Natural Gas Price Fundamental Daily Forecast – Vulnerable to Strong Short-Covering Rallies

Natural gas futures are trading higher on Monday after hitting a multi-year low the previous session. While concerns over the weather are keeping a lid on prices, the market is picking up some support today by continued tightening in the underlying supply/demand balance.

Natural Gas Intelligence, citing NatGasWeather, said looking at the weekend weather data, the outlook from the European model remained mostly unchanged, while its American counterpart lost an additional 10 heating degree days.

“Both are consistent in showing the only decent cold shot in the next 15 days being Friday to Saturday,” and the overall pattern points to “bearish weather headwinds” continuing “through the first half of March,” NatGasWeather said. “The past few months have shown considerable tightening in the supply/demand balance, highlighted by Lower 48 production dropping 4-5 Bcf/d off all-time highs” and liquefied natural (LNG) feed gas demand reaching record highs.

“However, weather patterns have trended milder all winter long, preventing the tighter supply/demand balance from being taken advantage of, driving natural gas prices to multi-year lows…Also of consideration, there have been huge daily price moves in most markets due to coronavirus fears. This could again carry over to the natural gas markets, especially if LNG export forecasts decrease due to cargo cancelations,” the forecaster said.

At 15:58 GMT, April Natural Gas is trading $1.735, up $0.052 or +3.09%.

U.S. Energy Information Administration Weekly Storage Report

Last Thursday, the EIA reported that domestic supplies of natural gas fell by 143 for the week-ending February 21. Total stocks now stand at 2,200 trillion cubic feet, up 637 billion cubic feet from a year ago, and 179 billion cubic feet above the five-year average, the government said.

Going into the report, traders were looking for a larger-than-average withdrawal for the week-ending February 21.

A Bloomberg survey predicted withdrawals ranging from 145 Bcf to 165 Bcf, with a median of 156 Bcf. Polls by the Wall Street Journal and Reuters produced similar results, while NGI’s model projected a pull of 152 Bcf.

The EIA recorded a 167 Bcf draw for the similar week last year, while the five-year average withdrawal stands at 122 Bcf.

Daily Forecast

We warned over the weekend that short-sellers could be vulnerable to periodic short-covering rallies due to late season profit-taking. Furthermore, there is also the possibility of a major short-squeeze, given the size of the current short position in the market.

The key takeaway at this time for short-traders is not to become complacent. The tide could change quickly if the major short-sellers stop adding to their bearish positions. This could spook a few of the weaker short-sellers into covering their positions.