Natural Gas: It's Time To Turn Bullish

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

We expect a +102 Bcf change in the storage report for the week ended June 7.

A storage report of +102 Bcf would be higher than last year's +96 Bcf and higher than the five-year average of +92 Bcf.

We are currently long UGAZ to express our bullishness on natural gas. We believe prices are below their fair value right now.

The weather outlook is also turning more bullish, which should help push prices higher.

This, along with elevated power burn and lower production, has helped tighten balances.

Welcome to the turning bullish edition of Natural Gas Daily!

Housekeeping item first.

We expect a +102 Bcf change in the storage report for the week ended June 7. A storage report of +102 Bcf would be higher than last year's +96 Bcf and higher than the five-year average of +92 Bcf.

Trading Position

We are currently long UGAZ.

It's Time To Turn Bullish...

Natural gas bulls have been pummeled. Prices have broken multi-year support levels, and even lower production the last two weeks have not helped. The reasoning for those that track natural gas fundamentals was simple - the weather outlook wasn't getting any better.

But this started to change over the last 48 hours. The ECMWF-EPS long-range that was published last night turned more bullish, showing a warmer than normal pattern developing in early July. Then the ECMWF-EPS 00z update showed a much more promising set-up.

Finally, today's GFS-ENS 12z 16-day outlook was the last variable to push prices up:

Source: WeatherModels.com

In our view, natural gas below $2.5/MMBtu made very little sense to begin with. Power burn was getting a major boost from lower prices despite the recent weather outlook being neutral:

Source: PointLogic, HFI Research

Our expected storage builds started getting revised lower and lower on tighter fundamentals.

Lastly, lower 48 production continues to disappoint and the size of the disappointment is increasing!

Source: PointLogic, HFI Research

This leads us to believe that natural gas basin production levels are going to level off and even move lower this year. The only problem with the supply outlook is that there's additional pipeline takeaway capacity coming online for Permian associated gas in H2 2019, so this will boost production to ~91 Bcf/d. But if the other basins decline enough, the gains may be offset.

Not to mention that we expect another ~4 Bcf/d of LNG demand coming online by the end of the year:

Source: PointLogic, HFI Research

LNG demand is already much higher year-over-year, and it will be closer to ~9+ Bcf/d by year-end.

All of this is just to say that we think given the current level of pessimism in the market, now is the time to start turning more bullish. We are expressing this bullishness via our long position in UGAZ.

Disclosure: I am/we are long UGAZ. 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.