week to swing back to higher demand. Essentially, swings in natural gas demand from lighter than normal to above normal this weekend, and then back below early next week, averaging out to moderate.”