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James Hyerczyk
Natural Gas

Natural gas futures gapped lower on the opening at the start of week, driving the market to a multi-month low. This begs the question, what caused the move?  A. President Trump’s signing of the pandemic aid and government funding bill, B. The gap higher opening in Bit Coin, C. Traders were disappointed by Santa and decided to take it out on the longs, or D. A major shift in the weather forecasts.

Of course D is the right answer. Right now the professionals know the real reasons for the steep losses. After all they have the big bucks to pay for updated weekend forecasts. But I don’t think I’m going out on a limb with my forecast of a major shift toward warmer temperatures.

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Risk Seen Ahead of Long Weekend

The guys at Bespoke Weather Services were spot on with their outlook late last week. They said weather is expected to remain in the driver’s seat when it comes to price action over the coming weeks. Bespoke analysts said it suspects there is more model volatility to come, and that the pattern will likely continue exhibiting some variability. However, the pattern cannot go “truly” cold with the Pacific setup in place.

“Still, we believe a variable pattern can be bullish with prices now as low as they are, but we stress caution and lower confidence given that we are heading into a long weekend with multiple days for weather models to change.”

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US Energy Information Administration Weekly Storage Report

On Wednesday, the EIA reported a steep withdrawal of 152 Bcf natural gas storage for the week-ended December 18. The latest pull was shy of median estimates around 159-160 Bcf found by major polls. However, it was also more than the 146 Bcf pull recorded a year earlier and greater than the five-year average 127 Bcf withdrawal.

The latest withdrawal reduced inventories to 3,574 Bcf, though stockpiles were still above the year-earlier level of 3,296 Bcf and above the five-year average of 3,356 Bcf.

Weekly Forecast

The early price action likely indicates that warmer weather is on the way. Furthermore, it could be a sign that even a major draw in this week’s government storage report for the week-ending December 25 won’t be enough to trigger a meaningful rally.

NatGasWeather predicts that this week, we’re going to see moderate to locally strong national demand Monday – Wednesday, then easing to low late in the week through next weekend.

I suspect, however, the forecast for January came out extremely bearish over the weekend, triggering the gap opening, but we’ll learn more about that on Monday. The big takeaway this week is likely to be that next week’s government report is going to show an average draw. Remember that professionals look at least two weeks ahead.

Some speculative buyers are going to try to buy the gap opening. They are going to try to take advantage of the volume vacuum caused by the light holiday trade. So be prepared for volatility and whipsaw action. If you’re going to try to trade this mess, make sure you’re wearing the new big boy pants you got from Santa.

For a look at all of today’s economic events, check out our economic calendar.

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