Investment Thesis

Colder changes coming to the Midwest and East U.S. (October 14-18) could at best keep prices within a range, but because the cold will be transient and not strong enough to generate strong heating demand, downside risk will continue to outweigh upside potential. Strong production and above-average injections in the weeks ahead are also supporting catalysts for the bears.

November contract leads futures market lower on Tuesday with weather, supply/demand balance, and Thursday’s EIA inventory report weighing

On Tuesday, the new front-month November natural gas futures contract settled lower, down 0.58% or 1.5 cents ($0.015) to $2.288/MMBtu. Further down the strip, the December contract settled down 0.9 cents ($0.009) to $2.491/MMBtu, while the January contract settled down 0.7 cents ($0.007) to $2.623/MMBtu.

Figure 1 below is a chart depicting the price trend of the front-month November contract over the past week.

Source: Investing.com

On Tuesday, the United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, finished lower 0.61% to $19.61.

UNG’s leveraged exposure ETFs, the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), were seen lower by 1.99% and 1.22% at $13.82 and $12.43, respectively. Meanwhile, UNG’s high-beta leveraged inverse ETFs, the VelocityShares 3x Inverse Natural Gas ETN (DGAZ) and the ProShares UltraShort Bloomberg Natural Gas ETF (KOLD), were seen higher by 2.25% and 0.97% at $140.25 and $30.13, respectively.

Major Autumn storm system to bring record cold, heavy snow, and wind to the Rockies, Plains, and Upper Midwest; pattern over next couple of weeks can be described as changeable with bouts of warm and cool, but mostly bearish across the Midwest and Northeast

A significant change to the weather pattern is expected to take place over the next few days as the pattern will become more amplified with a deepening upper trough over the western U.S. and an upper-level ridge downstream over the eastern U.S.

Over the next 5 days, a second, more potent upper-level trough (currently over western Canada) from Alaska will deepen/strengthen as it quickly moves southward through the western half of the country, first across the Northwest U.S., the Rockies, into the Plains through the end of this week, and then eastward across the Plains/Midwest/Great Lakes this weekend.

This upper-level feature will be associated with a vigorous Autumn storm system that will bring another re-inforcing shot of unseasonably cold temperatures (20-40F degrees below average) across the western half of the country along with heavy snow and high winds across the Rockies, parts of the Pacific Northwest, as well as the northern and north-central Plains (Dakotas and Nebraska), and Upper Midwest (western Minnesota) through Friday.

Figure 2 below is a map from the 18z GFS ensemble depicting a blast of Arctic air behind a strong cold front over the Rockies and Plains in the 2-3 day (October 10-11) time frame.

Source: WeatherBell

Some record cold values are possible. Winter storm watches and warnings have been hoisted for sections of Montana, Wyoming, the Dakotas, Nebraska, and Minnesota. The cold will moderate some as it shifts eastward across towards the Midwest through next weekend. Enough cold will wrap around the backside of this storm system to bring the first snows across much of the Dakotas, Minnesota, and northern Wisconsin this weekend as it lifts northeastward towards Canada.

Figure 3 below is a map from the 0z GFS model depicting the 5-day projected total snow amounts by Sunday, October 13, across the Northern Plains and Upper Midwest.

Source: WeatherBell

Figure 4 below is a map from the 0z GFS model depicting this strong Autumn storm system’s wind field on Saturday, October 12, extending from the Northern Plains, to the Midwest/Great Lakes to south-southeastern Canada.

Source: WeatherBell

Meanwhile, across the eastern half of the country, through late week, gradual warming will take place under the influence of upper-level ridging and ahead of a strong cold front. Things thereafter (by this coming weekend) will turn colder, first across the Midwest U.S. over the weekend, and then across the East U.S. early next week as the upper-level trough ejects out of the Plains. All signs point to the first vigorous autumn storm system impacting the Midwest U.S. next weekend with wind, rain, and the potential for storms. Locally heavy rainfall is possible from the south-central Plains to the Midwest as this powerful storm system will draw in an enhanced moisture return flow from the Gulf of Mexico.

While this offers a healthy shot of below normal temperatures through early next week, the bulk of the cold during the next 5 days will be focused over the interior (less populated) parts of the country.

Figure 5 below is a map from the 18z GFS ensemble depicting the 1-6 day (October 9-14) temperature pattern.

Source: WeatherBell

In the 6-11 day time frame, upper-level troughing will develop and linger over the northern U.S. (mainly the Great Lakes and the Northeast U.S.) giving way to a cold northern U.S. vs. a mild southern U.S.

Figure 6 below is a map from the 18z GFS ensemble depicting the 5-10 day (October 13-18) temperature pattern.

Source: WeatherBell

The weather pattern will become more amplified again in the 11-16 day time period with yet another upper-level trough/colder temperatures dropping southward into the western U.S. This will result in temperatures quickly rebounding October 18-23 across the Midwest and East U.S. as downstream ridging develops over the eastern half of the country. Ultimately, this will result in a cold West U.S. vs. warm East U.S. (West U.S. trough/East U.S. ridge).

Figure 7 below is a map from the 18z GFS ensemble depicting the 11-16 day (October 19-24) temperature pattern.

Source: WeatherBell

As for the 6-15 day time frame, demand will be elevated from October 14-18 with cooler-than-average temperatures across the northern U.S. The pattern then returns bearish in the October 19-24 time period with warmth returning across the Midwest and Northeast U.S.

Ultimately, this will continue to support above-average, triple-digit injection over the next few weeks at least.

According to analysts at Powerhouse, the average rate of injection into storage is 28% higher than the five-year average thus far this injection season.

Meanwhile, the multitude of headwinds and the overall bearish state of natural gas in the near term reflects the latest drilling activity. According to Baker Hughes (NYSE:BHGE), U.S. rig count continues to drop week after week dropping by another 5 last week to 855. Total declines since the beginning of this year have dropped 220 rigs or by 20.5%. Of the total declines, natural gas rigs have decreased by 54 or 27.3%.

Final Trading Thoughts

Despite the fact that cold wintry weather is expected across sections of the northern U.S. and sections of the western U.S. over the next 10 days, the coldest temperatures that could make a difference in terms of demand will be confined mainly to areas of very low population densities. Additionally, the cold is not expected to persist (particularly across the Midwest and Northeast U.S.). Because of that, demand will remain relatively weak and non-threatening to natural gas bears. This will support the continuation of above-average, triple-digit natural gas injections over at least the next few weeks. Therefore, upside potential will remain limited as downside risk outweighs. At most, the coming colder air mass will help to keep prices within a range.

Expect a price range between $2.10 and $2.40 over the next week for the front-month November futures contract. UNG will trade between $16.00 and $21.00.

Stay tuned for more updates!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-10-09