Natural Gas: Prices Should Remain Rangebound, But Downside Pressure Could Be Applied With Heat Easing In The 11-15 Day Period

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

Natural gas prices continue to trade on a range with the balance of demand and storage build in play.

On Friday, UNG prices finished slightly lower as heat and thus demand in the 11-15 day period showing some signs of easing.

Injections should continue to remain above average and at triple-digit levels in the weeks ahead.

Investment Thesis

Investors should expect for prices to remain rangebound, but with heat showing signs of easing in the 11-15 day period, some downside pressure could be applied.

Natural gas prices muted Friday with the balance of demand and injection in the coming weeks being weighed

The front-month June natural gas futures contract finished Friday down 0.59%, or 0.8 cents ($0.008), to $2.631. The July contract decreased 1 cent ($0.010) to $2.664, while the August contract lost 0.9 cents ($0.009) to $2.680. Figure 1 below is a chart depicting the price trend of the 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, was seen lower 0.57% to $22.24.

UNG's leveraged exposure ETFs, the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), traded lower 1.34% and 0.90% at $25.76 and $18.76, 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 1.45% and 1.13% at $114.68 and $24.04, respectively.

The weather pattern remains consistent to previous reports with warmer trends over the eastern half of the nation including record-breaking heat developing over the southeast U.S. over the next week and a half. A high latitude blocking pattern remains in place keeping the northeast out of the heat for now. Figure 2 below is a map from the 12z ECMWF ensemble depicting the 5-10 day (May 22-27) upper level pattern.

Source: WeatherBell

The 11-16 day time frame (late May into early June) is where there were cooler changes recently. The jet stream pattern during this pattern looks to flatten out allowing for a less amplified pattern and instead a more zonal to semi-zonal flow pattern with mild weather entering from the Pacific. This development means that June will possibly start off on the mild/bearish side. The bearish outlook in the 11-16 day time frame will give support for continued strong, above-average injections for late May.

Figure 3 below are jet stream/upper level pattern comparisons from the 18z GFS, 12z ECMWF, and 12z CMC ensembles in the 10-16 day time frame, or from May 27-June 2.

Source: WeatherBell

Final Trading Thoughts

The bearish development in the 11-16 day time frame is likely what caused for prices to slide on Friday. Expect for prices to remain rangebound, with the possibility of downside risk increasing given that the heat in the 11-15 day period is showing signs of easing. The balance of demand and inventory build in the coming weeks will continue to be the primary players in focus. My price range will be $2.40-2.80 for the week for the front-month June futures contract, with UNG trading between $20.00 and $25.00.

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

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

Source: Andrei Evbuoma

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

Figure 5: Observed and four-week projected natural gas inventory levels.

Source: Andrei Evbuoma

Finally, Figure 6 below is the current storage deficit level and my four-week projected deficit levels.

Figure 6: Observed and four-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.