December natural gas is set to open 12 cents higher Monday morning at $4.14 after weather forecasts over the weekend turned supportive in key market time frames. Overnight petroleum markets slumped.
Weather forecasts overnight turned colder. MDA Weather Services in its Monday morning 11- to 15-day outlook shows below-normal temperatures east of a line from southern Wisconsin to West Texas, and west of a line from Montana to western Arizona is expected to be above normal.
"A moderate cold change was made to the extended-range period over the weekend as cold air moves in faster and stronger compared to Friday's outlook. This cold appears most potent early over the Midcontinent before shifting into the East and South as the period progresses.
"Low confidence accompanies the forecast today, especially in the second half. Here the models struggle with handling potential blocking, with the European showing a weak -NAO [North Atlantic Oscillation] and the development of a weak +WPO [Western Pacific Oscillation] set up over the west to central Pacific, with the GFS [Global Forecast System] stronger here.
"The potential for more blocking and a weaker +WPO brings colder risks to the Northeast and Great Lakes. Warmth could struggle to build persistently into the Rockies and Plains."
The National Weather Service reports that heating requirements are expected to be well above normal for the week ended Nov. 22 in key energy-consuming markets. New England is expected to shiver under 207 heating degree days (HDD), 30 above normal, and the Mid-Atlantic is expected to see 210 HDD, or 47 more than its seasonal average. The greater Midwest from Ohio to Wisconsin is forecast to endure 275 HDD, or 89 more than normal.
Risk managers are in no hurry to sell more distant winter months. "Technical selling, hedge selling and the cash market lagging the futures helped to push the market lower," said Mike DeVooght, president of DEVO Capital, in a weekly report to clients. "Fund buying, which are still holding a large short position, helped to exaggerate the rally over the past two weeks. The funds are still holding the majority of their short positions. With the pullback to the $4.00 level and holding, we feel there is a good chance the gas market could have another bull run in the next couple months.
"On a trade basis, we will continue to hold our long calls and we resold our short puts, which we covered the end of last week. For producers, we are still looking to 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."
For end-user and trading accounts DEVO advises a combination of calls and puts. Trading accounts are advised to hold long January $4.20 calls against a sale of January $3.90 puts. The firm also advises buying February $4.20 calls and selling January $3.90 puts. End-users are advised to pursue the same strategy.
In overnight Globex trading December crude oil fell 72 cents to $75.10/bbl and December RBOB gasoline shed 2 cents to $2.0220/gal.