Investment Thesis

Given the number of variables in play, investors should expect prices to continue to remain rangebound. Risk to the downside could be applied.

Export, production, forecast models, weather pattern, demand amongst factors driving natural gas pricing

Overall, it was a quiet day on Friday with prices fluctuating at times ultimately settling lower. The front-month May futures contract, which trades on the New York Mercantile Exchange (NYMEX), settled 0.4 cents lower to $2.66, as did the June contract which settled at $2.70.

Source: Andrei Evbuoma

Trading range during Friday’s session was again very tight at only 4 cents from $2.69 to $2.65. Figure 2 below is a chart showing the price trend of NYMEX’s front-month May futures contract over the past 5 days.

Source: Investing.com

The United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, finished Tuesday slightly lower 0.77% to $23.35. Figure 3 below is a chart showing the price trend of UNG over the past week.

Source: Investing.com

The VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL) were seen down 1.93% and 1.22% to $28.46 and $20.22, respectively. Meanwhile, the VelocityShares 3x Inverse Natural Gas ETN (DGAZ) and the ProShares UltraShort Bloomberg Natural Gas ETF (KOLD) were seen up 1.75% and 0.94% to $108.56 and $22.62, respectively. Figure 4 below is a chart showing the price trend of DGAZ over the past week.

Source: Investing.com

In addition to the Energy Information Administration’s (EIA) morning storage report on Thursday, the agency also released its weekly supply/demand report. The update showed a week-to-week pullback in natural gas production to 0.8 BCF/day to 88.9 BCF. This comes after eclipsing all-time highs in production the previous two weeks. While the week-to-week production slipped, the year over year (YoY) production is high at 8.1 BCF/day. Production has been lowered due to ongoing springtime maintenance. High production and a lack of takeaway capacity has been an issue recently in the Permian Basin that was the main culprit in prices reaching all-time lows. If takeaway capacity begins to develop in the days ahead, then that will ramp up production again. This would be an additional bearish signal should that occur.

The weather pattern over the next week or so will feature a progressive (changeable) weather pattern with storm-driven bouts of warm and cool air. Beyond a week out, forecast models are mixed. The ECMWF slows down any progression in the weather pattern and maintains a warm West U.S. vs. cool East U.S, pattern in the 8-15 day. Meanwhile, the GFS continues a progressive pattern with a continuation of warm and cool air. Both models do agree that the strength of the cool air intrusions (heating demand) will not be as strong in the 10-16 day (April 21-27) as previous forecast indicated, and thus a milder trend in the 10-16 day. Figures 5 and 6 are 10-16 day 850 mb temperature anomaly maps comparing the outlook from April 11 to April 12 from the ECMWF and the GEFS models.

Source: WeatherBell

Source: WeatherBell

The figure below (Figure 7) is the Pacific North American Oscillation index with the black line being the observed values and the red lines being the ensemble forecast. The forecast indicates a neutral to positive phase over the next two weeks which supports a mild western U.S. Both the ECMWF and GEFS supports this idea of a warmer western U.S. as we dive deeper into the two-week time frame.

Source: NOAA

Final Trading Thoughts – More sideways trading but additional downside could be applied

The balance of LNG export data, natural gas production, a variable weather pattern, mixed model signals, and demand has and will continue to create a rangebound trading scenario in the near term. It would take one or more of these variables to break out or for the combination of all or most variables to move prices consistently higher or lower. I’m expecting continued contraction of the storage deficit in the coming weeks due to lackluster demand. Looking back at recent trends, forecast models have over played the blocking pattern and resultant cold with latest model updates walking back the strength of the cool air. This, combined with strong April sun especially as we approach later April, suggests that demand will be hard to draw and thus will be on the light side meaning that injection will get stronger. My price range over the next week will be $2.55-$2.80 for the front-month May futures contract. UNG should trade between $21.00 and $24.60.

Figure 8 below is my natural gas inventory withdrawal projections over the next 4 weeks vs. the 5-year average and the total 4-week projected level vs. the 5-year average.

Figure 8: Natural Gas Weekly Storage Injection/Withdrawal Projections over the next 4 weeks.

Source: Andrei Evbuoma

Figure 9 below is the observed or current Nat Gas inventory level and my forecast levels over the next 4 weeks vs. the 5-year average.

Figure 9: Observed and 4-week projected natural gas inventory levels.

Source: Andrei Evbuoma

Finally, figure 10 below is the current storage deficit level and my 4-week projected deficit levels.

Figure 10: Observed and 4-week projected natural gas storage deficit.

Source: Andrei Evbuoma

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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2019-04-13