Natural gas futures are trading lower on Tuesday, but volume and volatility are below average early in the session. This is both a surprise and a concern for bullish traders because it seems to be signaling that traders are having an issue with the current weather forecasts.
The price action also seems to be indicating that bearish short-sellers may have fully-priced in the forecasts calling for back-to-back extremely cold week-ends and the arctic blast that may linger into the first week in February.
At 1238 GMT, March natural gas is trading $3.085, down $0.154 or -4.75%.
Furthermore, technical factors are also playing a role. Based on the main range of $2.771 to $3.406, the key support area to watch is $3.089 to $3.014. This zone has been tested for three consecutive sessions. This is telling us that the buying could strengthen on a sustained move over $3.089 and weaken under $3.014.
Short-Term Weather Forecast
According to NatGasWeather for January 22 to January 28, “Frigid conditions continue across the northern and eastern US with lows of -10s to 20s, including 20s deep into the Southeast, although followed by a milder break mid-week with temperatures briefly warming above normal. However, another polar blast will be spreading across the Midwest and East late in the week through the weekend with lows dropping back into the -20s to 20s for very strong demand. The West will see a mix of mild to cold. Overall, national demand will be high, easing mid-week, then back to high-very high.”
I can’t help but think how different this market would be without the periodic warming spells. If the forecasts had called for 2 to 3 weeks of extremely cold temperatures, prices would be substantially higher. As it stands, however, the periodic breaks in the cold may be just enough to discourage the aggressive buying this market needs to drive it sharply higher.
Demand may be high, but production seems to be strong enough to offset some if not most of the usage.
Furthermore, having been burned in December by forecasts for extreme cold that never panned out, buyers seem to be a little reluctant to buy and may need some convincing, but this is only likely to occur if the whole month of February is extremely cold.
Look for updated forecasts to drive the price action today. The early slow trade suggests investors may be waiting for new forecasts.