Natural Gas: Much Warmer Than Normal Weather In September Pushes Storage Builds Lower

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

We expect +75 Bcf for the week ending Aug. 30. A build of +75 Bcf would be compared to the +66 Bcf five-year average and +63 Bcf last year.

EOS has now been revised to 3.71 Tcf with the fundamentals for the next five reports tightening.

September CDDs will be on track to be much higher than the average.

In our view, October contract is very fairly valued at $2.35/MMBtu, but it's the winter contracts that are undervalued.

Welcome to the Mother Nature is Helping edition of Natural Gas Daily!

Housekeeping item first.

We expect +75 Bcf for the week ending Aug. 30. A build of +75 Bcf would be compared to the +66 Bcf five-year average and +63 Bcf last year.

Much Warmer Than Normal Weather In September Pushes Storage Builds Lower

EOS has now been revised to 3.71 Tcf with the fundamentals for the next five reports tightening. September CDDs will be on track to be much higher than the average.

Both GFS-ENS and ECMWF-EPS are showing up as much higher than normal. So long as the weather models continue to improve, natural gas prices should remain steady around this level. But the early outlook for the 16-day is starting to turn more or less mixed.

Source: hfirweather.com

As you can see in the cluster breakdown in the GFS-ENS outlook, the warmer than normal outlook also is offset by a colder than normal outlook scenario. So the recent bullish weather will moderate going forward.

In our view, the October contract is very fairly valued at $2.35/MMBtu, but it's the winter contracts that are undervalued.

According to our model, prices are still undervalued along the curve but not by much. If, however, EOS finishes at ~3.65 Tcf vs. ~3.71 Tcf, then January would see the fair value shoot up to ~$3/MMBtu.

Of course, the winter contracts will be very sensitive to changes in HDDs when November comes around. If heating demand is materially higher than normal in December, we think this could cause quite a dramatic jump in fair value for January contracts. Given that short positions are massive at the moment, a short squeeze is likely in the making heading into winter.

For now though, we don't see a trade set-up just yet. Cooling demand is set to moderate seasonally going forward, so even if the weather remains warm, the impact on storage will be less.

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.