December natural gas is set to open 2 cents higher Monday morning at $4.43 as traders factor in still colder tweaks to the weather outlook and comparisons are made to the winter of 2000-2001. Overnight oil markets rose.
Overnight forecasts ratcheted another notch colder overnight. WSI Corp. in its Monday morning 11-15 day outlook said the period has "trended significantly colder across the interior Northwest in through the eastern two-thirds when compared to Friday's forecast. Forecast confidence is considered average at best as models show reasonably good agreement but uncertainty increases late in the period.
"The forecast could trend cooler over the Northwest and warmer over the Plains/Midwest if the highly amplified pattern relaxes and the Pacific jet stream takes on a larger role than what is currently forecast."
WSI forecast that Chicago's Monday high of 60 and low of 41 would plunge by next Monday to a high of 29 and low of 18. The normal readings in Chicago this time of year are for a high of 49 and low of 33.
Risk managers are taking the current advance more or less in stride. "We have been looking for a rally prior to the kickoff of the heat season. But the past week definitely exceeded even our bullish expectations," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.
"We feel a big part of this week's rally was driven by short-covering by the funds, which have been covering huge short positions in natural gas. The forward markets have risen considerately more than the spot market over the past week. Last year the rally was driven by the cash market because of extremely cold weather driving up demand. Even though we still feel we can see higher prices in the weeks to come, we would be cautious and suspect of the current rally. Unless the cash market (and physical demand driven by cold weather) start to show some relative strength, we could give back half of the recent rally very fast.
"On a trade basis, we will book profits on our short puts (half of our long collar trade) and hold our calls. We will look at selling the puts again if we break back to the $4.00 level. For producers, we are still look at establishing short hedges if we get in the mid $4.00 level on the forward six and 12 month strip. We are in no rush to sell the balance of the winter strip at this time. If considering just locking in the winter, we would do so in the $4.70-4.90 range."
Friday the winter strip settled at $4.432.
Following Thursday's inventory report, Teri Viswanath, director of natural gas trading strategy at BNP Paribas, put some historical perspective on the recent advance. "In a little more than a week, the December '14 contract has gained more than [$0.77], or trading from $3.637 to [$4.41]/MMBtu. This impressive recovery represents the largest move in gas prices in the first half of November since 2000.
"Interestingly enough, a similar cold pattern was responsible for that earlier rally more than a decade ago," she said. "According to MDA Weather Services, the period of Nov. 1-20 will likely rank as the 11th coldest since the 1950s, or closely aligned to 2000 which ranked as the eighth coldest. Last November was actually warmer by comparison, ranking 35th in the last 64 years.
"The massive institutional deleveraging that has taken place over the course of the injection season has opened the door to accumulation ahead of the winter. Now the prospect of strong heating demand ahead has given bargain-minded investors an excuse to rush back into the U.S. natural gas market. Accordingly, if we had to weigh in on whether the current sell-off is a reality check or a short-term buying opportunity, we would opt for the latter. In the absence of a string of re-affirming stock reports that ease winter supply concerns, winter risk appears to be back on," she said.
The January 2001 contract went on to reach a peak of $10.100 on Dec. 27.
In overnight Globex trading December crude oil added 87 cents to $79.52/bbl and December RBOB gasoline rose 3 cents to $2.1634/gal.