Gas Pares Losses As Afternoon Weather Models Cool Down

The January natural gas contract took traders on another wild ride today, shooting higher overnight then selling off hard this morning on weak cash prices and warmer overnight weather model trends. Yet afternoon models then trended back colder enough to allow a significant bounce, with the January contract settling down just 3% on the day. 

The role of weather and weak cash can clearly be seen with the January contract by far logging the largest loss on the day. 

The result was the January/March contract spread heading back to recent lows even as the January contract sits solidly higher than it did on Monday. 

In our Morning Update for clients today, we highlighted that while there may have been slight GWDD additions in some overnight forecasts, in the long-range we still did not see GWDDs getting above average in the first couple days of January. 

We highlighted that $3.5 could be put in play "...if models prove unable to increase cold risks by the end of the week..." when prices were back above $3.75. They proceeded to shoot lower following this Update to under $3.575, and in our Note of the Day we highlighted that afternoon weather model guidance would determine whether prices can trend to $3.5 or $3.75 this afternoon. 

Those cold risks arrived on afternoon model guidance, as Climate Prediction Center guidance shows for Week 2, and prices accordingly shot higher. 

Just before the settle the January contract tested the $3.75 level we had been watching for before pulling back and holding below it now post-settle. This comes as traders are weighing these colder weather models against tomorrow's EIA print, where a large storage draw should be announced off the coldest week of the winter draw season thus far. 

Already we have seen three days with continued significant gas volatility even with prices below $4, and we would expect that to continue tomorrow with the EIA data release and another round of weather model changes.