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James Hyerczyk
Natural Gas
Natural Gas

Natural gas prices are trading marginally lower early Tuesday as investors continue to assess the impact of current cold conditions and the arrival of milder temperatures in the near future. Prices gapped higher on Monday in reaction to the cold weather over the week-end, but buyers couldn’t sustain the upside momentum and prices settled into a range.

At 0915 GMT, January Natural Gas futures are trading $4.519, down 0.026 or -0.57%.

Daily January Natural Gas

Despite the lack of follow-through to the upside, prices remained underpinned because a new weather forecast is now showing cold weather could return to key demand areas in the United States around December 25.

The cold weather from over the week-end and the first two days of the week have already been priced into the market. Beginning Wednesday and continuing through Saturday, milder temperatures are expected to spread across the central, northern, and eastern United States. This should lead to an easing of national demand.

Speculators are asking, if relatively warmer temperatures are coming then way aren’t prices going down? Firstly, I think there is some doubt over the strength of the weather pattern. Secondly, rather than drive prices lower, I think the news is putting a lid on rallies. The big concern for bullish traders is that the pattern extends beyond the week-end.

The price action also suggests that investors may already be looking beyond the inconsistencies of the weather forecasts leading up to around December 22, and instead are focusing on the possible return of much colder temperatures between Christmas and New Year’s.

Early Peek at This Week’s Storage Report

Bespoke Weather Services is saying that this week’s U.S. Energy Information Administration storage report is likely to show a “solid draw” in the mid- to upper 80 Bcf range. Bespoke went on to say that, “This will continue to emphasize that storage levels are dangerously low should we see significant cold sustain through the winter, though loosening on warmth will similarly indicate we need that cold to sustain for storage fears to really be justified.”

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Forecast

The price action since the spike to $4.964 on November 14 suggests a balanced market. It also indicates that traders are being influenced by the inconsistent weather patterns. This is why prices continue to straddle the short-term retracement zone at $4.431 to $4.557.

Trader reaction to this zone will determine the next major move by natural gas. Look for a bullish tone to develop on a sustained move over $4.557 and a bearish tone to develop on a sustained move under $4.431.

The catalyst for the next major move is likely to be the weather for December 25 to January 1. Prices could remain rangebound until the weather models for this period become consistent.

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