Welcome to the bottoming out edition of Natural Gas Daily!
Housekeeping item first.
For the week ending 11/29, we have a draw of -10 Bcf. This compares to -63 Bcf last year and -41 Bcf for the 5-year average.
Natural gas prices at one point recovered more than 7% before falling as the ECMWF-EPS run was underway. The discrepancy between ECMWF-EPS and GFS-ENS is monstrous right now.
Both models have not been exactly very reliable over the last few weeks making natural gas trading extremely volatile. ECMWF-EPS has done a much better job keeping a more measured tone, while GFS-ENS has been wildly bullish only to temper back expectations.
From what we are seeing right now, GFS-ENS is far too bullish. In fact, the polar vortex displacement is coming almost 15 days ahead of ECMWF-EPS with the long-range forecast showing this event to happen closer to the end of December versus mid-December for GFS-ENS.
As a result, we think GFS-ENS will need to revise its outlook lower, which could see renewed pressure on prices at least in the short term.
But this doesn't mask the fact that the real long setup is coming which is the bet that January could be much colder than normal. By our estimate, if January turns much colder than normal, especially during the new year, we could see prices shoot up to $3/MMBtu for January expiration.
We've modeled in the bullish scenario and how it changes the price, and you can see a clear divergence here.
Now, traders may also be contemplating going long the widow-maker spread, which is to go long March and short April in the case winter does turn bullish. You can see that we forecast the spread to widen to as much as 35 cents.
Nonetheless, this is still reliant heavily on the weather outlook, but for the bulls, a warmer-than-normal December may translate to a much more bullish January outlook.
We will be keeping an eye on the weather reports to see when we will go long. Timing-wise, we think it's in about 9 to 10 days.
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