Natural Gas Prices Forecast: Bullish Trends Emerge from Updated Weather Models

Highlights

• Natural gas futures reached a two-week high on the back of weather forecasts.
• Contract expirations and revised cold weather projections fuel the bullish sentiment.
• RSI signals overbought conditions, cautioning traders to temper their bullish outlook.
• Low trading volumes raise eyebrows, amplifying volatility especially near contract expiration.

Volatility Marks Natural Gas Market Amid Geopolitical and Weather Factors

Natural gas futures experienced a significant uptick on Friday, rallying about 4% to reach a two-week high. This was on top of Thursday’s 7% jump.

The rise was primarily influenced by the contract expiration and updated forecasts indicating colder weather and greater heating demand than previously anticipated.

The futures for November delivery on the New York Mercantile Exchange climbed 11.2 cents, or 3.5%, settling at $3.326 per million British thermal units (mmBtu). These conditions have moved the futures into technically overbought territory, as signaled by a relative strength index (RSI) above 70.

Advanced Weather Modeling Driving Prices

According to Natgasweather.com, their Advanced Heating Degree Days (HDD) and Cooling Degree Days (CDD) Data are valuable tools in assessing how weather trends impact natural gas prices. Recently, colder trends in the European Centre for Medium-Range Weather Forecasts (ECMWF) have been exerting upward pressure on natural gas prices.

Low Volume Amplifies Volatility in Front-Month Futures

Contrary to the typical market behavior, low trading volumes significantly fueled market volatility in the front-month natural gas futures. On Friday, only 1,759 November futures contracts were traded, a stark contrast to the daily average of 129,500 front-month contracts since the start of the year. This reduced liquidity can exacerbate price movements, making the market more susceptible to sudden spikes or drops.

Such heightened volatility is particularly pronounced during contract expiration periods, as traders rush to close out or roll over their positions. As a case in point, November futures saw a substantial jump of approximately 7% on Thursday and were up by over 5% earlier on Friday. The low volume environment contributed to these erratic price movements, as even small trades could result in significant price changes.

Supply and Demand Equations

Financial firm LSEG reported that the average gas output in the Lower 48 U.S. states had risen to 103.9 billion cubic feet per day (bcfd) so far in October, marking a new record. Pipeline exports to Mexico have declined slightly, but analysts expect a rebound once New Fortress Energy’s plant in Altamira begins operation in November.

Meanwhile, gas flows to major U.S. LNG export plants rose to 13.6 bcfd, driven by higher global prices and supply disruptions, particularly in relation to the conflict in Ukraine.