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Bearish Overnight Weather Trends Pressuring November Natural Gas Futures

Coming off Thursday’s 12.2 cent sell-off, the November natural gas futures contract was trading lower early Friday, down 2.2 cents to $3.176/MMBtu shortly after 8 a.m. ET as forecasters pointed to milder trends in the weather outlook overnight.

Bespoke Weather Services viewed the overnight guidance as “solidly more bearish,” with the European model dropping heating demand expectations in both the medium and long range as the Global Ensemble Forecast System cooled somewhat. This resulted in a “solid decline” in expected heating degree days (HDD) overnight.

“Though we still expect demand to run slightly above average on net through the next couple of weeks the long-range pattern is not quite as threatening and the medium-range continues to hold the same warm risks we were watching yesterday,” Bespoke said.

The firm noted a “brief overnight spike above $3.25 before warmer European guidance hit prices hard” and suggested “this is not necessarily a sell-off to chase; there remain long-range cold risks on guidance and models are noisy enough that we could easily see colder trends provide bounces.”

EBW Analytics Group’s latest weather maps Friday morning similarly showed declines in expected space heating demand over the next three storage weeks, confirming trends that showed up Thursday and helped send prices lower.

“The forecast for Week 1 remains ultra-cold compared to seasonal norms, posting a small gain,” EBW CEO Andy Weissman said. “This morning’s runs, however, all confirm the expected loss of gas-weighted HDDs during Week 2 that surfaced in yesterday’s midday runs, losing 5.2 gas-weighted HDDs and 9 Bcf of demand. During Week 3, colder-than-normal weather continues to fade, limited to portions of the Southeast.

“Over the next few trading days, very cold weather over much of the country will provide some support for cash prices, limiting the rate at which futures decline,” Weissman said. “Forecasts are also likely to continue undulating, resulting in day-to-day volatility. For now, though, the rally appears to be over.”

Meanwhile, on Thursday the Energy Information Administration (EIA) reported an 81 Bcf injection into storage inventories for the week ending Oct. 12, slightly below market expectations for a build in the mid-80s Bcf. The reported build was larger than both last year’s 55 Bcf injection and the five-year average build for the week of 79 Bcf. The 81 Bcf build lifted storage inventories to 3,037 Bcf, 601 Bcf below year-ago levels and 605 Bcf below the five-year average.

“With only two weeks remaining in the refill season, we expect to enter November at around 3.2 Tcf (about 550 Bcf, or 15%, below average),” analysts with Jefferies LLC said following Thursday’s report. “Given the rapid supply growth that has occurred through the summer and early fall, we believe that the storage deficit can easily be reduced further in the winter.

“Assuming five-year average withdrawals, we estimate that production would need to average just around 8 Bcf/d higher year/year for storage to reach the five-year average (about 1.7 Tcf) by the end of March. This level of production would imply a winter average of just around 85 Bcf/d, less than 1 Bcf/d off recent daily highs.”

Shortly after 8 a.m. ET, November crude oil futures were up 73 cents to $69.38/bbl, while November RBOB gasoline was trading about 2.9 cents higher at $1.9210/gal.

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