Natural Gas Price Fundamental Daily Forecast – Needs Bigger-than-Expected Draw to Sustain Rally

The return of cold weather to several key demand areas helped drive up natural gas futures on Wednesday and early Thursday. The buying was strong enough to take out last week’s high at $3.035, but the rally stalled at $3.070.

At 0855 GMT, March Natural Gas futures are trading $3.012, down 0.012 or -0.40%.

The price action suggests the hedge funds may be betting on further upside action in reaction to today’s U.S. Energy Information Administration’s (EIA) weekly storage report.

They may also be betting that the cold weather extends beyond the forecasts and turns into another lingering system, similar to the one that gripped the nation two weeks ago.

Forecast

According to the latest weather forecasting models, below freezing temperatures are expected to linger across most parts of the Northeast, but only until January 20. However, temperatures are expected to return to more seasonal levels from January 21 to January 28.

I don’t think the weather forecast is strong enough to support a rally so this burden will be on the EIA report. It is expected to show a draw of 201 billion cubic feet. A bigger-than-expected draw could trigger a spike to the upside. A lower-than expected number should encourage the hedge funds to lighten up a bit on the long side.

A 201 bcf draw will be pretty close to the five-year average drop of 203 bcf.

I also don’t believe the long side play in natural gas is in the nearby futures contract, but rather in the deferred contracts.

The chart pattern suggests we’re in a rangebound market. The range has been created by the November top at $3.272 and the December bottom at $2.532. Its 50% to 61.8% retracement zone is $2.902 to $2.989. The market has been straddling this zone since the beginning of the year. I expect prices to continue to be attracted to this zone.

Bigger-than-expected drawdowns could hold prices over $2.989 while the return of more seasonal or mild temps could drive the market under $2.902.