Natural Gas Prices Forecast: Oversold Conditions Setting Early Bullish Tone

Key Points

• Short-covering rally and oversold conditions boost gas futures.
• Warmer weather impacts LNG demand.
• Ample storage likely to limit natural gas price gains.

U.S. Natural Gas Futures Surge

U.S. natural gas futures are trading higher on Wednesday after gapping on the opening. The move is being primarily driven by a combination of short-covering and oversold technical conditions, alongside domestic supply and demand factors.

At 12:42 GMT, Natural Gas futures are trading $2.529, up $0.079 or +3.22%.

Short-Covering and Technical Influences

The market’s upward movement is likely a short-covering rally, fueled by technical conditions that suggest an oversold market. This scenario typically leads to a temporary surge in prices as traders cover their short positions.

Weather Impact on Demand

Changing weather patterns, particularly the warmer-than-average conditions expected across most of the U.S., are influencing LNG demand. Despite this, colder weather is forecasted to enter the western U.S. by early February, potentially affecting future demand trends.

Supply Constraints and Ample Storage

While recent freeze-offs have led to a slower output return, contributing to the price increase, the U.S. natural gas market is cushioned by ample storage. This significant storage capacity is likely to limit the gains from the current price surge, setting the stage for future shorting opportunities in the market.

Outlook and Market Sentiment

Given the interplay of these factors, the short-term outlook for U.S. natural gas futures leans towards a cautious bullish sentiment. However, the presence of ample storage and the potential for demand fluctuations due to changing weather conditions suggest a volatile market landscape, where gains might be short-lived, offering traders opportunities for shorting in the near future.

Technical Analysis

U.S. natural gas futures gapped the opening on Wednesday, surprising most traders and leading to short-covering by some weaker traders.

There were no major shifts in the fundamentals, but traders note that by some measures, the market became oversold, which essentially means it ran out of sellers.

Given the current bearish supply situation and low-demand outlook, the market is likely to attract sellers once again after it reaches a favorable price level. The first target is the 50-day moving average at $2.689.

We expect fresh sellers to show up on the first test of this level. Overtaking it, however, could fuel a further rally into the minor resistance at $2.874. The best shorting area is the price cluster formed by the main resistance at $3.056 and the 200-day moving average at $3.064. However, given the fundamentals, the market is not likely to reach this area.