Welcome to the turning sign edition of Natural Gas Daily!
This week saw EIA report +55 Bcf for the week ending Aug. 2. This was lower than our forecast of +62 Bcf and lower than the consensus average of +57 Bcf.
Next Week's Estimate
For the week ending 8/9, we have a build of +60 Bcf. EOS is now 3.72 Tcf.
Weather Turns Warmer, Signaling A Bottom Is Near
The weather gods have not been kind to natural gas bulls this year, but things are finally starting to turn. Projected cooling demand over the next two weeks is expected to be higher than the average, while the 15-day outlook suggests the warmer than normal weather is here to stay.
In addition, lower natural gas prices this year have resulted in higher power burn. This chart below by Josh is a great illustration:
Turning to the technicals, there also are encouraging signs that a bottom is near with a breakout of this falling wedge indicating upside to ~$2.3.
Lastly, natural gas positioning remains heavily biased to the short side, indicating any potential combination of a technical breakout or bullish weather could send prices higher quickly.
As a result, we are now long ~50% our desired UGAZ position and looking to add when the September contracts break out of ~$2.16/MMBtu. Subscribers will receive real-time trade alerts.
Turning over to fundamentals, the medium-term outlook is not looking good, however. Lower 48 production hit a new all-time high last week, clocking in above ~92 Bcf/d. LNG exports have dropped, resulting in total demand being lower week-over-week.
The higher than expected production growth now projects the exit to be around ~94 Bcf/d, which would keep 2020 oversupplied despite the increase in LNG demand. The futures curve is reflecting this dreaded scenario already.
We estimate that producers will need to cut production by ~6 Bcf/d in the medium term to push prices higher structurally. Otherwise, we think the structural surplus will keep the curve below $2.5/MMBtu.
We will be watching weather models closely, so if you are trading natural gas and need guidance on weather, fundamentals, and trader positioning, we think you should sign-up for HFI Research Natural Gas. Sign-up here now.
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.