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Natural Gas Price Fundamental Daily Forecast – When Are the Shorts Going to Start Covering?

We still think a massive short-covering rally is in the cards, but we don’t know when. Right now there is a lot of money on the table.
James Hyerczyk

Natural gas futures are trading lower late Friday after hitting a multi-year low earlier in the session. The catalyst behind the move and into the weekend is an overnight weather outlook that brought warmer temperatures into the forecast through the first week of February.

The technical picture is still gloomy after sellers took out Tuesday’s low at $1.862. The market would have to close over $1.904 to get anyone excited about a short-covering rally next week.

At 18:55 GMT, March natural gas is trading $1.873, down $0.031 or -1.63%.

Short-Term Weather Outlook

Natural Gas Intelligence wrote on Friday that the overnight guidance, particularly the European model, shifted milder, according to NatGasWeather. The European data showed a warmer pattern for the northern part of the country around February 3-7, while the American data also came in warmer for around February 6-8, the forecaster said.

“This is a bearish development, as the natural gas markets were likely expecting or hoping for stronger demand after February 4, and any backing off after five weeks of bearish weather is likely to be viewed as disappointing,” NatGasWeather said. “Essentially, the weather data would need to trend back colder Feb. 4-7 or bearish weather headwinds will continue through the first week of February.”

Natural Gas Intelligence also reported, the warmer trends in the forecast early Friday set the stage for a test of support as low as $1.85, according to analysts at EBW Analytics Group. Potentially “more important” is the possibility for a shift in expected gas-weighted heating degree days for the February 7-13 time frame, they said.

“Model guidance this morning is all over the map, split between much colder and much warmer solutions than currently shown,” the EBW analysts said. “This model chaos could clarify over the weekend, setting the stage for another move up for natural gas – or significant further losses early next week.”

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Daily Forecast

The price action is bearish, but the truth will be told in the next two Commodity Futures Trading Commission (CFTC) Commitment of Traders reports. We want to see if short sellers added to their already huge positions. This will tell us if the bears have been willing to short at current price levels, or if this week’s selling was associated with speculative long liquidation.

We still think a massive short-covering rally is in the cards, but we don’t know when. It could happen at the futures rollover, or the expiration of the nearby futures contract. At some point, a few of the shorts are going to want to book profits. Right now there is a lot of money on the table.

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