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Natural Gas Freefall Continues Unabated

Monday, December 07, 2020 at 10:40AM

Over the last several days, we have seen a perfect storm of factors come together to lead natural gas prices much lower. Just since Wednesday morning, the prompt month January contract has declined more than 50 cents.

prompt natural gas

Given the time of year, one would assume that weather forecast changes have played a key role in such a decline. That assumption would indeed be correct. Model guidance since the middle of last week has rapidly shifted toward projection the re-emergence of a strong upper-level low anomaly centered near Alaska, an earmark of a significant positive EPO regime.

Such a pattern is highly correlated to significant warmth across much of the nation

As a result, our forecast GWDD totals moved much lower this morning, relative to Friday’s outlook.

While this is a very important development, it is not the *only* reason for the steep selloff. The market has been very long based on fundamental expectations. The following chart shows market positioning as of last Tuesday.

money manager percent of open interest

Given that we are nearing the end of the year, and already had seen a notable decline in prices during the month of November, it is likely that many folks simply liquidated late last week, evidenced by the selling across the entire natural gas curve. We believe this accelerated the price declines.

Also, we had a bearish EIA report last Thursday. Now, it is tricky anytime you are dealing with a holiday week, but even adjusting for holiday demand impacts, the number reflected a much looser supply / demand balance. We are seeing signs that this week’s report will reveal that balances have tightened back up, however.

In short, it was a rare combination of various factors that led to the recent plunge. We are now more than $1.00 off the highs in the January contract. Certainly, one would think the recipe exists for a strong snap back, based on a fundamental picture that is improving again, but the big hindrance right now remains Mother Nature. High-end warmth in winter always takes precedence over anything fundamentals can throw at the market.

With access to our daily report, the active natural gas trader can keep up to date with the all of the latest trends in both weather and fundamentals data in order to anticipate where prices will move next. 

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Originally Posted on December 7, 2020 – Natural Gas Freefall Continues Unabated

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