Natural Gas Price Fundamental Weekly Forecast – Vulnerable to Short-Squeeze if Demand Picture Shifts
Natural gas futures gapped lower early Monday, which means the weather forecasts over the weekend came in on the seasonal-to-warm side.
The move wasn’t much of a surprise after the midday run of the American weather model dropped a huge amount of demand from its long-range forecast, and the late European model held firm in its milder stance.
Nonetheless, there was still too much uncertainty ahead of the weekend for undercapitalized traders to take an aggressive position ahead of the new forecasts. The gap lower opening suggests some decided to chase the news lower, and some aggressive counter-trend buyers were forced to sell at sharply lower levels.
At 04:27 GMT, January natural gas futures are trading $2.230, down $0.104 or -4.46%.
Latest Weather Outlook
“In its midday Friday run, the Global Forecast System (GFS) moved decidedly lower, shedding a “hefty” 30 heating degree days (HDD) from its forecast. The American GFS still advertises a strong cold shot into the northern United States for the middle of the week, but it locked onto a milder break for December 13-15 and also wasn’t as cold across the northern United States December 17-20,” NatGasWeather said.
“It’s still chilly December 17-19 with above-normal HDDs, just not nearly as ominous.” Although the models are much closer than they had been, the GFS remained “a little chillier December 15-19,” the forecaster said.
U.S. Energy Information Administration Weekly Storage Report
The EIA reported last Thursday a 19 Bcf pull for the week-ending November 29. Ahead of the report, estimates for the withdrawal ranged widely from a draw of just 8 Bcf to a draw of as much as 33 Bcf. Some traders said that last week’s U.S. Thanksgiving holiday week may have skewed the data.
Total stocks now stand at 3.591 trillion cubic feet, up 591 billion cubic feet from a year ago, but 9 billion cubic feet below the five-year average, the government said.
The EIA recorded a 62 Bcf withdrawal in the same week last year, and the five-year average stands at 42 Bcf.
Production Flows Remain High
Production flow monitors suggest dry gas production may have broached 97 Bcf/d in the final days of November, EBW said. Recent measurements, however, suggest a mind-boggling 4.0 Bcf/d of incremental production from the September average to the end of November.
“Rising supplies heading into the winter have tilted a bearish outlook further in favor of shorts, and contributed to decisive losses in Nymex futures last week,” EBW said.
The natural gas market gapped as expected. The move was no surprise. NatGasWeather had warned that it would have been dangerous to hold a position had either model not moved significantly one way or the other.
As long as there remains a wide discrepancy between weather models, there is going to continue to be risk on either side of the market.
Technically, the trend is down, but most technical indicators and oscillators are showing oversold conditions. They can show oversold conditions as long as they want because they are coincidental indicators. In other words, oversold conditions are not a buy signal.
Watch the chart pattern. The best sign of a bottom will be a “lower-lower, higher-close”. This pattern won’t indicate the trend is changing, but it will indicate the buying is greater than the selling at current price levels.
Also be aware that the number of shorts in the market is huge. So the biggest concern for short-sellers should be an unforgiving squeeze.