Natural Gas Price Fundamental Weekly Forecast – Mild Colder Trends Ahead, but Buyers Aren’t Biting on Forecasts

The outlook for natural gas is bearish but Friday’s light short-covering suggests there is still risk in holding short positions over the week-end with five weeks to go in the winter season and the weather forecasts a little mixed up. Furthermore, some traders are saying that Thursday’s downside spike may have been a little overdone.
James Hyerczyk
Natural Gas

Natural gas prices were pressured all week by the return of warmer temperatures, which reduced heating demand. The selling was extended late in the week following the release of a bearish government storage report. Traders also responded to a change in the weather forecasts which now say the return of a weather system in mid-February will not bring the extremely cold temperatures previously expected.

For the week, March natural gas futures settled at $2.583, down $0.151 or -5.52%.

Despite Friday’s higher close the overall bias remains decidedly bearish. This was particularly evident late last week when the spread between the nearby March futures contract and the April futures contract turned negative.

According to Natural Gas Intelligence, “With storage supply fears firmly erased from the minds of traders, Thursday’s NYMEX action saw the March/April spread flip to negative.”

“The first flip in the so-called widow-maker spread occurred in early-morning trading as the European weather model – which had been the coldest in recent days – trimmed a huge chunk of demand from the forecast. The American Global Forecast System (GFS) and the European model had been at odds regarding the intensity of a pair of weather systems moving into the country beginning this weekend,” Natural Gas Intelligence wrote.

U.S. Energy Information Administration Weekly Storage Report

The EIA reported a 237 Bcf withdrawal from storage inventories for the week-ending February 1. The number was about 10 Bcf higher than the consensus estimate.

Total working gas in storage as of February 1 stood at 1,960 Bcf, 135 Bcf below last year and 415 Bcf below the five-year average, the EIA said.

Short-Term Weather Outlook

According to NatGasWeather for February 8 to February 14, “Cold air over the Midwest will continue to fan out and advance into the southern and eastern U.S. today and Saturday, including with a wintry mix of precipitation along the cold front across the East. Temperatures behind the core of the cold front will drop into the -20s to 20s, but also with teens to 30s into Texas and the South. The West will be unsettled and cool to cold. A mild break will return across the southern and eastern U.S. early next week before another cold shot arrives mid-week with warming then following late week. Overall, national demand will be high Friday-Monday, then moderate for the rest of next week.”

Weekly Forecast

The outlook for natural gas is bearish but Friday’s light short-covering suggests there is still risk in holding short positions over the week-end with five weeks to go in the winter season and the weather forecasts a little mixed up. Furthermore, some traders are saying that Thursday’s downside spike may have been a little overdone.

“Based on the latest data, colder trends have better odds in the weeks ahead,” according to NatGasWeather forecasters. “But even then, will that be enough to rally prices that refuse to get off the mat? Supplies are still relatively tight with deficits set to bounce between 300 and 425 Bcf the next several weeks. Although, the natural as markets must see it as not intimidating enough, or prices wouldn’t have continued the freefall this week.”

Essentially, the price action suggests the market is still in the strong hands of the major short-sellers. If there is going to be a rally then it will be driven by short-covering from a few of the weaker sellers. However, these gains will likely be limited as the major players will likely take advantage of any rally to short again.

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