Weekly Natural Gas Storage Report: Bearish Balance Vs. Bullish Weather

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Includes: BOIL, DGAZ, KOLD, UGAZ, UNG, UNL
by: HFIR Energy
Summary

EIA reported a storage draw of 78 Bcf for the week ending Feb 8. This compares to the -90 Bcf we projected and consensus average of -85 Bcf.

For the week ending Feb. 15, we have a storage draw of -160 Bcf.

EOS is now at 1.284 Tcf.

We exited our UGAZ position early in the week, but we are now back long a half size position into the three-day weekend.

The market is fixated on the bearish balance arising from supplies, but the weather outlook remains bullish. We think April can go to $2.80.

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

EIA reported a storage draw of 78 Bcf for the week ending Feb. 8. This compares to the -90 Bcf we projected and consensus average of -85 Bcf. The -78 Bcf was much lower than the five-year average of -154 Bcf and significantly lower than last year's -194 Bcf.

Source: EIA

Next Week's Estimate

For the week ending Feb. 15, we have a storage draw of -160 Bcf. This would be compared to the five-year average draw of -145 Bcf and last year's -124 Bcf.

EOS is now at 1.284 Tcf.

Trading Position

We exited our initial long UGAZ position on Tuesday following a bearish ECMWF-EPS 12z update. The outlook showed the ridging pattern in the Southeast gravitating toward the Northeast, so we exited the position.

But the recent ECMWF-EPS models have started to show a much more constructive outlook for the Northeast, so we have taken a half-sized UGAZ position into the three-day weekend.

Bearish balance vs. bullish weather

The fundamental outlook for the natural gas market is still bearish. Why? Because total supplies continue to outpace total demand. Now casual observers would look at the natural gas storage and wonder, how can supplies be greater than demand if storage is near multi-year lows?

Well, that's because the weather factor in natural gas fundamental analysis is often ignored. By our calculation, Lower 48 production needs to be around ~84 to 85 Bcf/d vs. the ~88 Bcf/d where it's currently at. With natural gas prices trading where it is, the market is effectively saying there's still too much supplies.

Source: HFI Research

Production, however, has been flat, which is encouraging for the bulls, but the market is effectively saying, "stop growing production." We calculate that if natural gas averages $2.50/MMBtu this year, then production in the US will stagnate into year-end even with more associated gas production. But at $3/MMBtu, production is likely to grow and keep the market oversupplied.

But during winter time, weather plays a huge role in swinging prices, so right now, the market is in a battle between bearish balance and bullish weather. The weather outlook remains bullish with HDDs trending higher than the 30-year average, but prices remain low as the market tries to figure out a fair value to pin prices.

Our view is that if the bullish weather continues into early March, then April contracts should trade up to $2.80/MMBtu. But if March turns out to be warmer than normal, then we could see the multi-year support of $2.55 break. It will be in the hands of Mother Nature.

But on a technical basis, the natural gas market looks primed for a bullish move.

We like the setup here on a technical basis as well.

Overall, we think the bears make a valid point on higher supplies keeping balances bearish, but we can't ignore the bullish weather factor. We think April could move to $2.80.

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.