Nearby natural gas futures soared on Monday with seasonal buying and a hotter-trending forecast fueling a massive short-covering rally at the start of the week.
According to Bespoke Weather Services (BWS), the weather outlook over the weekend “jumped solidly hotter” by showing a stronger and longer lasting upper level ridge over the eastern half of the country this week and next.
On Monday, October natural gas settled at $2.585, up $0.089 or +3.57%.
Bespoke went on to say that the upcoming conditions should result in “well above normal” cooling degree day totals east of the Rockies.
“The intensity of southern heat starts to wane this week, while increasing up into the Midwest and over into the Mid-Atlantic,”
Bespoke said. “We do, climatology-wise, start picking up some minor” heating degree days further north “after mid-September, though they have little impact this early in the season.”
“Our view has been that the higher wind and gradually lowering temperatures (albeit still well above normal) in the South could allow cash to weaken somewhat, with less hindrance on storage refills,
but the hotter forecast makes that less certain, so we are in wait-and-see mode this morning,” Bespoke said.
Technically, the main trend is up according to the daily swing chart. The current rally has wiped out all of this summer’s highs with the market closing at its highest level since May 30.
On Monday, the rally stopped at $2.608. Taking out this level will signal a resumption of the uptrend with major targets the May 20 top at $2.770, followed by the April 10 top at $2.861 and the March 19 main top at $3.000.
With the exception of the weather, the market continues to be well-supplied so it won’t go up forever. However, if the heat comes in as forecast, the winter heating season will start with smaller supply than recently seen.
Short squeezes typically last until the weakest short is taken out, then the big hedgers come in and the market heads back down.
Additionally, these types of rallies usually end ugly, which means if long, have an exit strategy in place because once it turns lower, it’s not likely to look back. Also start preparing for a dramatic closing price reversal top.