September 7 Natural Gas Weekly: The Patience Has Paid Off. Short Positions Closed. Long-Term Bias Is Still Bearish

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Includes: BOIL, DGAZ, FCG, GASX, GAZB, KOLD, UGAZ, UNG, UNL
by: Bluegold Research
Summary

Total demand for American natural gas is up 13.0% y-o-y to 73.2 bcf per day;

Total natural gas supply is up 12.0% y-o-y to 92.0 bcf per day;

We currently expect EIA to report an injection of 73 bcf next week;

We have closed all our short positions on Thursday;

Latest trading results and trading view are in the report (scroll down).

This report covers the week ending September 7, 2018.

TOTAL SUPPLY/DEMAND BALANCE

We estimate that aggregate demand for American natural gas (consumption + exports) totaled around 510 bcf this week ending September 7 (down 2.0% w-o-w, but up as much as 13.0% y-o-y). The deviation from the norm stayed positive and actually increased marginally from +22% to +23% (see the chart below).

According to our calculations, aggregate demand for U.S. natural gas (on a weekly basis) has been above 9-year norm since February 24, 2017. The weather conditions cooled across the country. We estimate that the number of nation-wide cooling degree-days (CDDs) dropped by 7.0% w-o-w, for the week ending September 7. However, total energy demand (measured in total degree-days) was as much as 27% above last year’s level. Seasonal trends call for a declining number of CDDs and TDDs. Natural gas consumption should hit a trough by the end of September or early October.

Total exports dropped by 9% w-o-w, mostly due to weaker LNG sales. According to Marine Traffic data, Sabine Pass and Cove Point together served at least 5 LNG tankers this week (total natural gas carrying capacity 18 bcf). In annual terms, total exports were up 19.0%.

* norm defined as simple average over the last nine years. Source: Bluegold Research

We estimate that dry gas production has been expanding in annual terms for 66 consecutive weeks now. We estimate that dry gas production will average 84.1 bcf/d in September, 84.6 bcf/d in October and 84.6 bcf/d in November. The aggregate supply of natural gas (production + imports) averaged around 92.0 bcf per day for the week ending September 7 (up 12.0% y-o-y, but mostly w-o-w).

Overall, total unadjusted supply/demand balance should be positive at around 130 bcf. The volume is some 10 bcf larger than a week ago, but is 16 bcf above 5-year average for this time of the year (see the chart below).

Note, that the total Supply-Demand Balance does not equal storage flows. Source: Bluegold Research

In the simplest of terms, and with all other things being equal, this kind of volume is bearish for natural gas prices, since it is above last year’s level and also above the historical norm. However, the market is forward-looking and this week's data is, to some extent, irrelevant for traders. The price is often a function of a 2-week weather forecast, but as we are moving into the shoulder season, other factors start to play an important role – notably, end-of-season storage outlook and winter forecast. At Bluegold Research, we provide a daily (early morning and afternoon) update on the weather forecast as well as a full update on the end-of-season storage outlook. In addition, we publish the latest results of the extended-range ECMWF model (twice per week). Consider signing up, if interested (see the link below).

LATEST TRADING RESULTS AND TRADING VIEW

Given that the weather has been getting progressively bearish for the past week or so and supply-demand balance was getting a lot looser relative to 2017, we felt confident enough holding our short positions for a protracted period of time (essentially from early-August). Last Thursday, however, we decided to finally take all the profits and close all the existing trades. The patience has paid off. September, 2018 is already the best performing month for us. See the list of the recent trades below.

Please note that returns are "unleveraged". If you trade ETNs, your equivalent returns would have been 2 or 3 times greater.

We maintain our long-term bearish bias on natgas, but a technical rebound towards 2.810 and 2.830 is very likely at this point. The market is technically oversold and the latest weather models are mostly neutral-to-bullish (consumption-wise) due to the influence of other non-degree days factors (such as "wind speeds"). CDD/TDDs are still declining, but mostly due to seasonal factors. Our End-of-withdrawal-season storage index is still above market expectations as well as above 5-year average and 2018 results. Supply-Demand balance is set to loosen substantially (vs 2017) in the weeks ahead. Therefore, we would still prefer to sell the rallies and go short at higher prices (preferably, above 2.800 per MMBtu).

Dry gas production remains very strong, but daily rate has not set a new all-time record for 13 consecutive days now. Low ng/coal spreads are spurring coal-to-gas switching, which is likely to be revised higher (because of the cheaper natgas). Indeed, should prices continue to decline, we might consider entering a quick long position (for a very short-term profit) - preferably near 2.750 or (better) near 2.730.

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.