Natural Gas Fundamental Forecast – January 16, 2017

Natural gas futures rebounded to close higher on Friday after early session weakness threatened to derail the developing rally. Traders were responding to weather forecasts that predicted high temperatures will moderate into the end of the month and into early February.

March Natural Gas futures finished the session at $3.396, up $0.029 or +0.86%.

Forecast

According to revised weather models, the latest 11 to 15 day outlook indicates a system may be setting up for colder than normal temperatures in February. Early data suggests the system may produce temperatures capable of creating 200+ Bcf draws in back-to-back weeks.

Despite the updated forecast, I suspect bullish investors are going to take a cautious trading approach because longer-term forecasts have a history of changing overnight. Keep in mind that in late December, the weather services were predicting colder-than-normal temperatures for January. Bullish traders were caught off-guard with the sudden shift in the forecast for the first two weeks of January, leading to a steep break.

If a lingering arctic cold blast hits key demand areas, we could be looking at average draws of over 200 Bcf starting with the February 10 report. Due to the expected normalization of temperatures into January 25, we expect this week’s and next week’s storage draws to be relatively bearish. However, about the second week of February, we expect the storage deficit to tighten.

Technical chart traders will be watching for key support to form at $3.296 to $3.170. If buyers can build a support base over $3.296 then look for a test of this week’s first key upside target at $3.469 to $3.554.

If volume begins to increase on the rally, this will serve as evidence that shorts are coming and new buyers are coming in. Overtaking $3.554 could trigger a spike to the upside with potential targets at $3.685 to $3.828.

Technically, we’d like to see $3.296 hold as support. This is likely to occur if investors start to believe the accuracy of the longer-term forecast.