Welcome to the cold February edition of Natural Gas Daily!
A housekeeping item first.
We expect a -90 Bcf change in the storage report for the week ended Jan 11. A storage report of -90 Bcf would compare with -183 Bcf last year and -203 Bcf for the five-year average.
What would a cold February do to natural gas prices?
Natural gas prices soared yesterday, probably a little too much, but the market is now starting to price in the bullish weather we talked about. And of course, the market went from expecting the rest of this winter to being warmer than normal to now wondering what happens if the rest of February remains colder than normal.
We saw that with the price action around 6 PM EST yesterday when the ECMWF-EPS long-range came out and prices went up almost ~2% on the back of it. As you can probably guess from the price move, the long-range was bullish and the model breakdown suggests that the rest of February could be colder than normal. CWG also mentioned this in this tweet:
But like all things weather, nothing is certain. The key appears to be the ridging pattern in Alaska and Greenland. The cluster breakdown suggests that both need to remain in place in order for there to be a durable sustained cold throughout February.
In our morning NGF update today (exclusive to subscribers), we laid out the following scenarios:
- For March to remain at $3.20/MMBtu, the current cold outlook needs to play out.
- For March to move to $3.50/MMBtu, the current cold outlook needs to continue into February.
- For March to move to $3.75+/MMBtu, the intensity of the cold needs to increase AND the duration needs to extend into February.
- For March to move to $4/MMBtu, we need the intensity to be severe, the duration to extend into February, AND the certainty to be high.
As you can see, on a probabilistic basis and for trading purposes, it's favorable risk/reward to bet on a price move to $3.50/MMBtu for March, which is ~10% move from here.
For price moves up after that, the bulls would need an intense cold + a durable one. And if you follow weather models closely, these things can change like the mood of a teenager, so it's better to be safe than sorry.
Our view is that if February turns out to be intensely cold and long in duration, March could eclipse $4, but you won't get that price spike to $5 or higher. Part of the reason for that is because Lower 48 production remains too high and storage is not in an Armageddon scenario. Now if March's weather outlook turns out to be another cold one, then we will have to reassess. But our view right now is that a price spike to $5+ is unlikely given the bearish first half of January.
For us, we remain long UGAZ. We are watching the daily models closely to see if the cold is sustainable. Our positioning will change when the weather model changes.
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Disclosure: I am/we are long UGAZ. 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.