Natural-gas futures rallied Monday to their highest settlement so far this month and biggest one-day climb since mid-January.
Expectations for higher demand for the commodity, against a backdrop of forecasts for colder temperatures throughout much of the U.S., boosted prices for natural gas.
“Natural gas is responding to winter weather forecasts that are tracking modestly colder, as well as extremely short positioning in natural gas,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management.
“Winter is a volatile season for natural gas…which will continue to respond to 7-10 day forecasts,” she told MarketWatch. “This season will likely prove to be even more volatile than the past due to the extremely bearish positioning, which will drive short covering rallies when weather trends colder than expected.”
On the New York Mercantile Exchange, natural gas for November delivery
rose 14.6 cents, or about 6.4%, to settle at $2.446 per million British thermal units. The settlement was the highest for a front-month contract since Sept. 25, according to Dow Jones Market Data. Prices also saw their highest single-session dollar and percentage rise since Jan. 14.
Year to date, however, natural-gas futures, based on the front-month contract, have fallen by nearly 17%.
Speculators had added to a large net short position in natural-gas futures in the weekly period ended Oct. 22, according to the latest Commodity Futures Trading Commission data, noted analysts at Commerzbank. Net shorts rose by 17,731 contracts to 228,040 (see chart below).
Extreme speculative positioning is often viewed as a contrarian indicator. That’s because a market move against those positions can be accelerated as weak-handed speculators are forced to liquidate bets.
Meanwhile, the natural-gas market is “at the point in the year where the weather forecasts tend to take control…as speculators bet on how temperature trends will affect demand and ultimately supply levels,” said Tyler Richey, co-editor at Sevens Report Research.
“With updated forecasts over the weekend calling for colder-than-average temperatures for much of the central and eastern parts of the U.S. in the days and weeks ahead, natgas futures are catching a healthy weather bid,” he told MarketWatch.
The pending expiration of the November contract at Tuesday’s settlement has also likely contributed to volatile trading for natural gas.
For now, natural gas has been holding on to a “critical support zone between $2.20 and $2.30 since futures broke out of a multi-month downtrend back in early September,” said Richey. “Looking ahead, a run toward $2.65 is likely as long as weather forecasts are not drastically adjusted. A break above $2.70 would provide a measured move target of $3.20, which would put futures just 10% below the early 2019 highs.”