Natural Gas Prices Finish Down More Than 1% Monday On Continued Mild Weather, Weak Demand Expectations

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

Natural gas futures see a 4-cent contraction Monday as bulls continue to struggle to find a strong catalyst.

Pacific Northwest to draw in some early season cooling demand with record to near record-breaking temperatures; highs expected to reach 80s, possibly 90s.

Mild weather with weak demand to be the theme across much of the country for the better part of the next two weeks.

11-15 day period still mild, though we could see temperatures moderate/warm to near seasonable levels in central and eastern U.S.

Investment Thesis

There's just not a lot out there right now to support a rally. Downside risk should continue for natural gas prices despite some near-term cooling demand across the Northwest U.S.

Weather pattern to continue to support the bears; stronger than normal injections expected in the weeks ahead

The front-month June natural gas futures contract finished Monday down 1.60%, or 4.3 cents (-$0.043), to $2.524. Meanwhile, the July contract traded 4 cents (-$0.040) lower to $2.560, while the August contract traded 3.8 cents lower (-$0.038) at $2.578. Figure 1 below is a chart depicting the price trend of the new front-month June contract over the past 24 hours.

Source: Investing.com

The United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, finished Monday lower 1.26% at $21.91.

UNG's leveraged exposure ETFs, the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), traded lower 3.73% and 2.46% at $23.23 and $17.45, respectively. Meanwhile, UNG's high-beta leveraged inverse ETFs, the VelocityShares 3x Inverse Natural Gas ETN (DGAZ) and the ProShares UltraShort Bloomberg Natural Gas ETF (KOLD), traded higher 3.78% and 2.64% at $129.54 and $25.99, respectively.

In the near term, the weather pattern will feature a split-flow regime highlighted by a developing strong upper level ridge that will build just off the west coast of Canada. This will result in unseasonably warm temperatures across western Canada and the Pacific Northwest. Temperature anomalies are expected to range 10-20 degrees above average with near to record-breaking temperatures. This region is about the only region nationally that will be drawing meaningful cooling demand as high temperatures are expected to climb into the 80s with some 90s possible. Coinciding with this upper level feature will be two areas of upper level troughs cyclonic flow. One will be underneath the upper level ridge across the Southwest U.S. while a second area will be found further downstream across central/eastern Canada. This will result in cooler than normal temperatures from central/eastern Canada southward into the central U.S. and into the Southwest U.S. Figure 2 below are temperature anomaly maps from the 12z GEFS in the 0-5 day (May 6-11) and 6-11 day (May 12-17) time frames.

Source: WeatherBell

Over the next 10-11 days, the Pacific Northwest or the NWPP power market region will be the main area drawing some meaningful cooling demand. Elsewhere, expect very mild/bearish demand with normal to cooler than normal anomalies or comfortable temperatures.

In the 11-15 day time frame, forecast models fade out the upper level troughing over the eastern parts of North America. Meanwhile, the models emphasize a strong upper level trough or cyclone taking position in the Gulf of Alaska region extending southward into the Southwest U.S. with downstream higher heights across the central and eastern U.S. (very El Nino-like). This could be a pattern that results in storms dropping out of the Gulf of Alaska region into the Southwest U.S., and traveling across the southern U.S. brings storms undercutting higher heights to the north. During this time period, temperatures could begin to moderate to near normal levels at least across the central and eastern U.S. From a trading and price standpoint, expect continued weak demand levels and an overall mild weather pattern during this time frame. In Figure 3 below are upper level pattern comparisons from the 12z GFS, 12z ECMWF, and 12z CMC ensembles in the 10-16 day time frame or from May 16-22.

Source: WeatherBell

Final Trading Thoughts

There could be some hope for the bulls in a potential pattern change late May/early June. But until we begin to see strong signs of heat with heat ridges being evident in the forecast models, downside risk will continue to outweigh upside potential. Seasonal buying and near term cooling demand from the Northwest U.S. could help to slow the selling pressure. My price range will be $2.35-2.75 for the week for the front-month June futures contract with UNG trading between $19.00 and $24.00.

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.