Natural Gas Price Fundamental Weekly Forecast – Bears Waking Up from Hibernation Early

Natural gas futures plunged to their lowest levels since November 12 last week as speculative bulls dumped long positions amid expectations of lower demand. The selling was not only felt in the front month futures contract, but across the strip with the February and March contracts also recording huge losses.

For the week, February Natural Gas futures settled at $3.753, down $0.625 or -14.28%.

Last week’s steep losses were primarily driven by a bearish weekly injection according to government data and the forecast of warm weather. Both factors contributed to speculators reducing their outlook for a severe supply storage later in the winter.

U.S. Energy Information Administration Weekly Report

On Thursday, the U.S. Energy Information Administration reported that domestic supplies of natural gas fell by 77 billion cubic feet during the week-ending December 7. Ahead of the report, estimates called for a withdrawal in the low to mid-80s Bcf range. Bloomberg predicted a withdrawal range of 72 Bcf to 95 Bcf, and a median of 85 Bcf. Reuters was looking for a withdrawal range of 74 Bcf to 102 Bcf, and a median of 84 Bcf.

Total stocks now stand at 2.914 trillion cubic feet, down 722 billion cubic feet from a year ago, and 723 billion below the five-year average, the EIA said.

Short-Term Weather Forecast

According to NatGasWeather for the period of December 14 to December 20, “A strong weather system will sweep across the South and Southeast the next couple days with areas of rain, locally as snow. The rest of the country into early next week will be mostly mild with highs of 40s and 50s across the northern tier and 60s, to locally 70s elsewhere. A fast moving weather system will race across the Northeast early next week with colder temperatures but remaining mild over the rest of the country. Additional weather systems are expected late next week, just not very cold ones. Overall, national demand will be moderate.

Mid-Term Weather Forecast

According to Bespoke Weather Services on Friday, “Overnight weather model guidance trended significantly more bearish, as all weather model runs showed ridging able to build across the East in the long-range that would prevent Gas-Weighted Degree Days (GWDD) from rising back to season averages into the end of December.”

Bespoke went on to say that there was a “large spread across models” in the latest runs, with the American guidance coming in the coldest as the European model “showed even more pronounced warmth with sustained ridging that only looks to begin to be disrupted into early January.”

Forecast

The bears are clearly in control now. Expect more downside pressure if warm temperatures continue to dominate the forecasts. However, if you’re out of the market, continue to remain loose because the market could spike higher with the first sign of cold weather. It’s probably too early to price out any cold snaps in January.

To give you a perspective of the supply and demand situation, according to S&P Global Platts Analytics, “demand has been in a freefall since reaching 105.4 Bcf on December 10. The average for the week was 96.4 Bcf/d.”

“This slide is expected to continue Saturday, when demand for 84 Bcf is expected. After that, the consumption forecast strengthens a bit, averaging 88.2 Bcf/d over the next week and 91.9 Bcf/d the following week.”

Rising production continues to be an issue that has helped cap prices. Dry production is still running at near-record levels. Year-to-date production has averaged 80.5 Bcf/d. At this point in 2017, the average was 71.9 Bcf/d.

What this likely means is the top for the season is in and barring a long, lingering cold spell, hedgers are going to pounce on any significant rallies to lock in prices.