Natural Gas - Even Lower Production Didn't Help Prices

|
Includes: BOIL, DGAZ, GAZB, KOLD, UGAZ, UNG, UNL
by: HFIR Energy
Summary

EIA reported +119 Bcf for 5/31 week. This was bearish as it was 13 Bcf higher than our estimate of +106 Bcf.

For the week ending 6/7, we have a build of +100 Bcf. EOS is pegged at 3.66 Tcf.

Natural gas prices broke the multi-year support zone and kept falling. This took place despite production being lower m-o-m.

The weather outlook remains neutral to bearish providing no support for bulls.

Given that the market is still in surplus today despite tightening fundamentals, only a warmer than normal outlook would push prices back higher.

Welcome to the low production didn't even help edition of Natural Gas Daily!

EIA reported +119 Bcf for 5/31 week. This was bearish as it was 13 Bcf higher than our estimate of +106 Bcf.

Source: EIA

Next Week's Estimate

For the week ending 6/7, we have a build of +100 Bcf. EOS is pegged at 3.66 Tcf.

Natural gas prices continue to decline even as production falls...

Natural gas prices broke the multi-year support and have fallen even more since...

For natural gas bulls that thought the multi-year support line would hold, this breakdown is causing a lot of heartaches. To make the matter worse, prices continue to break lower despite lower natural gas production m-o-m:

Source: PointLogic, HFI Research

Pipeline outages have pushed lower production and demand variables have gone up thanks to higher LNG/Mexico gas exports and higher power burn. But despite all of these fundamental balance differences, the surplus continues to weigh on natural gas prices:

This combined with the fact that the weather outlook remains dismal at best continue to keep a lid on natural gas prices.

Source: WeatherModels.com

What's it going to take to go long?

Over the summer, natural gas prices tend to find a natural bottom as lower gas prices fuel higher demand like power burn. But the key fundamental variable that needs to play in the bulls' favor is a bullish weather outlook. In this case, you want it to be much warmer than normal in the Northeast.

So far? That's not looking good into the end of June.

Naturally, if the market was undersupplied, then you could go long on the basis that higher power burn would just push the market into a further deficit. This happened in 2016 and 2017 when supply was lower than demand. But in 2018, supply had already outpaced demand, but bullish weather from April to November 2018 masked the underlying surplus. And we are now seeing just how much surplus there is in the market with the weather outlook neutral to bearish.

Given the surplus today, we estimate that prices won't rebound unless we are at least ~15 CDDs higher than the 30-year average. That's because elevated cooling demand is needed to wipe out the surplus with the remaining bullish CDDs sending the storage builds lower than the 5-year average.

Or to put it more simply, don't go long until the weather turns bullish.

Finally, we would want a technical bottom at least in the short-term. So far? We don't see one.

But with prices falling and falling, the risk/reward to go long is getting better and better. The key is to wait for that catalyst. We don't see one just yet, but it will likely show up soon enough.

HFI Research Natural Gas subscribers will be getting real-time trade alerts if we go long.

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.