Natural Gas - Big Production Drop Tightens Fundamentals

Summary

• 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.
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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 should eat that surplus away assuming production stays flat.

For natural gas bulls, this is the only way natural gas prices can move higher for longer. That, of course, is not discounting the fact that producers will likely increase capex again as prices increase, but we will save that for another day.

Overall, we think natural gas prices are bottoming and we have taken a 1/4 sized UGAZ long position.

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.