Prices Fall In The Face Of Bullish Fundamental Developments

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Includes: BOIL, DCNG, DGAZ, GAZ, GAZB, KOLD, UGAZ, UNG, UNL
by: HFIR

Summary

Fundamentals have been trending bullish.

But natural gas prices are selling off.

We attribute the latest weak price action to further position liquidation from money managers.

Welcome to the “what the heck” edition of Natural Gas Daily!

July contracts fell just less than 1% today to trade around $2.94/MMBtu. The sell-off came even though overnight weather forecasts were turning more bullish for the next 15 days. Traders are puzzled by the latest price action, but we have a good explanation for this.

Remember that throughout May, fundamentals weren’t exactly turning out to be bullish at all. Weather forecasts were underwhelming and EIA reported multiple weeks of above consensus injection figures, but natural gas prices didn’t budge and continued higher as money managers piled into long positions.

What’s happening now is the exact opposite of the phenomenon we saw in May.

Fundamentals are trending bullish with power burn averaging above 32 Bcf/d, and US gas production faltering back to 71 Bcf/d. Yet, prices couldn’t seem to hold the $3/MMBtu level despite two back to back bullish weather forecast revisions.

We think there’s additional position liquidation that needs to take place before prices move higher. We received several questions asking, “If fundamentals are bullish, why are people selling?”

Fundamentals weren’t “that bullish” when the specs decided to get record net-long. The fundamental supported price for May for example was $3.10/MMBtu, but traders bid prices up to $3.30/MMBtu.

Just like how July contracts are supported by a fundamental price of $3.25/MMBtu, but prices today are trading around $2.94/MMBtu.

When price falls below the “fundamental supported price,” power burn increases and results in a tighter daily balance, which would push injections lower and push prices higher.

This is just part of the position liquidation process the market needs to go through. As specs liquidate additional positions, we will watch price action and trader commentary for when things will start to flip.

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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.