Seeking Alpha

Natural Gas Prices Could Begin Trading Sideways With Seasonality Versus Bearish Underlying Fundamentals Weighing

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

After rising as high as $2.64 and testing the 200-day moving average of $2.63, the natural gas rally took a breather on Tuesday, settling slightly down or flat.

Temperature outlook has very warm to hot and humid air mass in place over the central and eastern U.S. next 10 days before easing and potentially shifting westward thereafter.

Natural gas prices poised for sideways trading as investors weigh/gauge seasonality, but also some bearish underlying fundamental variables.

Investment Thesis

After an impressive run-up of prices over the past month, natural gas prices could begin trading rangebound/sideways. Downside risk to be applied as bearish underlying fundamental data attempts to take away seasonality's thunder.

Natural gas rally pauses Tuesday; settles slightly down or flat after climbing as high as $2.64 in earlier trading

On Tuesday, the front-month October natural gas futures contract settled lower down 0.15%, or 0.5 cents ($0.005), to $2.580/MMBtu, the November contract lower 0.5 cents ($0.005) to $2.620/MMBtu, and the December contract up 1.2 cent ($0.012) to $2.780/MMBtu. Figure 1 below is a chart depicting the price trend of the front-month September contract over the past seven days.

Source: Investing.com

On Tuesday, the United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, finished lower 0.40% to $22.39.

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 1.17% and 0.97% at $21.17 and $16.39, 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 1.25% and 0.68% at $98.03 and $23.55, respectively. Figure 2 below is a graph depicting the natural gas contract prices over the next seven months.

Source: Andrei Evbuoma

Typical mid-summer type weather pattern with very warm to hot and humid conditions to persist over the next 10 days across the major natural gas consumption regions of the central and eastern U.S. before potentially shifting back out to the West U.S. late September or in the 11-16 day time frame

Over the next 10 days, the national weather pattern will be driven by a series of upper level troughs/low pressure systems that will drop southward out of the Gulf of Alaska. These upper level troughs will help to amplify/de-amplify the jet stream pattern across the country during this time frame. The first upper level trough is already entrenched over the western U.S. This has resulted in the amplification of the jet stream with downstream upper level ridging now taking place over the central and eastern U.S., and an impressive 594 dm sub-tropical heat dome centered over the southeastern U.S. The aforementioned upper level trough over the western U.S. is on the move as it is set to begin propagating eastward across the northern tier U.S. late this week into the upcoming weekend. This will trigger shower and thunderstorm potential through Thursday across the northern Rockies and Plains into the Upper Midwest. This will also allow for cooler air to move in across the northern U.S. as the jet stream pattern flattens out/becomes less amplified late week into the weekend. This will serve as a quick/brief reset in the pattern before a second upper level low pressure system drops off of the Gulf of Alaska this weekend and moves into the western U.S. early next week. As that happens (early next week), the jet stream pattern will re-amplify with upper level ridging re-developing/re-strengthening yet again across the central and eastern U.S. through next week.

Overall, the next 10 days will feature mean upper level troughing over the western U.S. and mean downstream upper level ridging over the central and eastern U.S. Ultimately, this will result in cooler-than-average temperatures across the western U.S. and a very warm to hot and humid air mass across the central, southern, and eastern U.S. Figure 3 below is a map from the 0z ECMWF ensemble depicting the 1-6 day (September 11-16) temperature pattern.

Source: WeatherBell

Figure 4 below is a map from the 0z ECMWF ensemble depicting the 7-12 day (September 17-22) temperature pattern.

Source: WeatherBell

The very warm to hot temperatures across the central and eastern U.S. will relax in the 10-16 day time period (Sept. 21-27) as the jet stream pattern flattens out and the heat begins to shift back towards the western U.S. Figure 5 below is a map from the 06z GFS ensemble (GEFS) depicting the 15-16 day (September 26-27) upper level/jet stream pattern.

Source: WeatherBell

Figure 6 below is a map from the 06z GFS ensemble (GEFS) depicting the 15-16 day (September 26-27) temperature pattern.

Source: WeatherBell

Figure 7 below is a map from the 0z ECMWF ensemble depicting the 14-15 day (September 25-26) temperature pattern.

Source: WeatherBell

Disturbance/Area of interest in the Atlantic being monitored for development

Another weather development that's increasingly becoming of interest in the energy trading space is in the tropics. That's where we have a disturbance producing a widespread area of cloudiness and showers extending from the southeastern Bahamas northward to the southwestern Atlantic that's being monitored for development. While environmental conditions are not favorable for development, conditions are forecast to become more conducive for development over the weekend. A tropical depression could form as the disturbance moves slowly toward the west-northwest across the Florida Straits or South Florida and over the eastern Gulf of Mexico. Regardless of development, this disturbance at the very least could bring periods of locally heavy rainfall and gusty winds across the Bahamas through Thursday and across Florida during the weekend. Figure 8 below is a five-day tropical outlook map depicting the area (in orange) being monitored for development. This disturbance has a medium (60%) chance to develop into a tropical cyclone over the next five days.

Source: NOAA/NHC

Figure 9 below is a GOES East satellite shot showing the area being monitored for development.

Source: COD

Final Trading Thoughts

Seasonality has been the primary variable that's triggered the immense short squeeze over the past few weeks. Just recently, the hotter pattern that's expected over the next 10 days across the central and eastern U.S. provided some additional supported to the upside.

But there are a number of variables that are bearish and could offer downside risk to prices:

One is that the heat across the central and eastern U.S. is not expected to hold, but instead is expected to ease/relax in the 11-16 day time frame or Sept. 21-26 (thus trending cooler).

Another variable at play is the supply/demand balance. The market is not showing any strong signs of tightening as the natural gas storage deficit is expected to continue to contract/narrow on near normal to stronger-than-normal injection in the weeks ahead. Despite inventory build for mid-September being trimmed down some as a result of the hotter pattern near term, injections in the upper 70s to mid 80s over the next few weeks are still expected to result in near normal to higher than normal injection.

Furthermore, liquefied natural gas (LNG) feed gas deliveries have shown some weakness with a recent scaling back. After starting the month near 6.6 Bcf/d, volumes as of Tuesday were seen at 5.4 Bcf/d (down 1.2 Bcf/d month to date).

Lastly, Goldman Sachs and the EIA have both lowered their price forecast for natural gas in 2020 on prospects for continued increase in production/supply.

Tuesday's market reaction was an indicator of these variables being considered/weighed. Natural gas prices could very well begin trading sideways with these variables helping to apply some downside pressure.

Expect a price range between $2.40 and 2.65 over the next week for the front-month October futures contract. UNG will trade between $20.00 and $24.50.

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.