Natural gas futures finished higher last week, helped by a bullish government weekly storage report and the possibility of colder temperatures returning by the first week of January.
The move in the futures market offset a mixed performance in the spot market, which came in weaker on the East Coast, but stronger at several West Coast hubs. At the end of the week, traders were even talking about the possibility of a short-squeeze due to the huge short-position build by speculators.
Last week, February natural gas futures settled at $2.310, up $0.280 or +1.23%.
U.S. Energy Information Administration Weekly Storage Report
The EIA on Thursday reported a 107 Bcf withdrawal from natural gas storage for the week-ending December 13. The reported draw was well-above the consensus estimate of 87 Bcf and was even several Bcf above the highest projection in market surveys.
Total stocks now stand at 3.411 trillion cubic feet, up 618 billion cubic feet from a year ago, but 9 billion cubic feet below the five-year average, the government said.
Short-term Weather Forecast
Shortly before the opening on Friday, NatGasWeather said, “The next 11 days of the forecast are absolutely bearish as far as weather patterns and national demand. However, the data teases colder around January 3-5 to at least something more seasonal. A colder weather pattern January 3-5 will be needed after the weekend break or bearish weather headwinds will continue.”
The forecast, however, changed at the mid-session on Friday, putting a bullish spin on the trade into the close.
“The midday Global Forecast System (GFS) data Friday showed stronger cooling for the Northern United States January 1-4,” according to NatGasWeather. Afternoon data from the European model also showed colder air moving into the northern part of the country but was not as cold as its American counterpart.”
“They both show a better pattern to start January,” the forecaster said. “Not bullish without colder trends, but better. It’s possible the weather data has trended too warm since both the GFS and European models currently show” accumulated national heating degree days (HDD) coming in more than 50 HDDs below normal for the 15-day outlook period, Natural Gas Intelligence added.
“Therefore, adding numerous HDDs back wouldn’t be a surprise,” according to NatGasWeather. “But what will be of primary interest is if the weather data is able to trend colder for the first week of January” and thus “counter the damage done from the coming 12 days of very warm December temperatures.”
The slight change in the weather forecast on Friday means we could see a gap higher opening on Monday if the outlook is confirmed over the week-end.
Furthermore, Mobius Risk Group said, “It is important to consider how quickly a discounted view of weather risk can turn when the speculative community is as short as it currently is.”
EBW Analytics Group shared that sentiment, saying that a near-record short-positioning represents a potential “tinderbox” if bulls can force a short-covering rally.
“Net speculator short positioning is a contra-indicator. Record short positions in mid-August and mid-October pre-dated significant short-covering rallies in early September and early November,” the firm said. “Near-record speculator short positioning in mid-December could foreshadow a similar rally in early January.”
Watch for a possible “Gap and Go” rally on Monday if the chances of an early January cold spell increase over the weekend. If not, prices could erase Friday’s gains and possibly Thursday’s rally.
This article was originally posted on FX Empire
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