Natural Gas: Winter’s Here, And Many Funds Aren’t Long Yet

Will it come? Or rather WHEN will it come?

Expectations over “real” cold weather—the kind that forces one to bundle up, even indoors, and crank the heat up all the way—are raging as the first true month of the northern hemisphere winter gets underway. 

Yet, temperature dials on the US East Coast haven’t dropped enough. That leaves traders and investment funds in a quandary over how long they should go—or rather WHEN to go long—on natural gas, the key heating fuel for the region.

Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, underscores this debate in a note issued Wednesday as natural gas futures on New York Mercantile Exchange’s Henry Hub opened lower before closing virtually flat at $2.70 per mmBtu, or million metric British thermal units.

Natural Gas Daily

Said Shelton:

“Weather models showed a weaker recovery from the warmth in the 11-15 day forecast, resulting in a retracement.”

“The market is not nearly as long as it once was and it makes sense as while the NG specialists are more accustomed to the year-end need for risk, many of the non-specialists are not and likely are flat and wondering if they should get long.”

Net Longs Collapse 55% As Year Begins

Net longs on Henry Hub gas held by money managers collapsed by 55%, or 9,684 lots, during the week ended Jan. 5, standing at 7,894, the Commodity Futures Trading Commission said in its Commitment of Traders Report.

Fewer funds seemed to be keen on being long gas after weather forecasters sharply pared their expectations for cold weather in the eastern US in the first half of January, said Dan Myers, analyst at Houston-based gas risk consultancy Gelber & Associates. He adds:

“Nonetheless, at least in the American Global Forecast System model (pictured below), there is potential for below-normal temperatures to return to the Central US by the late 11-15 day period, and expand east after that.”

American Global Forecast System, courtesy of Gelber & Associates

“In some ways, the slight cold in early January is a bonus to a market that had been expecting an all-out mild period only one week ago. However, the necessary factor to extend the natural gas price range beyond the $2.72-$2.76 resistance is hope for real, sustained winter cold by the end of the month.” 

Slower Transition To Cold

Bespoke Weather Services is also forecasting a slower transition to colder weather in the second half of January.  

Naturalgasintel.com, citing Bespoke’s forecast in a blog Wednesday, said:

“It appears we are in a period of above-normal model volatility, as models struggle to resolve the exact configuration on both the Atlantic and Pacific sides of the pattern, along with how much true cold air can get involved.”

“We still lean toward the idea that this pattern ultimately can give us a colder-than-normal week after the middle of the month, which promotes some upside risks in prices, but confidence is lower for now.”

The delay in cold comes as traders and investors await the first gas storage report for 2021, due at 10:30 AM (14:30 GMT) today from the {{0|US Energy} Information Administration.

152 Bcf Drawdown Forecast For Latest Week

Analysts polled by Investing.com expect the EIA to cite a drawdown of 152 bcf, or billion cubic feet, for the final week of last year. That would be a step up from the 122 bcf reported during the previous week to Dec. 24.

Back to gas prices, Investing.com’s Daily Technical Outlook shows a ”Strong Buy” for Henry Hub’s front-month February contract. 

Should the contract extend its upward trend, then a three-tier Fibonacci resistance is forecast, first at $2.760, then $2.798 and later at $2.861.

Should the trend turn negative, then support will likely be first at $2.634, then $2.596 and later at $2.533.

In any case, the pivot point between the two is $2.697.

As with all technical projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.