The Widowmaker Is Back
Natural Gas Prices Squeeze Higher On The Incoming Polar Vortex
Natural Gas Prices Squeeze Higher On The Incoming Polar Vortex
Natural gas trading is so much fun (not)! The widowmaker is back as February contracts surge ~15% with March contracts surging ~9%. Unlucky for us, we sold our BOIL long position last Thursday.
While we should still be thankful for the positive P&L this year, "could've, would've, should've" is still on our minds. But for those of you who have traded natural gas across many winters (like we have), weather model roulette is a real thing, and PTSD is equally real.
With that said, the latest ECMWF-EPS model update showed lower heating demand than the previous run. These models will continue to ebb and flow over the coming week as the incoming polar vortex gets confirmed.
ECMWF-EPS TDDs
6-10 Day Outlook
10-15 Day Outlook
15-Day Cluster
As for natural gas prices, the rally today has priced in most of the polar vortex risk. In order for natural gas prices to move even higher than today, the weather models have to 1) show higher intensity in the cold and 2) a longer duration.
From a risk/reward standpoint, it doesn't make much sense to remain long. In terms of upside, you are looking at $4.1 to $4.25 for February and $3.25 to $3.5 for March.
If weather models show the cold trend waning and HDDs fall back to the seasonal norm (going to the end of January), you are looking at $3.4 to $3.6 for Feb and $3 to $3.1 for March.
Fundamentally, where are we now?
From a natural gas storage perspective, we are going to be in a deficit to the 5-year average by Jan 24 week.
The size of the withdrawals is hard to pinpoint for now given the intensity of the cold is still uncertain (too far out). But for now, we have Jan 17 week breaking records. It will be the largest natural gas withdrawal in history. This is because of a combination of production freeze-off and record demand.