Natural Gas Prices Capped by Unclear Weather Models

Natural gas futures are edging lower shortly after the regular session opening on Tuesday, giving back about half of yesterday’s gains. Inconsistent weather models are being blamed for the weakness with some showing a gradual warming into early February.

Despite this potentially bearish development, the market remains well-supported by high production and strong export demand which continues to come in near record levels.

At 13:41 GMT, March natural gas futures are trading $3.815, down $0.060 or -1.55%.

Latest Weather Models Fail to Provide Clarity

The latest weather models failed to provide any clear indication that the biting cold in store for this week could carry over into February, according to Bespoke Weather Services.

Natural Gas Intelligence (NGI) reported that the forecaster pointed out that despite the lack of polar air in the United States expected early next month, there still is “plenty of cold that will be available up in Canada, so small changes in the upper-level pattern can mean larger changes in the overall demand pattern.”

Production Outlook Trimmed

Bespoke also noted that production remains well off highs, with fresh cuts to output possible given the widespread freeze this week.

EBW Analytics Group said the recent bouts of cold already have trimmed production to near month-to-date lows. Some estimates pointed to output declining by another 3-4 Bcf/day-plus this week.

Traders Expecting Strongest Gas Demand of the Winter

In addition to production issues, cold temperatures are expected to generate the strongest gas demand of the winter so far, topping the past week’s surge in the process.

The current chilly temperatures are likely to cause a steep drawdown in storage inventories. NGI’s model is projecting a pull of 198 Bcf, which compares to last year’s 137 Bcf withdrawal in the similar week and the 161 Bcf five-year average draw.

EBW said the next three storage reports could result in a more than 700 Bcf pull from stocks, NGI reported.

Looking ahead, “Demand this week will be the strongest so far this winter and will result in next week’s draw likely printing over 250 Bcf,” NatGasWeather.

Daily Forecast

Technically, March natural gas remains capped by a major retracement zone at $3.964 to $4.378. On the downside, the key support is $3.416.

Fundamentally, the bullish weather forecasts have led to increased long speculator positions. The latest Commodity Futures Trading Commission data showed speculator net long positions jumped for a second consecutive week as of January 18, adding 17,000 positions to the highest level since early October.

The increase in long positions isn’t particularly bullish since traders are betting on the January cold to continue into February. If the peak January cold falls off then prices could move lower quickly as longs will be forced to unwind their positions.