Weekly Natural Gas Recap - Mother Nature Comes To The Rescue

Summary

• Natural gas finished the week lower by 1.17%.
• Weather models flipped 180 on Friday to show a colder than normal second half of April; this reduces the bearish fundamental pressure on the market.
• Both the bull and bear case make compelling points, and because the facts are mixed, mother nature will once again dominate the trading direction over the summer.
• The latest monthly outlook from CFS shows neutral to bullish weather from May to September.

Welcome to the weekly natural gas recap edition of Natural Gas Daily!

Natural gas finished the week lower by 1.17%.

Last week in our weekly natural gas recap, we said that bearish pressure was building. After falling to a low of $2.65/MMBtu, mother nature swooped in Friday morning's weather model update to show a 180 flip from the bearish weather in the second half of April to bullish.

We originally initiated a short UGAZ position on Wednesday, but closed out the trade on Friday for a gain of 4.47% after we noticed the sharp HDD revision higher.

For natural gas bulls, 2018 has been somewhat of a mixed year. Fundamentals have deteriorated via higher than expected Lower 48 production growth thanks to new takeaway capacity in Northeast and higher Permian associated gas production, but the weather trends have also been very supportive suppressing the bearish fundamentals.

As we wrote in our Friday NGD, if the second half of April remains colder than normal, then natural gas storage will exit at a deficit of more than 800 Bcf to last year. This will push higher the production needed during the injection season to ~81.5 Bcf/d, and if the weather continues to trend bullish, then the figure increases to ~83.5 to ~84 Bcf/d.

In our preliminary forecast for storage at the end of injection season, we have an estimate of ~3.65 Tcf, and this could be lower if the weather continues to trend bullish.

The set-up in 2018 is not going to be as straightforward as we were in 2017. In 2017, we had storage coming in higher than the 5-year average, but supplies were materially lower as a lack of takeaway capacity and low gas prices the previous year suppressed production growth. But this year, we sort of have the opposite set-up of 2017. Storage is significantly lower than the 5-year average and last year, but production is materially higher y-o-y.

But given the low base of where storage is today, and if mother nature continues to lend a supportive hand, while baseline power burn demand increases y-o-y, one could make an argument that natural gas prices could very well average closer to $3/MMBtu during the summer months.

And the latest CFS monthly outlook shows neutral to bullish weather for May to September:

Source: StormVistaWxModels.com

Nonetheless, we think both camps, the bulls and bears, make very compelling arguments on where gas prices should trade, but the facts remain mixed. On one hand, bears are right that Lower 48 production growth will likely continue for the rest of 2018, but bulls are also right that with storage so low, a higher production level is needed just to balance storage. So for us, it looks like it will come down to mother nature once again as a bullish weather set-up could very well push prices higher than expectations, and a bearish weather set-up could favor the bears a bit more.

For traders, this could be a very attractive summer gas trading session, because if prices fluctuate meaningfully based on weather models again, it leaves informed traders with the edge to make money. It looks like mother nature will once again dictate the playing field.

Thank you for reading this article. For readers that find value in our public natural gas articles, we know you will find more value in our premium service. HFI Research Natural Gas is the highest ranked natural gas service on Seeking Alpha. We are currently the #1 most read author in commodities. If you are interested in what you will receive from the service, please see here for more info.

We hope to see you join the community!

Analyst’s 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.