Natural Gas Prices Edge Higher Tuesday Amid A Combination Of Lower Production And Increased Near-Term Demand

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

Strong upper level East Pacific ridge to result in strong cooling demand with record to near record-breaking temperatures across the Northwest U.S. (NWPP); highs expected in the 80s.

Decline in natural gas production drove prices higher Tuesday.

Weather pattern overall to remain mostly bearish with triple-digit injections expected in the weeks ahead.

Investment Thesis

Today's move to the upside was due to a combination of lower production, early-season cooling demand across the Northwest U.S., and mixed signals but slight increase in demand in the 10-16 day potentially cutting into injection. Overall, the sentiment remains bearish until we begin to see the emergence of sustained hot weather developing across the major gas-consumption regions.

Lower production, Northwest U.S. near-term cooling demand, and increased demand in the medium range provided support to the upside in Tuesday's trading session

The front-month June natural gas futures contract finished Tuesday up 0.69%, or 1.3 cents ($0.013), to $2.537. Meanwhile, the July contract added 1.3 cents ($0.013) to $2.573, while the August contract added 1.5 cents ($0.015) to $2.593. 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 higher 1.33% and 1.09% at $23.54 and $17.64, 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 lower 1.54% and 1.08% at $127.54 and $25.71, respectively.

The decline in natural gas production gave upside support for prices on Tuesday. However, given the mild weather pattern expected over at least the next two weeks and strong triple-digit injections in the coming weeks, the sentiment overall still remains bearish.

The national weather is still being influenced by a large scale -AO, -NAO blocking pattern.

Source: NOAA

This is resulting in a warm Arctic, cool Canada/U.S. sequence. While higher heights and warmer temperatures will reside over the higher latitudes and the Arctic, there will be two prominent upper-level troughing features that will continue to bring the influence of cooler air masses and/or stormy weather. One area of upper-level troughing will be located from under Greenland to the northeastern sections of North America (eastern Canada/Northeast U.S.). A second area of troughing will be located over the southern Rockies and the Southwest U.S. This trough will undercut an upper-level ridge currently located over the northeastern Pacific Ocean/Northwest U.S./Western Canada, resulting in a split-flow pattern with a northern branch jet stream and a second jet stream across the southern U.S. This upper-level low will produce cooler and stormy weather across the Desert Southwest with impulses in the form of storm systems associated with showers and storms ejecting eastward across the southern U.S. All of this will take place between now and the next 10 days or so. The northern jet stream will not be as active as the southern. Because of that, the northern sections of the nation will be drier but still experiencing chilly temperatures. In terms of demand, this will result in weak demand overall with comfortable temperatures across many areas of the nation and cooling demand across the south being limited.

Forecast models in the 10-16 day are mixed but still indicate a mild/bearish weather pattern.

Source: WeatherBell

The -AO and -NAO teleconnections are still in play as well as persistent troughing over the northeastern parts of North America and the Southwest U.S. The medium range models do hint around at temperatures moderating, but as long as these other weather features are in play, it will be difficult for any strong warming across the major gas consumption regions to take place.

Final Trading Thoughts

There are still no indications of any heat ridges developing over the next couple of weeks in the forecast models. Additionally, the AO and NAO are solidly in negative phases with no sign of flipping. Given this, demand will remain weak and injection strong in the coming weeks. This May, in fact, could be one of the strongest injection Mays on record, a stark difference with last year's very warm May that yielded near-record cooling demand. Bears are still in the driver seat here with downside risk outweighing upside potential. 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.

Stay Tuned For More Updates!

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.