The Surge in Natural Gas Prices. Was it overdone on cold weather?
February 3, 2021
As some of you suggested to me with personal emails, traders hopefully read between the lines of my special update a week ago Thursday about the Polar Vortex and big eastern snows coming this week.
Indeed “other weather forecast firms” changed their forecast last Sunday night and Monday to a much colder first part of February and prices for natural gas had the biggest two-day rally in months.
However, stocks are still huge and much of this was speculative short covering with hedgers coming in around $3.00 and selling things off. Normally, we need to see stocks below the 5-year average to get a “squeeze situation” with respect to “panic” over tight supplies. We do not have that right now. Traders were advised on the additional rally early Tuesday to take profits on short nat gas put and any futures positions and “wait“, while conservative traders longer term may be long the natural gas ETF (UNG), up about 7-10% as of this writing. Nevertheless, given my cold outlook into March, we will develop a new PUT OPTION STRATEGY FOR YOU.
Temperatures last week were mixed across the US but no extreme cold, so hard to say if this EIA on Thursday will be bearish or not.
You can see the cold weather for the 6-10 and 11-15 day. Maps turned much colder early this week, as I advised last week
What about the month of March? Stay tuned for my Sunday night or early Monday am report, right now I am leaning towards a least slightly colder than normal.
What’s wrong with the wheat market?
The stronger dollar, mixed views about Russia’s export restrictions, some snows in the Plains wheat areas and in Russia, and the technical picture of the market, have all pressured wheat prices. Remember too that Australia produced a huge crop. We are not really in a weather market yet till after March or April.
Also notice how wheat prices have trended lower in 13 of the last 15 years from Mid February through March
Nevertheless, I am unsure but cold Midwestern weather and drought conditions still in some areas of the Plains could cause some concerns for the wheat crop again. So I do not want to get real bearish down here. Notice one of my favorite La Nina events that had a cold mid-winter in the US, shows dryness this spring for the western Plains wheat areas. This could be bullish again, later.
While ClimatePredict suggests some potential improvement in the Russian wheat crop this spring, this is not written in stone yet. The wheat crop from Nebraska to Texas could be hit by dry weather, but we may need to see weather issues in other parts of the world to get a roaring bull market. More on this later.
BIG TIME COLD BUT MOST OF MIDWEST WHEAT CROP MAY GET ENOUGH SNOW TO BE PROTECTED
Need to watch for winter kill to wheat in about a week
South American Weather has improved for corn, soybeans with rains coming for coffee areas
Improved weather has hit South American corn and soybean areas as I mentioned a few weeks ago in my forecast. Maps below show how the coffee area dryness will be eased over the next 2 weeks. Still some potential reduced crop prospects for coffee, but the lower Brazil Real and good rains for N. Brazil is keeping coffee prices in check.
There is still very tight stocks for corn and soybeans, so I do not want to get into a short term day trading affair in soybeans.
There are options strategies on my spread-sheet for soybeans and a coffee strangle that has been profitable the last couple months.
Big time rains for Brazil coffee areas next 2 weeks. Stay tuned come May-July, if it stays wet due to La Nina that would affect their coffee harvest. Right now, rains have prevented a major move up in prices, along with demand worries
Rains the last couple weeks eased drought conditions in S. Brazil and Argentina corn and soybean regions. One factor that has contributed to the volatility in grain prices. Improved weather vs strong demand.
Cocoa weather update
Ideal crop conditions (blue) for cocoa remain a bearish longer term aspect for prices. Though no new advice on my spread-sheet, we had 3-4 winning trades in 2020.
CRUDE OIL AND HEATING OIL
Crude oil and gasoline prices on Tuesday rallied sharply for a thirds straight day with crude at a 1-year nearest-futures high and gasoline at an 11-1/2 month high. Crude prices are rallying on expectations that a global crude surplus will be diminished by the middle of this year. Also, optimism that the U.S. economic recovery can gather pace as the Covid pandemic recedes is bullish for energy demand and crude prices.
A report Tuesday from the Joint Technical Committee of OPEC+ (JTC) was supportive for crude prices as the report said that global crude inventories will fall by -1.1 million bpd on average this year and that global oil stockpiles will fall back below their 5-year average by June of this year. The JTC assesses the oil market on behalf of the ministerial monitoring committee and will meet this Wednesday to assess the outlook.
Comments on Tuesday from OPEC Secretary-General Mohammad Barkindo were bullish for crude prices when he said that “OPEC is hopeful that 2021 will be a good year for overall demand.”
Crude oil prices are seeing support on hopes the U.S. economic recovery will gather steam and boost energy demand as the Covid pandemic recedes. The 7-day average of new U.S. Covid infections on Monday fell to 146,601, a 2-1/2 month low. Also, the pace of U.S. vaccinations is accelerating as 26.5 million Americans have received one or both doses of the current Covid vaccines as of Monday, more than the 26.3 million people in the U.S. that have tested positive for Covid.
Weather is supportive of heating oil futures as well.
HEATING OIL has rallied the same amount as crude oil due to lower global supplies and OPEC cuts. It is possible in coming weeks, that heating oil may begin to outperform crude oil on severe cold weather.
PLEASE CLICK ON THE IMAGE ABOVE TO SEE RECENT AND OPEN TRADE IDEAS
(There are some renewable energy stocks and a couple of commodity ETF trades that have been on there for a while, as well)
OTHER TRADE IDEAS TO BE ADDED TO SPREAD-SHEET NEXT WEEK
GRAINS. moderate confidence buying new crop wheat against short may soybean call options
Traders have been short the May $15 soybean call on my forecast of drought easing in South America, 2-3 weeks ago, from 38 cents ($1900 a contract); buy July KC wheat against it on this break as a hedge and given potential crop problems, later
NATURAL GAS. high confidence selling puts
After taking nice profits in natural gas and short put options, as I mentioned in another special report yesterday at the top of the market to take profits, look to sell the April $2.60 natural gas put. I know this is ultra-conservative but we are just trying to make $1000 here. If March is cold, then April should not get below $2.50. If there is a bearish EIA on Thursday, aggressive traders can buy natural gas if another 10 cent sell-off or so, but again, we have huge stocks and we already had the price rally I was expecting on the psychology of cold.
I cannot say by any means prices will go to $3.30-$3.50 anytime soon given such big supplies.
HEATING OIL MODERATE- HIGH CONFIDENCE BULLISH WHEN SPREADING AGAINST OTHER SECTIONS OF ENERGY COMPLEX
On cold weather and chart formation
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