Bearish Theme To Continue For Natural Gas With No Signs Of Heat And Lackluster Cooling Demand

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

Natural gas build of 119 BCF beats consensus estimates, sending prices lower on Thursday.

Weather pattern remains under the influence of a high latitude block and mostly zonal regime.

Look for additional triple-digit natural gas builds in the coming weeks.

Investment Thesis

Expect risk to the downside to continue as there's just not much support for gas prices to head higher.

Natural gas prices edge lower after weekly natural gas build topped estimates

The Energy Information Administration (EIA) released its weekly storage report on Thursday morning. The report revealed an inventory build of 119 BCF for the week ending May 31, topping consensus estimates of 111 BCF. The build of 119 BCF for the week ending May 31 is compared to the 93 BCF build from a year ago and the five-year avg. build of 102 BCF. Stockpiles stand at 1,986 BCF vs. 1,804 BCF a year ago and the five-year avg. of 2,226 BCF. That's 182 BCF higher than last year and 240 BCF less than the five-year avg. Figures 1 and 2 below are both depictions (table and graph) of Thursday's EIA natural gas storage report for the week of May 27-31.

Source: EIA

Source: EIA

The front-month July natural gas futures contract fell Thursday 1.81%, or 5.4 cents ($0.054), to $2.324. The August contract decreased 5.6 cent ($0.056) to $2.324, while the September contract decreased 5.7 cents ($0.057) to $2.315. Figure 3 below is a chart depicting the price trend of the front-month July contract over the past 24 hours.

Source: Investing.com

On Thursday, the United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, finished down 1.72% to $20.01.

UNG's leveraged exposure ETFs, the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), were seen lower Friday 5.07% and 3.49% at $17.21 and $14.39, 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), were seen higher 4.90% and 3.20% at $163.70 and $30.61, respectively.

Weather pattern over at least the next couple of weeks to remain bearish; heat remains shunted well south over Mexico

Over the next five days, the national, large-scale weather pattern will undergo a change from a split-flow pattern (present state) to an amplified, Rex Block/dipole pattern that will feature a warm to hot West U.S. vs. a cool Central/Eastern U.S. The warm to hot West U.S. will be associated with strong upper level ridging developing over western North America. Meanwhile, the cooling over the central and eastern U.S. will be associated with strong, anomalous cool upper level trough over central Canada and the central U.S. Figure 4 below is a map from the 12z ECMWF depicting the upper level/jet stream pattern change going from the present state of the atmosphere (split-flow; see June 8) to the left to a more amplified, dipole pattern by next week (see June 11 to the right).

Source: WeatherBell

During the 6-11 day time frame, the jet stream will begin to relax and the large-scale pattern de-amplifies with temperatures across the western and central U.S. returning closer to seasonable levels. Even though the pattern will de-amplify with the jet stream flattening out within the 6-11 day period, forecast models (namely the ECMWF and CMC) slower progression/breakdown of the pattern will result in net upper ridging over the western U.S. with net troughing over the central U.S. resulting in a warm west U.S. vs. cool central/eastern U.S. Given the blocky nature of the atmosphere (e.g. -AO, -NAO) this makes the most sense. Figure 5 below is a map from the 12z ECMWF depicting the 6-11 day (June 12-17) upper level/jet stream pattern (map to the left) and its temperature display (map to the right).

Source: WeatherBell

Sentiment will remain bearish in the 11-16 day time frame. Forecast models diverge on the exact outlook of the pattern, but all indicate a continuation of a zonal/semi-zonal pattern with the heat (heat ridge) staying well to the south over Mexico into the southern tip of Texas. Figure 6 below is a map from the 12z ECMWF depicting the 10-15 day (June 16-21) upper level/jet stream pattern.

Source: WeatherBell

The longer-range computer models suggest more zonal/semi-zonal flow to the pattern in the 14-21 day time frame. However, as we fast forward into early to mid-July, models turn hotter namely across the southern U.S. into the central/interior western U.S.

Final Trading Thoughts

The sentiment will remain bearish in the near term after Thursday's above normal, triple-digit injection report and heat being kept well to the south across Mexico. The weather pattern is still under the influence of a high latitude (-AO/-NAO) block with cooler-than-normal temperatures expected to develop next week over the central U.S. before expanding eastward. This combined with a mostly zonal/semi-zonal flow that will help to keep heat out of the Lower 48 over the next 2-3 weeks will result in lackluster cooling demand and additional triple-digit injections in the weeks ahead, possibly through late June. Having a weak El Nino doesn't help the cause for heat either. My price range will be $2.20-2.60 for the next week for the front-month July futures contract, with UNG trading between $18.00 and $23.00.

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

Source: Andrei Evbuoma

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

Source: Andrei Evbuoma

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

Figure 9: 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.