Seeking Alpha

Support Strengthens For Natural Gas Bulls As Forecast Models Turn Colder Over The Weekend

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Includes: BOIL, DGAZ, KOLD, UGAZ, UNG
by: Andrei Evbuoma
Andrei Evbuoma
Commodities, energy, oil & gas, research analyst
Summary

Natural gas futures jump pre-market Sunday evening after forecast models turned colder over the weekend; front-month December contract poised to open over 3%.

Eastern Pacific/western North American ridge proves resilient, forcing downstream toughing/cold air seepage into central and eastern Canada/U.S. through mid-November.

The eastern half of the country to be under an unsettled northwest flow pattern as highlighted by frequent clipper rain/snow systems and subsequent reinforcing cold shots.

Investment Thesis

Natural gas finds additional cold support over the weekend to not only hold above $2.50, but surpass the $2.70 level.

Natural gas bulls find support over the weekend with cold potentially lasting through mid-November; short-cover rally potential is real as futures jump pre-market over 3%

On Sunday evening, the December contract was seen higher pre-market 3.70%, or 10 cents ($0.100), to $2.801/MMBtu. Further down the strip, the January contract was up 6.9 cents ($0.069) to $2.871/MMBtu, the February contract up 6.5 cents ($0.065) to $2.827/MMBtu, and the March contract settled up 6 cents ($0.060) to $2.691/MMBtu. Figure 1 below is a chart depicting the price trend of the front-month December contract over the past 24 hours.

(Source: Investing.com)

On Thursday, the United States Natural Gas ETF (UNG), which is the unleveraged 1x ETF that tracks the price of natural gas, finished lower 2.07% to $20.81.

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 6.51% and 3.42% at $15.80 and $13.29, 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 6.33% and 3.51% at $115.84 and $27.68, respectively.

Relentless barrage of cold air intrusions expected across the eastern half of the nation over the next 15 days; record cold possible and increasing snow chances likely

Forecast models remain mixed on the evolution of the pattern in the 11-16 day time period. The GFS continues to be the most aggressive in keeping the cold pattern in play, while the ECMWF is the least aggressive with the cold, and in fact, breaking down the pattern faster than the GFS. The Canadian/CMC model sides more with the GFS model. Overall, the outlook over the next two weeks has trended colder over the weekend. The eastern Pacific/western North American ridge has proved resilient and continues to do so. This feature will continue to give way to persistent downstream troughing over central and eastern Canada/U.S. A large and deep upper-level vortex rotating over central Canada is associated with this upper-level trough and will support a perpetual/incessant northwest flow pattern of clipper systems and subsequent reinforcing shots of cold air over the central and eastern U.S.

This will ultimately result in colder-than-average temperatures across the eastern half of the country for the balance of the next couple of weeks. The coldest of temperatures will be found from the northern Plains to the Upper Midwest/Great Lakes to the northeastern U.S. There will be several waves of cold shots coming in, but the most noteworthy/more anomalous cold air intrusions look to occur during the second half of this week Wednesday through Saturday (November 6-9) and then again Monday through Wednesday/Thursday (November 11-14) of next week. Figure 2 below is a map from the 18z GFS ensemble depicting the 1-6 day (November 4-9) temperature pattern.

(Source: WeatherBELL)

Figure 3 below is a map from the 18z GFS ensemble depicting the 7-12 day (November 10-15) temperature pattern.

(Source: WeatherBELL)

Figure 4 below is a map from the 18z GFS ensemble depicting the 15-16 day (November 18-19) temperature pattern.

(Source: WeatherBELL)

Final Trading Thoughts - Cold pattern to accelerate withdrawal season and could send stockpiles from a surplus to a deficit

Forecast models have trended colder over the weekend with increased heating demand (HDDs). The expectation is not only for the cold to linger into mid-November, but now to potentially last through mid-November as upper-level ridging over the eastern Pacific into Alaska and over western North America hangs tough, resulting in downstream troughing over central and eastern Canada/U.S. This cold pattern has accelerated the withdrawal season, with withdrawals coming as early as this week's report (for the week ending November 1). Not only will the withdrawal season be accelerated, but stockpiles are projected to potentially go from a surplus to a deficit within the next month. There have been some signs of temperatures moderating, especially from the ECMWF model, but there needs to be much stronger support/convincing evidence to change the overall bullish sentiment. Given this, prices are poised to open decisively higher and above the $2.70 level as thought in my previous report.

Adding additional cold into an outlook that has plenty of cold in it gives natural gas bulls further support to the upside. Given that the market is overrun with net short speculators, this additional cold potentially through mid-November could trigger or continue a "short squeeze" rally.

Expect a price range between $2.60 and $2.85 over the next week for the front-month December futures contract. UNG will trade between $19.50 and $23.00.

Figure 5 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 5: Natural Gas Weekly Storage Injection/Withdrawal Projections over the next four weeks.

(Source: Andrei Evbuoma)

Figure 6 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 6: Observed and four-week projected natural gas inventory levels.

(Source: Andrei Evbuoma)

Figure 7 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 7: Observed and four-week projected natural gas inventory levels.

(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.