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James Hyerczyk
Natural Gas

Natural gas futures spiked higher for a second consecutive session on Tuesday as both the American and European weather models trended cooler for the coming weekend and next week. This is a marked change from last Friday’s forecast that put some warmth in the market. The size of the current rally suggests the move is being driven by both speculative buying and the triggering of protective buy stops.

At 12:24 GMT, December natural gas futures are trading $2.633, up $0.078 or +3.05%.

The buying is being described as so strong that it is even offsetting another jump in production. A surge in the cash market is also helping to generate the strong upside momentum.

What Changed in the Forecast?

The news of chillier weather came in over the weekend, catching many short-sellers off-guard. The change was stronger in the American weather data, which is now the colder of the two models.

“The Global Forecast System (GFS) added another 10 heating degree days (HDD) on top of the 8-9 HDDs it gained over the weekend by seeing a weaker break between cold shots November 5-8 and by favoring cold pushing strongly back across the Canadian border November 9-11,” according to NatGasWeather. “However, the European model lost 5 HDDs overnight compared to Sunday afternoon’s data.”

“The European data isn’t nearly as aggressive with cold into the United States after this coming weekend compared to the GFS and where much of the differences lie,” the forecaster said.

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Production Rise

Production reached 95.5 Bcf on Sunday and could be even higher pending revisions, according to Bespoke Weather Services (BWS).

Short-Sellers Hold Large Position

Natural gas net short positioning continued to grow last week for the fifth consecutive week, as shorts reached 198,000 contracts, the latest Commodity Futures Trading Commission (CFTC) data showed.

The CFTC data is indicative of the widespread bearish sentiment in natural gas, and absent strong weather-driven bullish shifts, a demonstrated willingness to short the market may help weight on Nymex gas, EBW Analytics Group said.

Daily December Natural Gas

Daily Forecast

The main range is $2.884 to $2.388. Its retracement zone at $2.636 to $2.695 is currently being tested. Trader reaction to this zone will set the near-term tone.

Given the size of the number of shorts in the market, it is going to take a lot more than just a short-term cold snap to shift the market to net long. In fact, with the current ample supply, there’s no guarantee that we’ll even see a net long position this heating season.

Furthermore, there are currently doubts creeping into the market about temperatures after November 11. If the market suddenly shifts back below $2.636 then this will be a sign that traders are looking for warmer temperatures after this day. A breakout over $2.695, however, will indicate that traders have put cold temperatures back into the forecast.

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