This report covers the week ending July 12, 2019.
The market became overbought in the short term just as projected TDDs seem to have peaked and dry gas production was still very close to an all-time high. Even as all the other market variables are giving bullish signals (weather models, coal-to-gas switching, consumption, exports, etc.), the supply side is still very discouraging for the bulls. Therefore, the rallies are unlikely to be smooth and easy.
We have significantly reduced our long exposure yesterday (particularly in UGAZ) and decided to increase our short exposure (particularly in futures).
Technically, the mid-term trading bias is bullish. In the short term, as long as August contract price remains above 2.430, the trading bias will be bullish. Alternatively, a break below 2.430 (August) will negate the bullish bias in the short term and will open the way towards:
- 2.424, 2.410, 2.400, 2.377, 2.360, 2.350, 2.337.
An ascending wedge is providing dynamic support and resistance levels. An inverse head and shoulders pattern is calling for a re-test of 2.490-2.500, which has essentially already been tested.
We estimate that aggregate demand for American natural gas (consumption + exports) will total around 623 bcf for the week ending July 12 (up 2.2% w-o-w and up 4.8% y-o-y). The deviation from the norm is to remain positive and should increase from +19.50% to +21.05%. We calculate that total natural gas demand in the U.S. has been expanding in annual terms for 12 consecutive weeks now (see the chart below).
Source: Bluegold Research estimates and calculations
This week, the weather conditions have cooled down, but only slightly across the Lower-48 states. We estimate that the nationwide cooling degree days (CDDs) will edge down by about 1.7% w-o-w in the week ending July 12. However, total energy demand (measured in total degree-days - TDDs) should be below last year's level by about 3.3%. Still, total demand for natural gas is growing in annual terms due to bullish non-degree day factors and stronger exports as well as because of structural factors.
The most important four non-degree-day factors that we are looking at are: nuclear outages, the spread between natural gas and coal (coal-to-gas switching), wind speeds, and hydro inflows.
- Nuclear outages have remained below the norm (1.9 GW per day on average) - see the chart below.
- Despite a 23% drop in the price of Central Appalachian coal, NG/Coal spreads remain very low, allowing coal-to-gas switching to stay above 8.5 bcf/d (no less than 2.5 bcf/d above the 5-year average).
- Wind speeds and hydro inflows were mostly stronger y-o-y. On balance, these two factors will probably displace some 330 MMcf/d of potential natural gas consumption in the Electric Power sector in the week ending July 12.
Source: U.S. Nuclear Regulatory Commission
The net cumulative effect from non-degree day factors this week should be bullish, at +4.8 bcf/d of potential natural gas consumption in the Electric Power sector.
Total exports are up 17.4% y-o-y - primarily due to robust LNG sales and stronger pipeline exports into Mexico. According to Marine Traffic, over the past six days, U.S. LNG export terminals (Sabine Pass, Cove Point, Corpus Christi, and Cameron) served eight LNG vessels with a total natural gas capacity of 29 bcf, very close to an all-time high. Total flows to liquefaction averaged 5.9 bcf/d, setting a new all-time record.
We estimate that dry gas production has been expanding in annual terms for 110 consecutive weeks now, but the growth rate is weakening due to base effects. Currently, we project that dry gas production will average 90.52 bcf/d in July, 90.51 bcf/d in August, and 90.89 bcf/d in September. In the week ending July 12, we estimate that the aggregate supply of natural gas (production + imports) will average around 97.60 bcf per day (down 0.8% w-o-w but up 7.0% y-o-y).
As you can see in the table below, total balance is projected to be moderately bearish (vs. 2018) in week 1-week 3 (July 12-July 26) and in week 5 (August 9). However, the price is already below last year's level. Total balance is also projected to be bullish vs. 5-year average in week 1-week 5 (July 12-August 9).
Source: Bluegold Research estimates and calculations
The figures in the table below are weekly averages measured in million cubic feet per day (MMcf/d). Deviations from the 5-year norm are measured in percentages. Deviations from the previous year are measured in MMcf/d. Deviations are colored in accordance with their notional effect on the price. For example, higher consumption should have a positive effect (green color), whereas higher production has a negative effect (red color). Total Balance represents the net result of the interaction between total supply and total demand. Total Balance = total supply minus total demand. *Total Balance deviation vs. 5-year average = total supply deviation minus total demand deviation.
Currently, we expect the EIA to report a build of 56 bcf next week (final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average +45 bcf over the next two weeks (three EIA reports). Natural gas inventories' deviation from the 5-year average is currently projected to expand from -142 bcf today to -152 bcf for the week ending July 26.
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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.