Seeking Alpha

Natural Gas: Market Shrugs Off Bullish Storage Report; Prices Fall More Than 1% On Decreased Worries Over Demand

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Includes: BOIL, DGAZ, GAZB, KOLD, UGAZ, UNG, UNL
by: Andrei Evbuoma
Summary

Market participants largely ignore Thursday morning's inventory report, dropping more than 1%.

Cooler-than-normal weather is expected over the next two weeks, but demand should be on the lighter side and shouldn't impact injection season much.

Natural gas should continue to trade within a range, but downside risk could be applied given strong production and overall stronger-than-normal projected build in the weeks ahead.

Investment Thesis

Expect for natural gas to continue to be range-bound between $2.50 and $2.80. More downside risk could be applied given Thursday's market reaction and the decreased concern over demand despite cooler-than-normal weather over the next two weeks.

Market shrugs off inventory report; cooler weather expected over the next two weeks not as concerning as it once was

The Energy Information Administration (EIA) released its weekly storage data Thursday morning. The report revealed a +25 bcf build in storage, slightly less than market expectations of a +29 bcf build. This brought inventory levels up to 1,155 bcf from 1,130 the week prior. It was the South Central region again leading the way, taking most of the build of +21 bcf.

(Source: EIA)

The front-month May futures contract settling down 1.07%, or 2.9 cents, lower to $2.67, and the June contract settling down 0.88%, or 2.4 cents, to $2.72. Figure 2 below is a chart showing the price trend of NYMEX's front-month May futures contract over the past 5 days.

(Source: Investing.com)

The United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, finished Thursday lower 0.97% to $23.52. Figure 3 below is a chart showing the price trend of UNG over the past week.

(Source: Investing.com)

The VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL) were seen down 2.78% and 1.87% to $29.02 and $20.47, respectively. Meanwhile, the VelocityShares 3x Inverse Natural Gas ETN (DGAZ) and the ProShares UltraShort Bloomberg Natural Gas ETF (KOLD) were seen up 2.93% and 1.93% to $106.69 and $22.41, respectively. Figure 4 below is a chart showing the price trend of DGAZ over the past month.

(Source: Investing.com)

Thursday's market reaction revealed that despite the less-than-expected results, demand is not going to be of much concern given strong production, and cool weather not being as effective in driving demand given the time of season and source of cool air. Money managers expect for inventory build to be stronger than average over the next few weeks despite any cool weather.

Forecast models continue to indicate a variable weather pattern over the next two weeks, averaging cooler-than-normal across the western two-thirds of the country during the first week and shifting to the eastern two-thirds of the country during the second week. Overall, cooler-than-normal weather will be centered over the central U.S. Demand for heat, however, will be on the light side. That said, injection over the next few weeks should average above normal or above the 5-year average. Figure 5 below is the 0-5, 5-10, and 10-15 day 850 mb temperature anomaly maps from the 12z ECMWF.

(Source: WeatherBELL)

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.