Natural Gas Price Fundamental Daily Forecast – Expiration Driven Rally Likely to End with Major Reversal Top

Natural gas futures are skyrocketing for a second session on Tuesday with the expiration of the October contract expiration fueling the move amid a potential global energy supply crunch. Translation: Weak shorts are agressively covering and speculators are buying with both hands.

But… speculators may have jumped the gun on this move because there isn’t any cold in the near-term forecast. This makes the market vulnerable to a series of steep sell-offs once the expiration process is complete later today.

The rally wasn’t a complete surprise. EBW Analytics Group analysts advised clients Monday to expect options expiration and final settlement of the October contract to potentially lead to “steep price moves untied to fundamental shifts.”

At 05:51 GMT, December natural gas futures are trading $6.238, up $0.399 or +6.83%.

Bespoke Sees Risks of Sizable Pullback

Bespoke Weather Service analysts seemed to be on the same page with the guys at EBW, but they added that higher European benchmarks also contributed to the move.

Contract expiration “is likely the main item to note, as options expire today (Monday), and the October contract rolls of the board tomorrow (Tuesday),” Bespoke said. “Regardless of any actual data, we have tended to see abundant buying into contract expirations. As such, it is difficult to tell how high we could run here, but we do see risks of a sizable pullback once the smoke of expiration has cleared.”

Yes, there are risks to the downside and this rally could blow up easily over the short-run because it is occurring much too early in the season to last. Bespoke supported this notion on Monday saying, the end-of-season storage trajectory has been “shifting higher” to potentially over 3.6 Tcf, and forecasts continue to show “awful” weather-driven demand levels for natural gas, according to the firm.

“This will begin to increasingly matter over the next few weeks, to be sure,” Bespoke said.

Daily Forecast

Prepare for heightened volatility on Tuesday with the expiration of the October futures contract taking center stage. The current semi-irrational spike to the upside is likely to end with a thud so traders should prepare for a possible wicked reversal to the downside.

Our daily chart work suggests the market is doomed to pullback into at least the old top at $5.790. If this level fails as support then the selling will likely extend into $5.652 to $5.469.

The best support area is $5.185 to $4.892.

We suspect the spike to the upside was fueled mostly by short-covering and by some overzealous speculators. Professionals rarely buy strength at the start of injection season, they short, so we could be looking at a major selling opportunity. This will lead to weak speculators holding the bag at unfavorable price levels.