Thursday, November 15, 2018 at 5:44PM
After rocketing higher in a wild short-covering rally that was the finale of a short H/J spread explosion, the prompt month December natural gas contract shot back over 16% lower today to settle below Tuesday's close, thereby giving back everything gained yesterday and then some. In our intraday Note we outlined that weakness focused most in the winter strip indicated that if 12z model guidance sustained GWDD losses from overnight weather models further downside was possible despite the December contract already being down 70 cents. Sure enough, that proved accurate as the December contract settled even lower and the later winter contracts led the way further down. It was a wicked reversal in the Z/F December/January contract spread which had recently approached its historical range. The move started overnight on some warmer weather model guidance that we confirmed in our AM Update, where we outlined "sellers should begin to return" and we see "increasing bearish risks with gas prices above 4.5..." Admittedly, our confidence was very low in the report, and we saw a bounce risk on any major colder trends in 12z model guidance, but it was clear sizable 0z GWDD losses would increase selling through the day. We also outlined to look for cash weakness to extend any sell-off, which occurred this AM into the EIA print. Yet again the EIA print missed just 3 bcf to our estimate, despite a number of other estimates clustered lower in the mid 20s to low 30s. The EIA announced that in fact 39 bcf of gas had been injected last week, compared to our expectation of 36 bcf. In our EIA Rapid Release right after the data report we warned clients we saw this number as "Slightly Bearish," as even though it was not far from our expectations it confirmed a rather loose market on a day where prices were already retracing significantly. Of course, next week's EIA print will show a lot more about balances when real cold arrives, but today's print certainly caught many off-guard. Then afternoon model guidance confirmed some of the temporary warmer trends that overnight guidance showed, seemingly helping send gas prices another leg lower. The warmer 6-10 Day Climate Prediction Center forecast today shows that well. We had been looking for these slightly warmer trends for a little while; in yesterday's Afternoon Update we highlighted that "...any weakening of the -NAO would allow the far more mild Pacific flow to take over..." which could finally reverse gas prices, and that is what seemed to happen on overnight model guidance. Still, the extent of the reversal was simply massive. Moving into tomorrow we will likely see continued volatility with traders attempting to position into the weekend. Each of the last two weekends we have seen significant gaps, and with both weather forecasts and gas prices so volatile it would perhaps be more surprise to *not* see one this coming Sunday evening. In our Afternoon Update we outline what we are watching in both weather and the gas market, as well as where we see risk skewed, how weather models should trend, and what today's strip action says about prices moving forward. To give all our detailed research a look, try out a 10-day free trial here.