Since mid-October, U.S. natural gas futures have been beaten down 40% as the narrative of colder weather and tight supplies quickly flipped and crushed bullish traders. As the Northern Hemisphere winter is less than two weeks away, new weather models suggest "significantly colder" temperatures could return for parts of the U.S. later this month into early 2022.
Meteorologists at private weather forecasting firm BAMWX expect a bullish setup for natgas futures. They say the narrative is flipping from warmer weather to the complete opposite as an Arctic polar vortex could plunge parts of the U.S. into a much colder weather pattern in January than today's currently mild, above-trend temperatures.
"Seeing an interesting pattern developing ahead leading up to Christmas and into early January '22, as higher pressure looks to finally re-establish towards Alaska and the North Atlantic, pushing cold from the Arctic down into the US (after a record warm start to the month). If the MJO (Madden-Julian Oscillation) can continue to progress through phase 7 into 8 (and possibly into 1) mid to late December, this can also increase the potential for a Polar Vortex displacement event, sending more consistent cold air deeper into the US…a big risk to watch for the energy markets ahead," Kirk Hinz, the chief meteorologist at BAMWX, noted.
BAMWX outlines now could be the time to find a long entry into natgas futures, or as they put it, "long UNG," the United States Natural Gas Fund, LP. ETF. Their reasoning behind the play is quite simple:
Long UNG Equity, Why? Polar Vortex Jan 2022 Northeast - Front-month NG1 40% drawdown in 6 weeks - Things can change on a dime but the setup is very good in our view - When you get a nice - healthy- capitulation puke ahead of this kind of possible shift typically leads to drama reversal - seasonal pattern - GFS (global forecasting system) pointing to an increased probability of Polar Vortex disruptions - decent chance forecasts suddenly get significantly colder to end Dec and open up 2022. Much of the Street got caught very long in Sept, anticipating a brutally cold winter, along with supply risk - then came above ave temps and then the "flush" exit, a now a polar vortex? -BAMWX
Natgas traders should carefully monitor temperature forecasts and heating degree day estimates for the U.S. to gauge future energy demand. Natgas futures have found support on an upward sloping diagonal trend line. Bloomberg reported earlier this week that traders were buying the dip on the prospects of colder weather later this month.
Looking across the Atlantic, colder weather and tight supplies sent Dutch natural gas for next month, the European benchmark, over the 100 euro mark and near all-time highs.
The divergence between U.S. and European energy prices is remarkable and may also suggest a reversal in U.S. natgas is nearing.
If BAMWX is right, a monster reversal in U.S. natgas futures could be ahead if forecasts pan out.