Natural gas futures are trading higher on Monday after finding technical support inside a key retracement zone. The inability to follow-through to the downside earlier in the session after two days of steep declines also suggests that sellers flipped to buyers rather quickly shortly after the opening.
Several factors could be contributing to the early strength. We could be looking at an unexpected jump in LNG exports over the weekend, a bigger than expected drop in production or a major shift in the weather forecasts to colder temperatures.
At 08:42 GMT, December natural gas futures are trading $3.230, up $0.035 or +1.10%.
We could also be looking at the potential for heightened volatility ahead of the expiration of the November natural gas futures contract later this week.
Short-Term (7-10 Day) Weather Outlook
According to NatGasWeather for October 23 -29, “Cold air continues across the Rockies and Plains with chilly lows of -0s to 30s. Much of the West and East Coasts will be comfortable with highs of 60s to 80s besides locally hotter 90s over the Southwest. Cold air over the Rockies & Plains will push into Northern Texas today and spread across the Midwest/Great Lakes and east-central U.S. this weekend into next week with lows of 10s and 30s for a swing to stronger national demand. The East will remain mild to warm until late next week when cooler air will finally arrive to drop highs into the 40-50s. Overall, national demand will be increasing to high.”
Intermediate-Term (11-15 Day) Weather Outlook
Ahead of the weekend, multiple reports were showing hints of warmer weather creeping up in some models, and on Friday, both the American and European datasets trimmed demand from the back of the 11-to-15-day outlook.
Bespoke Weather Services said the models moved toward strong upper-level ridging anchored over the Midwest, suggesting that risks to the current forecast still were to the warmer side after the first couple of days of November. There also was the possibility of a “strongly warm, very low demand pattern” setting up east of the Rockies in the November 5-15 time frame.
Bespoke also said the market still has the coming week’s cold to deal with, especially in the Rockies to Midwest, “but this has been a constant in the forecast for a while now, so should be factored into market sentiment solidly at this point.”
Early in the session on Monday, traders are showing respect for the technical support area at $3.177 to $3.133. This is a critical support zone. If sellers take out the last bottom at $3.132, prices could plunge sharply into $3.014 to $2.929.
There is a strong bias to the upside with the hedge funds holding extremely large bullish positions. They are betting on a colder winter.
We’re looking for short-term volatility ahead of the expiration of the November futures contract so don’t be surprised by some wicked two-sided swings.
Longer-term, we believe the market will be well supported by rising LNG exports, lower production and colder temperatures. We also expect the hedge funds to add to their bullish positions on weakness.
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This article was originally posted on FX Empire