Natural Gas Price Fundamental Weekly Forecast – Heightened Volatility Indicated but Short-Squeeze May Be Over

Natural gas futures finished higher last week after posting a pair of the most volatile consecutive daily price swings in its history. Buyers stepped in at the end of the week after a double-digit price surge on Wednesday and a double-digit plunge on Thursday.

To recap this week’s events, the market started firm as forecasts continued to call for cold weather until at least November 25. The market was also underpinned by historically low stockpiles. A short-squeeze spiked the market higher, producing the biggest one-day rally in 14 years and the highest closing price since 2014. This was followed by the sharpest one-day decline since February 2003.

Last week, January Natural Gas futures settled at $4.291, up $0.570 or +15.32%.

Outside factors also contributed to the wild price action. There is speculation that the hedge funds that had been long crude oil and short natural gas for the winter were forced to liquidate their positions to meet margin calls and end-of-the-year redemptions.

U.S. Energy Information Administration (EIA) Weekly Storage Report

According to the EIA, U.S. natural gas stockpiles rose by 39 billion cubic feet in the week-ending November 9, exceeding the 34 billion cubic feet rise analysts and traders had forecast. Furthermore, the increase was more than double the injection for this time of year.

Nonetheless, total storage remains about 16% less than normal for this time of year. This news should continue to underpin prices until it goes away. If the winter is cold enough or if below average temperatures continue into the spring, we may even begin the summer heating season with a deficit.

Forecast

According to NatGasWeather.com for the period November 16 to November 22, a weather system with rain and snow exited the Northeast on Friday. It was not as cold as recent systems since it came from the South. The West and South are expected to be mild to warm the next several days with highs of upper 50s to 70s. “Another strong cold blast is expected into the central U.S. and Midwest this weekend, then spreading into the southern and eastern by early next week with lows again of 10-30s north and 30s to lower 40s across portions of Texas and the South/Southeast. Overall, demand will be very high.”

As of Friday, Bespoke Weather Services saw the potential of a rally back to $4.50 if the cold risks seen in the European model is sustained over the weekend.

As far as last week’s EIA report and the price action are concerned, “Compared to degree days and normal seasonality, the 39 Bcf injection is about 4.1 Bcf/d loose versus the five-year average,” Genscape Inc. analyst Margaret Jones said, “…While the year/year deficit is still more than 528 Bcf, it has narrowed to its closest point since February.”

Additionally, according to Nat Gas Intelligence, “Analysts with Tudor, Pickering, Holt & Co. (TPH) viewed the market as about 2.5 Bcf/d oversupplied on a weather-adjusted basis for the latest EIA report week.

Technically Speaking

The price action last week brings to mind several factors. You can have the perfect storm of fundamentals, but you still have to have position management to make money.

Traders are probably going to look at last week’s high as an anomaly and consider the $4.00 as resistance.  The charts are zeroing in on $4.082 to $3.873 as the key area to watch.

We could see another upside bias develop over $4.082 and a downside bias to emerge under $3.873.

The short-term range is $4.964 to $3.898. If there is another rally then its 50% to 61.8% retracement zone at $4.431 to $4.557 will become the initial upside target.

The large build during the week-ending November 9 indicates that the market is well-supplied so any major change in the weather to the warm side could lead to a steep drop in prices. This week, investors will be focusing on the weather forecasts for the last week in November and the first week in December. So far they have been fairly inconsistent, but conditions may be clarified over the week-end.