Natural Gas Fundamental Forecast – February 6, 2017

Natural gas futures plunged on Friday as investors continued to react to weather forecasts calling for warmer temperatures over about 75% of the U.S. over the next two weeks. The selling likely represents liquidation by the last handful of speculators who bought natural gas hoping for increased winter demand.

March Natural Gas futures closed at $3.063, down 0.124 or -3.89%.

New data on Friday also showed U.S. natural gas speculators cut their net long positions for a second week in a row on forecasts that the weather will moderate the rest of the winter.

According to data released by the U.S. Commodity Futures Trading Commission, speculators in four major NYMEX and ICE markets reduced their bullish bets by 11,699 contracts to 314,396 in the week to January 31.

If one looks at historical data for comparison, the five-year (2012-16) average speculative net long position of around 127,300 contracts. The largest net long position was 456,475 contracts in April 2013, while the biggest net short position was 166,165 contracts in November 2015.

Forecast

Friday’s selling pressure took out the January 9 bottom at $3.110, putting the March contract at its lowest level since November 18. It even filled in the November 18 to November 21 price gap at $3.024 to $3.061.

Oversold technical conditions may trigger a short-covering rally this week, but fundamentally, the market is in trouble. For week’s we had been operating at a deficit and expectations were that the spring transition period and perhaps the summer heating season would begin with a storage deficit.

This is not the case, however. Although there was a drawdown in storage the week-ending January 27, bearish traders noted it was below the previous week’s 119 Bcf draw. Furthermore, stocks are now 8.9% below the year-ago figure from 11.1% the previous week and back above the 5-year average at 2.2% from just below last week. Both may be signs that production is increasing.

Traders are also worried that the lack of cold weather over the near-term may even cause an increase in production. Some investors are also concerned over a possible trade war with Mexico.

At the start of the week, natgasweather.com is predicting “unseasonably strong high pressure to dominate the week with comfortable mid-winter highs of upper 50s to 80s. There may be a couple of days of cold blasts, but “mild high pressure will regain territory next week-end with much of the country considerably warmer than normal. Overall, natural gas demand will be moderate to low.”

Don’t be surprised by a short-covering rally due to oversold conditions. I also think that the last of the crusaders who bought in anticipation of a cold January and February have finally bailed. This lays the groundwork for fresh buying from the hedge funds.