James Hyerczyk
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Natural Gas

Natural gas futures are trading higher early Tuesday after gapping last week’s high during yesterday session. The moves were triggered by a wave of speculative buying and aggressive short-covering. The catalyst behind the rally is a bullish weather outlook calling for a lingering blast of cold temperatures over the near-term in several key demand areas.

At 08:03 GMT, December natural gas futures are trading $2.887, up $0.066 or +2.30%.

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Current Pattern Mimicking Last Year’s Cold Display

Prices are soaring again on Tuesday as the 15-day forecast came in “much colder” yesterday than what guidance had advertised late last week, Bespoke Weather Services said.

“Upper level ridging is reluctant so far to move away from the west coast of North America up toward Alaska, which keeps a downstream colder trough in places in the eastern half of the nation,” the forecaster said. “Until the west coast ridge fades, we are at risk for additional colder changes.

“We do still believe the pattern will break, which at this point likely seems like nothing more than an exercise in stubbornness, but we still maintain that we do not see support for the cold pattern to extend all the way into December.”

The lingering cold pattern is “remarkably mimicking what we saw a year ago, but keep in mind that pattern also finally flipped warmer once into December,” Bespoke said.

Daily December Natural Gas

Daily Forecast

The current rally looks strong on the charts but keep in mind this is a short-covering phase and historically, short-covering rallies are short in duration. Furthermore, due to the rapid shifts in investor sentiment, they are also subject to volatile price swings.

If this rally is going to last through the winter then the major shorts are going to have to be taken out before the real buyers or longs take control.

Analysts at Enverus said updated Commodity Futures Trading Commission (CFTC) data, reflecting trading activity as of last Tuesday, points to the “initial stages of a short-covering process” as the market reacted to forecasts showing higher residential/commercial demand. The CFTC data also showed that money managers reduced short positions by 21, 951 contracts week/week as managed money long positions increased by 12,085 contracts.

Technically, the daily and weekly charts are both in an uptrend, now that buyers have taken out the late summer top at $2.884. If the upside momentum continues then look for buyers to take a run at the next main top at $3.009.

On the downside, potential support is layered at $2.849, $2.753 and $2.674.

If this current leg up is mostly short-covering then look for a wicked break at some point. This move will be necessary to shake out some of the weaker longs before new money enters the market. Smart money will not chase this market higher, but they will come in on a break if the fundamentals remain bullish.

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