Welcome to the surprise, it’s cold edition of Natural Gas Daily!

Just a week ago, the weather models were overwhelmingly bearish, but living up to the name of the widowmaker, the outlook has materially improved.

Source: HFIRweather.com

What’s happening in the chart above is that you will see the previous ridging pattern in Canada move West, while the East coast turns colder than normal. The Pacific/North American teleconnection or PNA is firmly positive, which means that colder than normal weather can penetrate into the East coast.

The only thing missing from the holy grail of bullish set-ups is a firmly negative EPO or otherwise known as Alaska ridge. All of these fancy terms are just another way of saying there’s red in Alaska. For long-time natural gas followers, Alaska ridge combined with a +PNA usually implies very cold weather in the East, which would increase heating demand and push prices up.

Source: HFIRweather.com

And you can sort of see this in the progression of the weather model updates over the last 24 hours. Notice how the 10-15 day range improved materially? Yeah, that’s largely thanks to much colder than expected weather.

For us, we have exited our CVE trading position for a material gain in our NG trading portfolio. We are currently long two tranches of BOIL and have committed ~$150k on this trade.

We view the following price move scenarios:

  1. We are wrong and the weather outlook turns bearish, which given where prices are today would stop us out for a ~5% loss.
  2. Or if we are right and the weather continues to trend bullish, and January contracts recover back to $3 to $3.1.
  3. The last one is that if the weather models are underestimating the incoming cold trend, we could see a much higher move back to $3.3.
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And on Monday, our assessment of natural gas fundamentals is that the market despite seeing ~91 Bcf/d is still showing a -1 Bcf/d deficit. As a result, bullish weather would catapult prices higher, so we have decided to go long already.

We will be updating all weather updates regardless of the incoming holidays. So stay tuned, and we hope this set-up turns out to be a profitable one.

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For readers interested in following natural gas fundamentals, HFI Research Natural Gas premium provides:

  • Daily natural gas fundamental updates.
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Disclosure: I am/we are long BOIL, CVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Via SeekingAlpha.com

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