Upside potential increases as potential demand destruction impacts from Hurricane Dorian lessens. Other variables in play include seasonality and warmer forecast trends over the weekend for the central and eastern U.S.
Natural gas rally pauses on Friday as prices settled lower ahead of Hurricane Dorian
On Friday, natural gas took a breather from the recent rally. The new front-month October natural gas futures contract settled lower 0.70%, or 1.1 cents ($0.011), to $2.285, the November contract lower 1.8 cents ($0.018) to $2.324, and the December contract down 2.7 cents ($0.027) to $2.485. On Thursday, the front-month October natural gas futures contract settled higher up 2.93%, or 7.4 cents ($0.074), to $2.296, the November contract higher 6.8 cents ($0.068) to $2.342, and the December contract up 6 cent ($0.060) to $2.512. Figure 1 below is a chart depicting the price trend of the front-month September contract over the past seven days.
On Friday, the United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, finished lower 0.35% to $19.76.
UNG's leveraged exposure ETFs, the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), were seen lower by 1.27% and 1.38% at $14.71 and $12.86, respectively. 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 higher by 0.99% and 1.38% at $146.34 and $30.48, respectively. Figure 2 below is a graph depicting the natural gas contract prices over the next 7 months.
(Source: Andrei Evbuoma)
Hurricane Dorian is still a dangerous storm despite some weakening; expected to track just offshore, not making a U.S. landfall; impacts will be felt but more reduced than previously anticipated
The latest on Hurricane Dorian is that it's stationary just north of the Grand Bahama Island with max sustained winds of 130 mph and wind gusts up to 155 mph. Currently, it's about 100 miles east of West Palm Beach, FL. A slow northwestward motion is expected to occur early Tuesday. A turn toward the north is forecast by late Tuesday, with a northeastward motion forecast to begin by Wednesday night. On this track, the core of extremely dangerous Hurricane Dorian will continue to pound the Grand Bahama Island into Tuesday morning. The hurricane will then move dangerously close to the Florida east coast late Tuesday through Wednesday evening, very near the Georgia and South Carolina coasts Wednesday night and Thursday, and near or over the North Carolina coast late Thursday and Friday.
Dorian's track is not expected to make landfall on the U.S., as it's now forecasted to stay just offshore as it rides northward along the southeastern U.S. coast. Because of this eastward shift in the track compared to previous days, the impacts of Dorian will by default have less impact than previously expected. Dorian is expected to weaken, but will still remain a formidable hurricane over the next couple of days. Power outages and extensive cloud cover is still expected, just not as bad as previously thought. Impacts will be felt greatest near Florida's eastern coast. Figure 3 below is a map depicting the projected path of Hurricane Dorian.
In addition to Hurricane Dorian, there are 4 additional systems being monitored that could become tropical depressions over the next 5 days. Most notable, is the low in the southwestern Gulf of Mexico that is likely to become a tropical depression as it approaches northeastern Mexico. Because of its track, it will not pose any impacts to the oil and gas rigs along the Gulf Coast. Figure 4 below is a map depicting 4 additional areas outside of Dorian that are being monitored for development.
Forecast models trend warmer in the 6-15 day time frame over the weekend; weather pattern shift takes place in the 6-11 day time frame that will feature a cool western U.S. vs. a warm central and eastern U.S.
Over the next 5 days, upper-level ridging will be centered over the southwestern and south-central U.S. This will yield warmer-than-normal temperatures across the western U.S. and southern 2/3rds of the U.S. Meanwhile, mean upper-level troughing/low with additional mid-upper level vortices/shortwaves rotating around it near the Hudson/James Bay area will generate cooler-than-normal temperatures across central/eastern Canada. Given that the north-central and Northeast U.S. will be in close proximity to this upper-level feature, cooler-than-normal temperatures will also extend southward into the northern tier states from the north-central U.S. to the northeastern U.S. as occasional surface cold frontal boundaries associated with the mid-upper level vortices push southward, bringing in cool and dry fall-like weather conditions to these regions. The first of such cold fronts will come mid to late week with a second, reinforcing cold front coming during next weekend. Figure 5 below is a map from the 12z ECMWF ensemble depicting the 1-6 day (September 3-8) temperature pattern.
In the 6-11 day time frame, a pattern shift looks to take place that will feature upper-level troughing over the western U.S. and downstream upper-level ridging over the central and eastern U.S. Ultimately, this will produce a cool western U.S. and a warm central and eastern U.S. Figure 6 below is a map from the 12z ECMWF ensemble depicting the 7-12 day (September 9-14) temperature pattern.
In the 11-16 day time period, the upper trough over the western U.S. fades and the jet stream pattern flattens out, becoming more zonal. This, in turn, will allow for temperatures to moderate over the western U.S. and for mild Pacific air to advect over the Lower 48. This should result in normal to warmer-than-normal temperatures across much of the country, with the bulk of the warmth being located across the southern U.S. Figure 7 below is a map from the 12z ECMWF ensemble depicting the 10-15 day (September 12-17) temperature pattern.
Final Trading Thoughts
With Hurricane Dorian now expected to track just off the coast of Florida and the Southeast U.S., demand destruction will not be as great as initially anticipated. The most powerful winds will be offshore, meaning that power outage expectancy will be reduced, though cloud coverage will still have some effect (also now reduced) in limiting demand (especially areas closer to the shoreline). This, plus the fact that forecast models have trended warmer over the holiday weekend and seasonality is in play, increases upside potential for the week ahead.
Expect a price range between $2.15 and $2.45 over the next week for the front-month October futures contract. UNG will trade between $17.50 and $22.50.
Figure 8 below is my natural gas inventory withdrawal projections over the next four weeks vs. the five-year average and the total four-week projected level vs. the five-year average.
Figure 8: Natural Gas Weekly Storage Injection/Withdrawal Projections over the next four weeks.
(Source: Andrei Evbuoma)
Figure 9 below is the observed or current natural gas inventory level and my forecast levels over the next four weeks vs. the five-year average.
Figure 9: Observed and four-week projected natural gas inventory levels.
(Source: Andrei Evbuoma)
Finally, Figure 10 below shows the current storage deficit level and my four-week projected deficit levels.
Figure 10: Observed and four-week projected natural gas storage deficit.
(Source: Andrei Evbuoma)
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.