The winter rally in the natural gas market has begun with traders getting a hint of volatility over the past 3 weeks that will likely only increase.
A two week rally which lifted spot prices by nearly 25% from the late-October lows was followed last week by a downside sell off that erased over 60% of the previous market gains.
Selling eased on Friday as the spot December contract fell back under the 4.000 level holding above key support levels.
Buyers have come back in overnight rally the market back higher as winter heating demand for natural gas is expected to remain strong this week.
Consumption last week exceeded supply which reached a record high of 71 Bcf per day for the first time since last April. Daily natural gas prices for the Algonquin city gate which serves Boston rose to $8.040/MMBtu last week, an huge spike this early in the winter.
Current stocks of 3,611 Bcf will likely be peak storage for 2014 falling 200+Bcf below last year's peak storage level and 300+ Bcf below 2012 record high storage. But with increased production 3-4 Bcf per day higher than 2013, total gas available this upcoming winter will be near an all-time high.
Funds should be active buyers in the market along with end users seeking to round out winter 14-15 and summer 15 coverage. Funds last week added 4,214 contracts, the first addition in 6 weeks. The current long position of 145,585 contracts is well below the 488,000+ contract position reached last February and is considered a bullish indicator for the market.
For this week's trade, below-normal temperatures and bullish chart patterns should keep selling to a minimum. Last week's weakness was considered a correction within a greater uptrend. 4.900-5.000 is the initial upside price objective for this winter. But if winter demand is even as close as last year's, price spikes into the 6.000-8.000 level cannot be ruled out.
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