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James Hyerczyk
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Natural gas futures are edging higher on Thursday, shortly before the regular session opening and the release of the government’s weekly storage report. Since gapping sharply lower at the start of the week, prices have consolidated for two sessions.

The consolidation could be traders being influenced by oversold technical indicators, a developing shift in the weather forecasts, or position-squaring ahead of the government report.

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At 07:37 GMT, March natural gas futures are trading $1.931, up $0.031 or +1.63%.

Oversold Technical Indicator? How About Gigantic Short Position

We’re not talking about a coincidental smoothed mathematical oscillator, we’re talking about real raw data.

Natural Gas Intelligence (NGI) reports, “As a group, speculators are about as net short on natural gas as they’ve ever been,” according to INTL FCStone Financial Inc. Senior Vice President Tom Saal.

“The way I calculate it, it’s the largest net short since 2006,” Saal told NGI, noting that 2006 is as far back as his dataset goes. “As far as getting more short, that’s the $64,000 question. Can the speculators get more short? And the answer is, of course they can. To get more net short, I would think you’d need more money, more new shorts” entering the market.”

Saal said he was “surprised” by the “aggressive selling” that has seen the February contract drop from above $2.20 as recently as last week to now down well below the $2 mark. This move lower occurred with “pretty good volume,” he said. As for Wednesday’s price action, “it didn’t look like new selling coming into the market, and it didn’t look like any new buying either. I think people were trying to figure out what happened.”

The extent of the net short position for speculators raises the prospect of prices rallying on buying momentum from short-covering, according to Saal.

“What you have now is a situation where they have unrealized gains,” he said. “That looks good on paper, but until you actually cash in the trade you haven’t made any money yet. So yeah, there’s some major league buying coming, and if it’s the speculators covering shorts, it’ll be motivated buyers.”

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U.S. Energy Information Administration Weekly Storage Report

Traders are looking for a lighter-than-average withdrawal for Thursday’s EIA storage report. Last year, the EIA recorded a 152 Bcf withdrawal for the similar week, and the five-year average is a withdrawal of 194 Bcf.

Bloomberg analysts see a median withdrawal of 88 Bcf. Reuters predicts a 91 Bcf pull, with guesses ranging from minus 84 Bcf to minus 115 Bcf.

NGI’s model predicted a 98 Bcf withdrawal for Thursday’s report, which covers the week-ended January 17. Energy Aspects sees a 97 Bcf withdrawal.

Daily Forecast

The weather and the EIA reports may have to take a backseat to a massive short-squeeze rally over the near-term if short-sellers start to book profits. There is no guarantee that this will take place. However, it’s something to think about because the rollover into the new front-month futures contract is coming soon as well as futures and options expiration. A sudden shift in the weather pattern to prolonged cold in February would be the best trigger for a short-covering rally.

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