Welcome to the messy bottom edition of Natural Gas Daily!
Hotter weather over the weekend combined with no increase in Lower 48 production propelled natural gas prices up by ~10%. Last week, we noted that following the closing of the August LNG export trading cycle, September should see very little cancellation due to much better economics. This is true for LNG exports all the way up to ~$2.30/MMBtu or 31% higher than today’s price. This means US natural gas prices will be dominated by US-related gas fundamentals, which means if the weather turns hot, prices will rise.
But the title of this article is a messy bottom because, like any bottoming market pattern, they are usually messy. Short-sellers get wiped out on days like today following a ridiculous surge in price, while sideline bulls get tempted to chase the rally.
It’s times like this that one needs to be particularly cautious of the landscape for natural gas. Has anything really changed since last Friday? Are the storage concerns for the US completely eliminated?
The answer to both questions is no, so the bottom is still taking its shape and form and readers should be aware to call this an absolute bottom just yet.
Now looking at the fundamentals, things are going to be getting better.
Storage build concerns should be somewhat alleviated starting next week once the fundamental balances start to reflect lower storage builds in the coming weeks. But building at or just below the 5-year average is not enough for this market. Remember that our article on Friday noted that if US gas storage builds exactly at the 5-year average, we would, in fact, hit operational tank top. This is a scenario the market does not even want to imagine as it could send gas prices deeply in the negative in some regions.
So to avoid all this altogether, the market is going to keep prices suppressed until it’s sure that we won’t hit tank top. This will likely require a few more weather reports confirming a much hotter than normal July.
Traders we survey believe that if the concerns do alleviate, we should see August contracts trade up to $1.90/MMBtu.
The other thing that has the market feeling a bit more relieved is the fact that with associated gas production returning, we are still at the bottom of the production range. Note that we said we need to see sub ~88 Bcf/d to start getting excited and with a new nomination cycle just 2-days away, the July production reading will be very important for where prices go.
For July, we don’t even need to see a decrease to be bullish. If production is still at ~88 Bcf/d, traders will start getting bullish because that’s with associated gas production returning online.
As a result, the key ingredients for higher prices are still hotter weather and lower production, so if these two variables continue to trend in the same direction, expect us to turn into bulls.
Last thing, due to illiquidity concerns on BOIL/KOLD, we will be using 3x leverage on trading UNG. This will require the use of margin, so please be careful if you do follow us into these trades and be sure to use stop-losses.
For readers interested in following natural gas fundamentals, HFI Research Natural Gas premium provides:
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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.