February natural gas is expected to open 3 cents lower Monday morning at $2.43 as overnight weather models hint at mild conditions in the longer term and the technical case for continued higher prices weakens. Overnight oil markets were mixed.
Weather forecasters over the weekend had to wrestle with diverging forecasts, but overall see a cool near term followed by more El Nino-like conditions longer term. In a Monday morning report Matt Rogers, president of Commodity Weather Group, said, "a bigger split has evolved between the American and European models in the six-10 day range, with the American more like our forecast from Friday with more warmth on the East Coast, while the usually more skillful European is colder for the Midwest, East and South overall. We leaned in this colder direction today, which leads to general demand gains that are enhanced by colder short-term conditions, too, especially in the Midwest.
"Otherwise, the American and European come back together somewhat better for warming trends in the 11-15 day. This is not a super-warm pattern, but the models slowly dismantle the colder, blocking components of the pattern in favor of warmer Pacific-influenced flow thanks to El Nino influences.
Last week's market strength has gotten the attention of risk managers. "After consolidating most of the week, the gas market rallied late in the week on a larger than anticipated storage draw and a continuation of colder than normal temperatures," said Mike DeVooght, president of DEVO Capital. "We did see a sharp decline in open interest this past week, which is signaling that the shorts are starting to liquidate their positions. On a trade basis, we will continue to stand aside [all accounts] and will look for an opportunity to establish short producer hedges at higher levels."
Market technicians are calling the rise from mid-December a classic five-part Elliott Wave pattern and are looking for a correction. "The price action up off the $1.684 [Dec. 18] low looks very much like a textbook perfect five-wave rally," said Walter Zimmermann, vice president at United ICAP, utilizing a 300 minute bar chart. "And it looks like a five-wave rally that just peaked at the $2.495 high. This suggests an "abc" correction has begun. A decisive break below $2.300 is now needed to buttress this bear case," he said in a weekly note to clients.
In overnight Globex trading February crude oil fell 25 cents to $32.91/bbl and February RBOB gasoline rose a half-cent to $1.1323/gal.