Natural gas futures and related ETFs jumped Tuesday on improving fundamentals as extended cold trends could drive up heating demand and producers dial back production in face of depressed prices.

The United States Natural Gas Fund (NYSEArca: UNG) increased 2.6% on Tuesday with Nymex natural gas futures up 6.2% to around $2.60 per million British thermal units.

According to NatGasWeather, all overnight models were pointing to colder weather ahead, especially the American Global Forecast System (GFS), which added more than 15 heating degree days (HDD), Natural Gas Intelligence reports.

“The European model trended only slightly further colder overnight by 2-3 HDDs versus Monday afternoon’s run but up an impressive 18 HDDs versus its run 24 hours ago,” NatGasWeather said. The latest data showed a “strong cold shot across the northern U.S. late this week and this weekend” followed by “a brief break around Nov. 5-6.” Additional cold weather is expected from Nov. 7-11.

Market watchers also noted that a big build up in short positions could further add to pricing volatility this week as weather forecasts force the shorts to exit positions and buy into the upside runs.

In order for weather-driven support to translate into “extended strength”, it will likely require “winter forecasts supporting demand into December,” Enverus analysts said. “Should the current forecast trend continue to support heating demand, there is the potential for some volatility as the speculative short position is forced to cover.”

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Meanwhile, on the supply side, shale oil producers that have inundated the market are cutting back on drilling after years of depressed prices weakened their bottom line, the Wall Street Journal reports.

A reduction in shale oil production could be good news for the natgas market since natural gas is also a by-product in shale oil drilling.

“Even with higher prices, I think there are a lot of shareholders out there, including a lot of shareholders around this table, that would like to see value come back to them as opposed to just see growth for the sake of growth,” Cabot Chief Executive Dan O. Dinges told investors last week.

For more information on the natgas market, visit our natural gas category.

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