Through most of the trading day, natural gas prices were relatively unchanged. We saw some selling overnight, some buying early this morning, and through around noon prices were about even on the day. From then, however, we saw prices plummet after noon, moving through a number of key technical support levels and just holding onto the 5-day average. Even after the settle prices continued to sell off, setting a new low on the day. Cooler afternoon model guidance may have played a role, but such a rapid decline on such large volume could not be tied to any one data set. On the daily chart, we see we are almost back down to where prices opened Sunday evening.

We see that there is support to the downside at $2.63 and $2.5 which will be eyed heading into the EIA data report tomorrow. But this raises the question: after such a large rally, is this a brief retrace before another break higher? Or is this a reversal in a trend that could bring prices back significantly lower?

The large down movement today would seem to open up the potential for further downside; looking back to late April we saw a similar reversal after a smaller rally that led to more downside in the ensuing weeks. Yet back in February when prices were declining more significantly we did see some days with relatively large moves in the opposite direction that turned out to just be brief counter-trend rallies.

Instead, we can look to the weather as to which way the risk lies moving forward. Below we show the latest forecast for the Pacific North American (PNA) Pattern, which is a measure of the average height of the 500mb atmospheric level over the American Pacific Northwest and surrounding region. A positive measure tends to result in warmth and ridging to the Pacific Northwest and result in cold air intrusions further east from the Midwest into the East.

As can be seen, the index is negative now, allowing warmth to spread across much of the East and keep cooling demand elevated. However, the GFS ensembles predict that the PNA will spike significantly in early July; this could result in forecasts cooling across much of the East and getting warmer across the Pacific Northwest. In fact, confidence in a warm Pacific Northwest in the long-range is extremely high. The most recent run of the GFS ensembles show extraordinary confidence in temperatures there being far above average 15 days out. Such a consensus is quite rare.

Similarly, we can see that no temperatures above average are expected across the South and Southeast. This would keep cooling demand at best around averages in the East, potentially not living up to the expectations that the natural gas market has priced in today.

Additionally, in a new update for subscribers today, we found that most global models currently have a warm bias across key forecasting areas, as seen below.

It is worth noting that the GEFS have been consistently too warm 10 days out in the Pacific Northwest, so that extremely positive PNA forecast may begin to trend back towards neutral in the coming days. Also, some of these warm biases have been partially counteracted by some colder bias models have inside of 7 days, as seen below.

Still, one of the themes passed along to clients today in our Model Verification Update is that models could be biased slightly too warm across the East in the long-range despite evidence of under-estimating heat in the short-term. If this were the case, and if the PNA were to turn very positive to start July, this would decrease cooling demand expectations across the East and increase bearish risk within the natural gas market.

Of course, any number of factors remain in play. Another very bullish miss in EIA data tomorrow could send prices right back into resistance at $2.78. As could further evidence of supply tightening. But in the long-range currently, we are seeing increasing evidence that weather risk is skewed bearish, which may need to be priced in over the coming couple of weeks if weather forecasts continue to trend in a similar direction.