This has been quite the rally.  Pundits are scrambling to explain it.

Some of the market talk has been about the bullish impact of Trump resuming the approval process for new LNG facilities.  Yes, that will boost demand in the long term, but stop and think for a minute: a new facility takes years to complete. These new facilities being approved will not impact demand until 2026 at the earliest.  The pundits are trying to imply that this is why the March contract has rallied 4% since the Tuesday settlement. 

But the pundits point out that some facilities are coming online now and LNG demand is up…  Yeah, but we are talking about 1 Bcf/d and we have known this was going to happen for a while.  1 Bcf/d is not huge when you consider that demand is estimated to fall this week from 146 Bcf/d to 130 Bcf/d next week as the weather warms up and heating demand falls off.

The cold is the other explanation: however, we have known for a while that it was going to be a cold week, so traders have had plenty of time to adjust their positions.  I don’t believe that this cold snap was really a surprise to the markets.

Does this mean that the market is wrong?  No, price is always right.  I’m just trying to say that I am not satisfied with the current explanations in the news. 

I think the simplest explanations are often the best. The change this week was in the forward forecast for the first week of March, which is not supposed to be cold.  So traders are looking ahead to March and thinking that maybe it will be like January and February.  ‘Recency Bias’ is the term for when traders (or anybody else) will look to the recent past to understand what is going on. For example, ‘Last winter was warm so therefore, this winter will be warm’ or ‘The market was up in January so therefore it should continue to go up.’  At this point, any shock to the market (like a colder forecast) will cause a larger rally because the market feels that the risk is to the upside.  Therefore, this rally is short-term conditions affecting market tone.  This winter has been a bit of a shock and the market is a bit spooked. 

Look at the changes from yesterday to today;

From a purely technical standpoint, yesterday we rallied to $4.000 USD/mm in March NYMEX.  Just above this round number is an obvious spot to put your stop loss order in (stop loss means “if it breaks above $4, get me out”). Therefore, the spike this morning might be the stops going off.  I don’t have any data to back this up but would be logical.

My conclusion is that we will continue on this path until the tone changes.