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Natural Gas Price Fundamental Daily Forecast – Bracing for Heightened Volatility Ahead of Options Expiration

By:
James Hyerczyk

Traders may set aside the fundamentals over the next two sessions as the focus shifts to November options expiration and contract settlement.

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Natural gas futures are inching lower on Wednesday after two-straight days of counter-trend buying drove the futures contract to its highest level in a week.

Traders are saying the two-day short-covering rally is being fueled by a number of factors including oversold technical conditions, options expiration, cooler weather forecasts and soon to be renewed liquefied natural gas demand.

At 11:31 GMT, December natural gas futures are trading $6.047, down $0.119 or +1.93%. On Tuesday, the United States Natural Gas Fund ETF (UNG) settled at $20.01, up $1.43 or +7.70%.

Heightened Volatility Expected Ahead of Futures Expiration

“The rapidly approaching November options expiration tomorrow and final settlement Thursday will soon overtake fundamentals in dictating near-term price moves … with a gaping November-to-December spread, continued volatility appears likely,” analysts at energy consulting firm EBW Analytics said in a report.

Short-Term Weather Outlook

The market is finding some support from new forecasts calling for bouts of colder weather in November.

Natural Gas Intelligence (NGI) reported that Maxar’s Weather Desk observed cooler trends for the western Lower 48 in its latest six- to 10-day forecast (Sunday through Nov 3). Forecasting for the eastern half of the country, however, continued to show warmer-than-normal conditions.

“Changes are mostly minimal for the eastern half, where temperatures are on the warm side,” Maxar said. “Much aboves are from the Midwest to the East during the mid to late period, in advance of a storm system entering the Plains and Midwest at the end of the period.”

A “more amplified” pattern in the 11- to 15-day period (Nov. 4-8) resulted in colder trends for the West and warmer trends for the East, according to Maxar.

“Below normal temperatures favor the West from early to mid-period, including much bellows in parts of the Rockies,” Maxar said. “Above to much above normal temperatures are in the eastern Midwest, South and East.”

Additionally, NatGasWeather credited “oversold conditions” and well as forecasts for colder weather – and stronger heating demand – in November for the two day surge in prices.

Looking Ahead to Thursday’s EIA Storage Report

Looking ahead to Thursday’s EIA print for the week-ending October 21, NGI is reporting that early estimates submitted to Reuters ranged from injections of 40 Bcf to 102 Bcf, with an average increase of 62 Bcf. Preliminary results of a Bloomberg poll landed at an average of 59 Bcf. The estimates compare with a five-year average of 66 Bcf and point to an easing of the recent spike in supplies.

Daily Outlook

We don’t see too much in the news to prevent the short-covering rally from continuing other than general nervousness ahead of the futures and options expiration and the Energy Information Administration (EIA) weekly storage report on Thursday.

Given that match-up, we do anticipate heightened volatility as bullish traders continue to try to build a solid support base while forcing weaker short-sellers to cover.

Seasonal expectations point to higher markets over the near-term, but I think gains could be limited until stubborn shorts are removed from the market.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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