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Natural Gas - Big Production Drop Tightens Fundamentals

May 07, 2019 4:42 PM ETUNG, UGAZF, DGAZ, BOIL, KOLD, UNL, GAZ17 Comments


  • We expect a +89 Bcf change in the storage report for the week ended May 3.
  • A storage report of +89 Bcf would be in line with last year's +89 Bcf and higher than the 5-year average of +72 Bcf.
  • Lower 48 production dropped ~2 Bcf/d from yesterday with the production drop widespread.
  • It's still early to call it a trend, but this is contrary to the increase we forecasted.
  • Lower production will equate to a higher fair value over the summer.
  • Looking for a community to discuss ideas with? HFI Research Natural Gas features a chat room of like-minded investors sharing investing ideas and strategies. Get started today »

Welcome to the tighter balance edition of Natural Gas Daily!

Housekeeping item first.

We expect a +89 Bcf change in the storage report for the week ended May 3. A storage report of +89 Bcf would be in line with last year's +89 Bcf and higher than the 5-year average of +72 Bcf.

Trading Position

We remain long UGAZ, but it's only a quarter-sized position.

Big production drop tightens fundamental balances...

The big news today was the big production drop observed in the Lower 48.

Source: PointLogic, HFI Research

The production drop was widespread so it wasn't one particularly outage that explained the production decline. While the volumes are likely to be assessed a bit higher in the coming days, it is a bit surprising considering we had production increasing to ~91 Bcf/d by month-end. That looks increasingly unlikely now.

A tighter market balance over the Summer will require lower production, low natural gas prices to boost power demand, and warmer than normal weather. For the time being, ECMWF-EPS long-range showed a rather bearish outlook for June, so the next two tailwinds will have to be low prices and lower production.

Natural gas prices are already at a level where they are very supportive of much higher power burn, so if production does hold around 88 Bcf/d, then it will equate to a much higher fair value over the Summer.

For the time being, it's still early to call it a new trend, but production discipline has been a key theme in shale producers' earnings call. We still expect production to increase into year-end, but we are watching the daily figures closely. If we do manage to exit year-end at ~88 or ~89 Bcf/d, then fundamental balances for 2020 will be very tight considering that the surplus in the market today is ~4.6 Bcf/d. LNG exports along with other demand variables

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Analyst’s 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.

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