Natural Gas: Expect Rangebound Trading With Heat Risks, Injection, And LNG Export Growth Concerns In Focus

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

First heat event of the season looms in the 6-11 day, possibly beyond with the southern U.S. in the crosshairs.

A -NAO high latitude block will keep the Northeast U.S. away from the very warm to hot air mass.

Triple digit injections expected in the weeks ahead though not as strong as initially anticipated with increased cooling demand.

Thursday's EIA storage build expected to be a bearish 106 BCF.

U.S.-China trade war could cause some disruptions to LNG export growth.

Investment Thesis

The combination of above average demand/increased cooling demand and above average injections expected in the weeks ahead should keep prices rangebound.

The front-month June natural gas futures contract finished Wednesday down 1.58% or 5.8 cents ($0.058) to $2.601. The July contract decreased 5.5 cents ($0.055) to $2.634, while the August contract lost 5.4 cents ($0.054) to $2.651. Figure 1 below is a chart depicting the price trend of the front-month June contract over the past 24 hours.

(Source: Investing.com)

Figure 2 below is a graph depicting the current natural gas contract prices over the next seven months.

(Source: Andrei Evbuoma)

The United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, was seen lower 1.74% to $22.56.

UNG's leveraged exposure ETFs, the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), traded lower 4.95% and 3.20% at $25.16 and $18.47, 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 4.88% and 3.13% at $117.81 and $24.40, respectively.

Highly amplified jet stream pattern will bring increased heat risk/CDDS across the southeastern US (southern East PJM and southern MISO); -NAO high latitude block will keep heat away from the Northeast US

We are in the midst of a large scale weather pattern change. By late this week and over the weekend, broad upper cyclonic flow (upper level troughing) will develop over the western U.S. with downstream upper anticyclonic (upper level ridging) developing over the eastern half of the nation. These two features will bring cool, unsettled (wet) weather across the western U.S., and warmer, more humid conditions to the eastern half of the nation. Because we're still under the influence of a persistent, high latitude blocking pattern highlighted by a -NAO, the Northeast U.S. will be cut off from the very warm and humid weather. This will likely set up a sharp demarcation between the cooler air over the Northeast U.S. and the warm/humid air mass from the Mid-Atlantic and points south. In the middle of this two upper level weather features, will be an active storm track that will develop over the central U.S. This will bring numerous rounds of showers and thunderstorms to the High Plains/western Midwest. Areas across the central and southern U.S. that are rain-free will have the potential for temperatures to climb into the 80s.

Figure 3 is a depiction of the current temperatures nationally. A welcome sight for many with widespread 70s and 80s showing up across the central and southern U.S.

(Source: Mesonet)

In the 6-11 day time frame, increased heat risk and cooling demand will be applied particularly across the southern U.S. as upper level ridging intensifies. Forecast models have consistently been advertising 588-591 dm geo-potential heights, indicative of a heat dome/strong heat ridge over the Southeast U.S. during this time frame. With this feature overhead, conditions are likely to be dry. Peak days over the Southeast U.S. will see daytime high temperatures easily climbing into the 90s with higher heat indices. A frontal boundary will be draped across the Plains/Midwest/Mid-Atlantic along the periphery of this heat dome during this time frame. Because of that, showers and thunderstorms will be developing/roaming these regions potentially limiting max temperature/heat potential. That said, based off of the latest forecast runs, high temperatures in the upper 80s/low 90s could occur as far north along a line from Lincoln, IL (central IL) to Washington DC on peak days. Placement of the jet stream/baroclinic zone/frontal boundary will be key. Power markets potentially subject to heat includes southern East PJM and southern MISO.

Figure 4 are maps from the 12z ECMWF showing on the left the 9-10 day upper level pattern, and on the right, the 9-10 day temperature pattern it represents.

(Source: WeatherBell)

Figure 5 below is a map from the 18z GEFS depicting the 6-11 day upper level pattern.

(Source: WeatherBell)

The 11-16 day signals a continuation of this pattern cool West U.S. vs. warm to hot central, southern, eastern U.S. With that, similar risks in the 6-11 day can be applied to this time frame.

Figure 6 below are jet stream/upper level pattern comparisons from the 18z GFS, 12z ECMWF, and 12z CMC ensembles in the 11-16 day time frame, or from May 25-31.

(Source: WeatherBell)

Final Trading Thoughts

Natural gas prices have traded in a very tight range lately. Since Friday, the June contract has traded within a 1.8 cent range between $2.601 and $2.619 as market participants have been weighing the strength of weather driven demand vs. above average injection. Even though a persistent -NAO blocking signature will help to keep the Northeast U.S. out of the heat, natural gas bulls have found support with heat being advertised over the southern half of the country in the medium range. This has trimmed down injection some for late May. However, natural gas build will remain above average/bearish and in the triple digit territory for the weeks to come. The increased trade tensions between the U.S. and China have created some concerns regarding LNG export growth. This could have contributed to some of Wednesday's price decline. I expect for rangebound trading to continue.

My price range will be $2.50-2.80 for the week for the front-month June futures contract, with UNG trading between $20.00 and $25.00.

Figure 7 below is my natural gas inventory withdrawal projections over the next 4 weeks vs. the 5-year average and the total 4-week projected level vs. the 5-year average.

Figure 7: Natural Gas Weekly Storage Injection/Withdrawal Projections over the next 4 weeks.

(Source: Andrei Evbuoma)

Figure 8 below is the observed or current natural gas inventory level and my forecast levels over the next 4 weeks vs. the 5-year average.

Figure 8: Observed and 4-week projected natural gas inventory levels.

(Source: Andrei Evbuoma)

Finally, Figure 9 below is the current storage deficit level and my 4-week projected deficit levels.

Figure 9: Observed and 4-week projected natural gas storage deficit.

(Source: Andrei Evbuoma)

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.