February natural gas is set to open 9 cents lower Monday morning at 3.20 as forecasters grope for hints of returning cold. Overnight oil markets tumbled.
Weather models moderated overnight but hint at returning cold. "In the past 24 hours, the models have lost about 15-20 heating degree days nationally over the forecast period [next two weeks], which was enough to wipe away the slight demand gain estimates from yesterday morning and then pile on more significant losses," said Commodity Weather Group in its Monday morning outlook.
"The final piece of Arctic air later this week seems to finally get resolved on the models (to lesser impact now) and then the pattern roars warmer, thanks to cold troughing around the Alaska area. Since this is the coldest time of year climatologically, the impacts of a bigger warm pattern can be quite large.
"This is pushing January toward one of the warmest outcomes of the 2000s. The end of the European ensemble does show potential pattern changes, with 60% of its members getting rid of the Alaska trough by the end of the 11-15 day. If true, it would be the first domino to fall to bring the pattern back colder by late January, but confidence is really low given no consistency yet on these themes," said Matt Rogers, president of the firm.
Risk managers acknowledge upside risks but are positioning from the short side of the market. "If we continue to see colder than normal temperatures for the balance of the winter, we could see the gas market continue to test the $4 level for the next couple of months," said Mike DeVooght, president of DEVO Capital Management in a weekend note to clients.
"If temperatures start to trend warmer, we could very well see gas back at $3 by the end of the heating season. Looking forward into mid 2017/early 2018, we feel the gas market is going to have a difficult time holding above the mid $3 range as takeaway capacity out of the Marcellus and Utica expands.
"On a trading basis, we will approach the market from the short side as we position for the New Year.” DeVooght advises trading accounts to hold a short February futures position from $3.70, yet end users are counseled to stand aside.
Producers and physical market longs should hold the remainder of an August 2016-July 2017 put strip at $2.70 offset by the sale of a $3.50 call at flat. Alternatively one could hold a $2.75 put and sell a $3.75 call paying 7 cents, he said.
In overnight Globex trading February crude oil fell $1.10 to $52.89/bbl and February RBOB gasoline dropped 3 cents to $1.6024/gal.