Colder Forecasts and Short-Covering Drive the Rally

Traders are blaming the price surge on colder U.S. weather forecasts and short-covering as key factors behind the move. Attention now turns to Thursday’s U.S. government storage report and fresh demand figures due in late January.

Weekend Forecast Shift Triggers Aggressive Buying

After hitting a multi-month low last week, prices consolidated for a couple of days ahead of the weekend. However, a gap higher opening Sunday night set in motion the current price spike. The initial move was fueled by a shift in the 10-15 day forecast over the weekend. The sudden shift is driving traders to rapidly adjust heating demand forecasts, catching some bearish bets off guard.

Front-Month Squeeze Amplifies Price Action

The rally comes about a week before the near-month futures rollover from the February to March contract. The front or prompt month is crucial because that is where the physical squeeze hits first. When the front-month contract is set off by weather, prices jump because short-sellers, caught on the wrong side of the trade, will pay almost anything to get out of their positions or risk turning winning trades into losing ones. Typically, utilities and industrial buyers, who haven’t hedged their purchases, often face sharp price increases, and are forced to pay up.

Sharpest Gain Since January 2022

On Tuesday, for example, the jump in February futures was its sharpest gain since January 2022. Traders pointed toward short-covering as the main reason for the price spike after U.S. CFTC data revealed speculative short positions hitting their highest level since November 2024.

Demand Surge and Freeze-Off Risks Loom

Not only is total demand, including exports, set to rise next week with some models showing an increase of more than 200 billion cubic feet in implied demand since Friday, but with more cold weather approaching, Energy Intelligence is warning of potential freeze-off risks. This could produce supply disruptions, new price spikes and potential power outages.

Technical Outlook: Uptrend Confirmed with Key Breakouts