Natural Gas Price Fundamental Daily Forecast – Look for Increasing Volatility into February Expiration

Nearby natural gas futures surged to their highest level since November 29 earlier in the session, falling short of a main top at $3.164 before enough sellers came in to stop the rally.

The buying is being driven by aggressive hedge fund buying in anticipation of another wave of extremely cold temperatures in several key demand areas.

Today’s early price action also suggests that investors may be taking a break ahead of today’s U.S. Energy Information Administration’s weekly storage report.

At 1205 GMT, March Natural Gas futures are trading $3.118, up $0.038 or +1.20%.

The catalyst behind this week’s strength is a forecast calling for frigid temperatures during early February. The weather services are predicting extremely cold temperatures after February 3. A so-called “polar vortex” may pour into the central, Midwest and east coast of the U.S. through February 6. This should drop temperatures well-below seasonal averages.

Forecast

Today’s EIA report is expected to show a draw of about 268 billion cubic feet (bcf) in the week-ended January 19. That compares with a decline of 183 bcf in the preceding week, a fall of 119 bcf a year earlier and a five-year average drop of 164 bcf.

Keep in mind that the EIA report is “old news”, traders are already looking forward to increased demand due to the return of cold weather over the next two weeks. Nonetheless, a greater-than-expected draw will be supportive for prices. However, I don’t expect a less-than-expected draw to have too much of an impact because traders are locked into the weather.

Due to the expiring February futures contract on Monday, we could see increased volatility between today and the expiration. A bullish-to-neutral EIA report could spike March futures prices through $3.164 and toward $3.272 if there is heavy demand for February or cash market natural gas.