Natural Gas Price Fundamental Weekly Forecast – Introduction of Cold into Forecast Could Bring Back Volatility

Natural gas finished lower last week after wiping out the entire winter rally and bottoms going back for several months. The selling started on Monday with a gap-lower opening and continued to Thursday when it posted a potentially bullish closing price reversal bottom on the daily chart. The technical chart pattern suggests the buying may be greater than the selling at current price levels.

For the week, March natural gas futures settled at $2.880, down $0.268 -8.51%.

Prices were a little higher on Friday despite a lower than expected storage draw the previous week. The market found support as new forecasts showed colder temperatures creeping into key demand areas during the last two weeks of January. Deficits continue to tighten due to the recent above average temperatures, however, technically, the market appears to be overdue for a short-covering rally.

U.S. Energy Information Administration Weekly Storage Report

On Friday, the U.S. Energy Information Administration (EIA) reported that domestic supplies of natural gas fell by 20 billion cubic feet for the week-ended December 28. Traders had priced in a decline of 42 billion cubic feet. The five-year average decline for the same period is 107 billion.

Total stocks now stand at 2.705 trillion cubic feet, down 450 billion cubic feet from a year ago, and 560 billion below the five-year average, the government report showed.

Near-Term Weather Forecast

According to Bespoke Weather Services, model guidance shows “a pattern into the second half of January that could increasingly shoot colder air down into the eastern third of the country.”

“We had always been looking for cold risks to increase moving through January, and models are finally showing an increase in negative Eastern Pacific Oscillation ridging upstream that could help dislodge colder air into the Midwest and East,” Bespoke chief meteorologist Jacob Meisel said.

Forecast

The week begins with the market in oversold technical territory and the introduction of cold into the forecast. This may be enough to underpin the market, but stubborn short-sellers may make it difficult to extend the rally very much. If there is a rally, the move is likely to be fueled by short-covering and some light speculative buying. The weekly chart suggests the most likely upside target over the near-term is $3.215. However, since the trend is down on both the daily and weekly charts, sellers are likely to re-emerge on a test of this level.

Traders should also keep in mind that the call for the return of cold temperatures is in its early stages, which is often the most volatile. Furthermore, European guidance still suggests warmer temperatures.

An Early Peek at This Week’s EIA Report

Traders should expect a much larger withdrawal for the week-ending January 4 because of a drop in production of 1.5 Bcf/d and a jump in demand of 7.4 Bcf/d.

Furthermore, Platts Analytics says, “Expect the EIA to announce a withdrawal of 90 Bcf for the week-ending January 4. This is still less than half the normal draw for the week, reducing the deficit to the five-year average to 463 Bcf. If this trend continues throughout the rest of the heating season, stocks could well be in line or even more than the five-year Average by April.”