Natural Gas Price Fundamental Daily Forecast – Rally Trying to Gain Traction Over $2.661

Natural gas prices are moving higher early Tuesday after taking out the high of its six-day range earlier in the session. The price action suggests we could be witnessing a relief rally, mostly due to oversold conditions after the recent steep sell-off.

At 1202 GMT, April Natural Gas is trading $2.659, up $0.054 or +2.07%.

There have been no major chances to the weather forecast, or Thursday’s storage report estimates so we have to conclude that hedge fund profit-taking is likely fueling a short-covering rally early in the session.

Forecast

NatGasWeather.com did update its weather forecast for the February 20 to 25 period. It says, “High pressure will strengthen over the southern and eastern U.S. this week with very warm February temperatures that will reach the 60s and 80s. The western and central U.S. will see weather systems with cold and snow. Modest cooling will at times also push into the Midwest/Western Great Lakes. This coming weekend, the warm ridge will continue to dominate the South and East, while still cold and unsettled over the West into the central U.S. Demand over the next week will be moderate to low.”

The key to the forecast is that “demand over the next week will be moderate to low.” Since traders are usually looking 10 to 14 days ahead of the forecast, I think it’s safe to say that the low demand has already been priced into the market, given the recent sell-off.

I think winter is over for the most part, however, we may see another period of cold temperatures before it is finally put to bed. This is not likely to be a trend changing event. Any rallies at this time are likely to be treated as opportunities to increase short positions at more favorable price levels.

Last week, the U.S. Energy Information Administration (EI) announced an estimated 194 Bcf draw from storage for the week-ended February 9, above the 183 Bcf draw expected by a consensus of analysts, and well above the 154 Bcf withdrawal average over the past five years.

The withdrawal brought the national stock deficit to the five-year average to an estimated 18.7%, according to the EIA data.

Looking ahead to next week’s EIA report, the market is expecting a 110 Bcf draw for the week-ending February 16. This will be slightly better than the -92 Bcf from last year and the -145 Bcf five-year average.

Looking at the daily chart, a sustained move over $2.661 will indicate the return of buyers. The buying could be short-covering and a little speculating. If the rally does gain traction, we could see a move into a key 50% level at $2.774. A test of this level is likely to be met with strong hedge fund selling.

A failure to drive prices well-above $2.661 will indicate that the market is still in the hands of strong short-sellers. This could lead to a retest of $2.565 and perhaps $2.487 over the near-term.