Natural Gas: Upside Potential Increases Amid Warmer Weather Trends, Though Overall Market Sentiment Remains Bearish

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

Classic amplified, dipole pattern resulting in a record-breaking hot West U.S. vs. a cool central and eastern U.S.

Jet stream flattens out in the 4-11 day time frame, resulting in temperatures closer to normal levels.

Weather pattern turns warmer in the 11-16 day time frame; best chance for heat risk across the southern U.S.

Thursday's EIA report to reveal another above-average, triple-digit inventory build.

Investment Thesis

Prices could continue to tick higher in the days ahead with forecast models trending warmer and heat shifting to the southern U.S.

Natural gas prices finished higher for a third consecutive day

The front-month July natural gas futures contract settled higher Tuesday 1.51%, or 4.2 cents ($0.042), to $2.399. The August contract increased 4.3 cent ($0.043) to $2.393, while the September contract increased 4.2 cents ($0.042) to $2.377. Figure 1 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 up 1.58% to $20.52.

UNG's leveraged exposure ETFs, the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), were seen higher 4.68% and 3.34% at $18.55 and $15.15, respectively, on Friday. 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 lower 5.01% and 3.34% at $150.80 and $28.98, respectively.

Excessive, record heat continues out West; Heat risk could shift to southern U.S. late June

In the near term (through Thursday), the nation will be under the influence of a robust, large-scale, amplified, upper-level wind regime. This pattern will yield record-breaking hot temperatures with increased cooling demand (CDDs) across the western U.S. (CAISO) amid a strong mid-upper level ridge and cooler-than-average temperatures with limited CDDs across the central and eastern U.S. courtesy of a broad cyclonic flow/upper level trough. Figure 2 below is a map from the 12z ECMWF depicting the present upper-level/jet stream pattern setup (map to the left) and its temperature display (map to the right).

(Source: WeatherBELL)

In the medium range (4-16 day time frame), the jet stream pattern will relax returning to a more zonal to semi-zonal flow that would reduce extreme temperatures and keeping anomalies closer to normal levels. There will be an increase in temperatures particularly in the 11-16 day time frame (June 22-27), with the best chance for any heat being limited to the southern U.S. Much of the country during this 4-16 day time frame will remain mostly bearish, with temperatures closer to normal levels. Figure 3 below is a map from the 12z ECMWF depicting the 6-11 day (June 17-22) upper-level/jet stream pattern (map to the left) and its temperature display (map to the right).

(Source: WeatherBELL)

Figure 4 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 June 21-27.

(Source: WeatherBELL)

The American GFS model is the most bullish, placing a strong heat ridge over the southern U.S. and a mean ridge axis across the central U.S., which would suggest hot weather and heightened CDDs over the southern and central U.S. in the 11-16 day time frame.

Figure 5 below are jet stream/upper-level pattern comparisons from the 18z GFS, 12z ECMWF, and 12z CMC ensembles in the 14-16 day time frame, or from June 25-27.

(Source: WeatherBELL)

Final Trading Thoughts

Natural gas prices have made insidious moves to the upside recently in response to the ongoing heat across the western U.S. (CAISO) and forecast models trending warmer in the 11-16 day time frame (late June). Heat risk and increased CDDs at this time are primarily confined to the southern U.S. in the 11-16 day time frame. There's less certainty on if or how much of the central U.S. will get in on any heat. Prices could continue to push higher if forecast models continue to trend warmer and to a greater degree if heat risk encompasses more real estate.

Expect for an increase in upside potential with prices potentially inching higher, though the overall market sentiment still remains bearish. 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.

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.