Natural Gas Price Fundamental Daily Forecast – Rally Hinges on Whether Cold Lingers After Nov. 25

Natural gas futures are trading lower early Thursday after failing to follow-through to the upside following yesterday’s spectacular 15.33% rally. Although the rally was impressive, it is suspect. The fundamentals at this time do not support a rally of this nature, which likely means the hedge funds were caught on the wrong side in a big way and were forced to pay the price.

We’ll know more about the rally later today when the exchange releases the open interest data. I suspect that the move was primary driven by short-covering. Professionals don’t chase markets higher. Small speculators usually do so we could see a bloodbath to the other side today if the inexperienced speculator gets caught in a bull trap.

Trading 101 tells us that when prices rally and open interest rises, new buyers entered the market. When prices rise and open interest falls then shorts covered. I strongly suspect that Wednesday’s rally was fueled by aggressive short-covering by traders who misplayed the market.

At 0842 GMT, January Natural Gas futures are trading $4.632, down 0.266 or -5.27%.

I suggested yesterday that it was probably a good time to start taking profits. Not because I saw the move coming but because I know that production is high and that not all of it is going into storage. Furthermore, the uncertainty over the weather after November 25 and especially the last week in November and the first week in December, would probably make longs nervous enough to start reducing their positions.

We all know the narrative, historically low storage levels and an early, strong start to winter, is underpinning the natural gas market. That’s going to be the story for several months since winter is just beginning and low storage builds mean the deficit may even be around at the start of the summer cooling season.

We also know from Wednesday’s price action that we could see strong daily double-digit rallies throughout the winter. But the size and duration of the rallies will be dictated primarily by the duration of the cold weather systems.

At this time, traders are still watching the European weather models, which are predicting colder weather for early next week, but a possible break from the cold November 22-24. Traders are also watching the location of the cold weather.

Some forecasts show a modest warm-up November 22-24 across the Midwest, and central and southern U.S., but lingering cold in the East/Northeast. Furthermore, the European model was starting to hint at more cold weather coming in November 26-28. This cold could linger in the east and re-emerge in the central.

According to NatGasWeather.com, “…If cold shows promise to continue Nov. 29-Dec. 2, as we see it currently teasing, weather sentiment will remain bullish into the foreseeable future.”

On top of the weather, traders are also watching production. Although production has been setting fresh weekly highs, a natural gas liquids (NGL) pipeline disruption impacting the Permian Basin is a potentially bullish development.

U.S. Energy Information Administration (EIA)

The EIA is set to release its weekly natural gas storage numbers today for the week-ending November 9. Reuters is looking for a build of 33 Bcf with estimates ranging from 20 Bcf to 47 Bcf. Bloomberg called for a median 33 Bcf injection, with a range of 28 Bcf to 42 Bcf. The International Exchange EIA financial weekly index futures settled Tuesday at a build of 36 Bcf.

Traders are likely to react too much to the report unless they grossly miss the ranges. Also the cold weather is not expected to show up in the EIA report until next week.

Forecast

We’re bullish but worried that yesterday’s rally may have been too much, too soon. Traders aren’t sure about support either since we’re in a momentum driven market.

Since the hedge funds follow the herd theory, when one starts to aggressively buy, the other will jump in. The herd theory works on the down side too.

One thing we do know is that in a bull market the hedge funds want to own all of it. They don’t want small specs hanging on for the ride so they may shake the tree a little to chase a few of weaker longs out of the market. So look for volatility in both directions.

As far as the weather is concerned, if the forecasts call for the cold to linger after November 25 and into the first week of December then look for another strong rally.