January natural gas is set to open 2 cents higher Friday morning at $3.56 as traders assess the likelihood of market-moving cold emerging around the first of the year. Overnight oil markets fell.

More deferred weather forecasts called for cooling directed primarily to the West. In its 11-15 day Friday morning outlook, MDA Weather Services said, "The forecast trends colder in this period, with these changes focused from the West to the Midwest. This comes with model support, as well as the background MJO [Madden Julian Oscillation] tracking toward colder correlating phase seven. The forecast, however, remains slower than models with the evolution of cold air, keeping belows limited to the western half while promoting continued above normal coverage downstream in the South and East.

"Ridging near Alaska is a feature worth monitoring going forward as a cold signal, but models keep troughing focused over the West during this period."

Traders see a treacherous environment with the possibility of extended cold placing risk to the upside. "[W]e still view this week's dramatic two-day price spike as a possible exaggeration relative to the forecasts for another Arctic blast at around the New Year holiday," said Jim Ritterbusch of Ritterbusch and Associates in a Friday morning note to clients. "Models continue to differ, and until a consensus develops in favor of a pronounced and lengthy broad-based cold spell, this market is apt to spend more time digesting the early week price pop. But we will also note that the market's sensitivity to any shifts in the forecasts toward abnormally cold trends will be heightened going forward now that a supply deficit against average levels is developing.

"Back-to-back large storage draws in excess of 200 Bcf have been efficiently discounted. But going forward into the heart of the heavy-usage period, a deficit supply situation could easily push nearby futures back to above this month's highs. This market has seen four distinct major price swings evenly divided between the up and the down side across this fourth quarter. As a result, this has provided a treacherous environment for position-type traders. We have, instead, focused on ‘spreading’ opportunities as an alternative strategy. After accepting profits out of bear spreads at the start of this week, we are now awaiting a significant reaction as an opportunity to establish bull spreads, such as long April-short December 2017."

In overnight Globex trading February crude oil fell 60 cents to $52.35/bbl and February RBOB gasoline dropped 2 cents to $1.6006/gal.