Prices of natural gas started the week with a gap higher past the $4.00 mark per MMBtu. The move was in tandem with rising open interest and volume, indicative that the continuation of the rebound appears likely in the very near term. While above the 200-day SMA at $4.030, the outlook for the commodity is seen as constructive.
Considering advanced prints from CME Group for natural gas futures markets, open interest increased for the second session in a row on Monday, now by nearly 2K contracts. Volume followed suit and added around 72.6K contracts to the previous build.
- Arctic-like temperatures across US Northern Plains and Midwest bolstering prices
- Nord stream 2 pipeline political implications afoot as US and Russia set to spare
- Prices put in strong start to January, but outlook uncertain below 200-day SMA
Natural gas prices are on the rise once again amid volatile weather and an ongoing energy crunch in Europe. A blast of frigid air has blanketed the Northern Plains in the United States, with mercury readings well below zero. Meanwhile, winter storm warnings are in effect across several states. These factors are likely to increase demand for the commodity.
However, warmer temperatures are forecasted over the next several weeks across much of the US. If temperatures do rise, we may see prices trim gains made this week. Despite US benchmark Henry Hub prices being up over 3% on the month, the heating gas is coming off three consecutive monthly losses. Prices will have to rise more than 50% to challenge the 2021 high seen last October.
The Energy Information Administration (EIA) will report stockpiles for the week ending December 31 tonight, with analysts expecting a reduction of 54 billion cubic feet (bcf). An outsize draw may see a short-term bounce in prices. However, US prices have become more insulated from supply-side shocks, with storage levels recently rising above the 5-year average.
Elsewhere, European prices are even more volatile as the energy crunch across the continent continues to face low inventory levels and political implications from the Russian Nord Stream 2 pipeline. That pipeline – slated to go into operation in the second half of this year – is now being used as possible leverage over Russia.
US Secretary of State Anthony Blinken stated earlier this week that it would be hard to see gas flowing through the pipeline if Russia continues its aggression toward Ukraine. Russia currently has nearly 100,000 troops massed on the Ukrainian border, with many fearing a possible invasion. The United States and Germany have an agreement in place that measures would be taken against Russia were they to weaponize the pipeline.
Germany sees the pipeline as a way to diversify its energy sources, but the US has always opposed it. The Biden administration has several diplomatic meetings scheduled in the coming weeks with Russia to attempt to ease tensions on the Ukrainian border. However, the US Senate is planning to vote on a measure that could renege a Biden administration waiver over previous sanctions on Russia that targeted the pipeline, complicating matters further. Republicans, and some in Biden’s party, believe the project would bolster Russia’s influence over Europe.
NATURAL GAS TECHNICAL FORECAST And Report
US natural gas has made headway so far this year, but prices remain below the 200-day Simple moving Average (SMA), and the 50-day SMA continues to drop after crossing below the 100-day SMA last month. The 78.6% Fibonacci retracement provided support around 3.610. A break below that level may open the door for some bearish action. Alternatively, prices will need to pierce above the 200-day SMA if bulls want to drive prices higher.
‘Most Bullish Setup’ of Season as Natural Gas Futures Rally Early
In the most recent models heading into Monday’s trading, the pattern starting around Jan. 20 was “very impressive” in the amount of cold advertised, according to Bespoke Weather Services.
Models showed “a deep trough diving into the central/eastern U.S., easily the strongest modeled pattern we have seen this winter in terms of the ensemble output,” Bespoke said.
The question will be whether this modeled cold progresses forward in the forecast, the firm said.
“Pattern signals do suggest colder risks into the final third of the month, before hinting at a possible return of the more classic La Niña base state into February,” Bespoke said.
As for prices, production was also likely a contributing factor to the rally early Monday, Bespoke said, pointing to output that remained “stuck down in the 92.0-92.5 Bcf/d range, having seen no recovery from last week’s dip.”
NatGasWeather similarly characterized the pattern heading into the final third of January as “the coldest/most bullish setup” of the winter season to date, with Canadian air expected to move “aggressively” into the Lower 48.
“The focus will soon be on just how long” frigid temperatures during this time frame last, the firm said.
In terms of balances, cold temperatures in the near term could lead to production freeze-offs over the next few days, keeping supply below the highs recorded in December, NatGasWeather said.
Colder conditions should also see the next two Energy Information Administration (EIA) reports shrink the current inventory surplus to the five-year average, according to the firm.
“And if the cold pattern Jan. 21-26 holds, as we expect, surpluses will flip to deficits in late January,” NatGasWeather said.
For the next EIA report, NGI’s machine learning model predicted a 164 Bcf withdrawal for the week ended Jan. 7. The year-earlier print is 153 Bcf, while the five-year average is a pull of 144 Bcf.
