Natural Gas Price Fundamental Daily Forecast – Huge Gap Higher on Opening Signals Weather-Driven Demand Jump

A change in the short-term weather forecasts over the week-end triggered a huge gap to the upside on the natural gas opening early Sunday. The market opened at $3.471, gapping last week’s high at $3.318, the October 17 high at $3.384 and the October 10 high at $3.409. This levels are potentially new support levels.

At 0518 GMT, December Natural Gas futures are trading $3.454, up $0.170 or +5.18%. The early burst drove the market to $3.511 before the rally stalled and prices retreated.

The move suggests buyers are looking for huge demand in the cash market which typically means unexpected cold weather is coming. I haven’t heard of any supply disruptions so the move has to be demand related.

The market started to show signs of strength on weather concerns on Friday after reports of a change in the recent forecasts changed. However, the forecast of cold weather wasn’t universally accepted. Additionally, in the spot market, most regions outside of the Northeast declined heading into the weekend, especially in the West and in constrained West Texas, according to Natural Gas Intelligence. NGI’s Spot Gas National Average even fell 15.0 cents to $2.855.

The two schools of thought came from two weather services, Bespoke Weather Services and NatGasWeather. Bespoke was a little more bearish and cautious, while NatGasWeather was bullish, predicting a jump in demand.

“Confidence is low as run-to-run changes in all weather models remain incredibly large,” Bespoke said Friday. “Recent trends have been across all guidance, indicating our models as a whole are struggling to ingest upstream data. This is not surprising given an extremely volatile Pacific, but it does indicate that very significant model volatility should continue over the weekend and into next week, and that today’s cold trends that led to a major reversal in price were not the last forecast change we should see.”

Bespoke went on to further say it expects warmer trends for mid-November and for bearish risks to eventually win out as balances loosen further.

Bespoke also said, “However, weather remains the sole focus this early in the season with stocks so low, and the colder trends early in Week 2 are both believable and intense enough to make the surprise spike in prices today (Friday) justified. The best warm signal we have been watching is mid-month, primarily from November 13 to November 20. In this time frame, we would look for models to warm over the weekend, and we do look for a more solid long-range warm signal when we return on Monday.”

NatGasWeather had a slightly more bullish outlook, calling for a nearly 40 Bcf increase in projected demand based on the Friday afternoon European ensemble, a “massive amount between successive model runs in ensemble data.”

NatGasWeather also noted that a cold shot expected from next Thursday to Saturday (Nov. 8-10) “still looks to be more impressive than the reinforcing cool shot that follows Nov. 11-13, but the combination of the two should lead to considerably larger than normal heating degree day totals compared to the 30-year average and should result in the first weekly draw on supplies of the season.

Forecast

Were traders, analysts and experts caught by surprise? The answer is yes. But this is what happens when changes are made in the forecasts over the week-end. A gap like this typically indicates short-covering. Speculators and professionals seldom chase a gap-openings. However, shorts will cover at any expense during a weather market.

The next move in the market according to the charts will be determined by trader reaction to the former tops at $3.409, $3.384 and $3.318.

A pullback into these areas will definitely indicate the gap was fueled by short-covering. If the market finds support on the old tops then it will indicate investors trust the weather forecasts calling for cold, but would rather by support or value rather than chasing the market higher.

The duration of the rally will also be determined by the accuracy of the new forecasts. The weather forecasts have been so inconsistent lately that it is possible that they got it wrong for the next cold snap. If this occurs then we could even see a gap lower later in the week.