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Natural Gas Prices Poised To Move Higher As Overall Weather Outlook Shifts Colder; Early December Cold Becoming Increasingly Likely

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

Withdrawal season kicks off with a bullish, larger than expected draw of 94 Bcf; sends stockpiles below the 5-year average.

Supply steady week over week as production increases offset Canadian import declines; demand drops week over week led by declines across all U.S. consumption sectors.

Colder than normal pattern to re-establish itself over much of the Lower 48 in December's opening week; North American jet stream pattern conducive for active weather.

Investment Thesis

Natural gas prices are poised to edge higher in the days ahead as a cold December open is becoming increasingly likely.

Natural gas market muted, finishes nearly flat in a pretty quiet trading session Thursday despite a bullish inventory draw; market participants seek direction

On Thursday, the December contract settled higher 0.8 cents ($0.008) to $2.567/MMBtu. Further down the strip, the January contract settled up 1.1 cents ($0.011) to $2.622/MMBtu, the February contract settled up 0.7 cents ($0.007) to $2.569/MMBtu, and the March contract settled up 0.3 cents ($0.003) to $2.462/MMBtu. Figure 1 below is a chart depicting the price trend of the front-month December contract over the past month.

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 up 0.60% to $20.18.

UNG's leveraged exposure ETFs, the VelocityShares 3x Long Natural Gas ETN (UGAZ) and the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), were seen higher by 2.13% and 1.49% at $13.91 and $12.23, 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 lower by 2.08% and 1.42% at $121.41 and $29.07, respectively.

Withdrawal season kicks off with a bullish, larger than expected inventory draw of 94 BCF; stockpiles fall below the 5-year average

The Energy Information Administration released its weekly natural gas storage report on Thursday morning. The report revealed an inventory draw of 94 BCF for the week ending November 15. This fell within, albeit on the higher side of, the trading range of 82 to 99 BCF, and more than the consensus withdrawal estimate of 89 BCF. The draw of 94 BCF for the week ending November 15 was seen as bearish compared to the 109 BCF withdraw from a year ago, but bullish versus the five-year average withdraw of 32 BCF. Stockpiles now stand at 3,638 BCF vs. 3,132 BCF a year ago and the five-year average of 3,698 BCF. Stocks are now 506 BCF higher than last year, but 60 BCF below the five-year average. Figures 2 and 3 below are both depictions (table and graph) of Thursday's EIA natural gas storage report for the week of November 11-15.

Source: EIA

Source: EIA

Natural gas supply steady week-over-week despite increase in production; demand drops WoW leading to a YoY deficit; U.S. consumption down week-over-week across all sectors

The EIA also released its weekly supply/demand data on Thursday afternoon for the week ending November 20. The data revealed that the average total supply of natural gas increased week over week from 100.6 Bcf/d to 100.2 Bcf/d. That put the year/year surplus at 8.8 BCF/d (100.2 BCF/d vs. 91.4 BCF/d). Meanwhile, total demand also increased week over week 7.5 BCF/d from 108.2 BCF/d to 104.2 BCF/d for the week ending November 20, with the year/year deficit of 0.6 BCF/d (104.2 BCF/d vs. 104.8 BCF/d).

Marketed and dry natural gas production increased week over week, while Canadian imports decreased 0.9 Bcf/d from 5.3 Bcf/d to 4.4 Bcf/d. Meanwhile, demand saw decreases across all sectors led by residential/commercial (power burn). Figure 4 below is a table breakdown of Thursday's EIA natural gas supply report for the week ending November 20.

Source: EIA

Figure 5 below is a table breakdown of Thursday's EIA natural gas demand report for the week ending November 20.

Source: EIA

Figure 6 below is a graph showing the natural gas supply/demand balance over the past year.

Source: EIA

Mild through the Thanksgiving Holiday Week, but forecast models have trended colder signaling a cold pattern to re-establish as December 2019 opens; weather pattern also to turn quite active/stormy in the days ahead

Led by the American GFS, forecast models have trended colder over the past couple of days. The GFS has and continues to be the most aggressive with the strength of the cold as well as the speed of transition/spread eastward, while the European ECMWF model is weaker with the cold and slower in progression. Taking a blend of the two, the expectation is that cold changes will first take place over the western U.S. late November before shifting eastward as we move into early December. As is most of the time when colder air comes in from the north, the northern half of the country will see the greatest cold anomalies during December's opening week.

Currently, we have a split flow, low amplitude, zonal to semi-zonal pattern setup across the country with higher heights/upper level ridging from western Canada back into the eastern Pacific and lower heights/upper troughing underneath over the Southwest U.S. As we progress over the next 5 days, the jet stream pattern across North America is expected to become a bit more amplified with higher heights/upper ridging developing over Greenland and the northeast Pacific into Alaska raising the risk for cold air penetration into the Lower 48. In the near term, the risk for cold air will be confined mostly across the western U.S. as the upper level setup will allow for upper level troughing/cyclonic flow to become lodge in between the two aforementioned upper ridges. This will introduce colder changes to the western U.S. over the course of the next 5 days.

With upper level troughing and cold temperatures over the western U.S. fully in place by mid next week, upper level ridging and unseasonably warm temperatures will develop further downstream across the eastern half of the country over the Thanksgiving holiday weekend or during the 6-11 day time frame. Things get interesting as we move into the latter parts of the 6-11 day time frame or during the first few days in December. That's when forecast models are showing the possibility of a return to a highly amplified pattern (much like we'd seen in the previous cold pattern) with strong upper level ridging over the northeast Pacific/Gulf of Alaska into Alaska and downstream troughing over much of Canada and the Lower 48 that will raise the risks for a return to more cold air outbreaks (more of an Arctic origin) and ultimately a colder pattern across the central and eastern U.S. Figure 7 below is a map from the 0z Canadian CMC ensemble depicting the jet stream upper level pattern for Thanksgiving Day.

Source: WeatherBell

Figure 8 below is a map from the 0z Canadian CMC ensemble depicting the Day 11 (December 2) jet stream upper level pattern.

Source: WeatherBell

Figure 9 below is a map from the 0z GFS ensemble depicting the 4-9 day, Thanksgiving Week's (November 25-30 or for week ending Fri. Nov. 29) predicted temperature pattern.

Source: WeatherBell

Forecast models continue this idea through the 11-15 day period (early December).

Figure 10 below is a map from the 0z Canadian CMC ensemble depicting the 11-16 day (December 2-7 or for week ending Fri. Dec. 6) jet stream upper level pattern.

Source: WeatherBell

Figure 11 below is a map from the 0z Canadian CMC ensemble depicting the 11-16 day (December 2-7 or for week ending Fri. Dec. 6) temperature pattern.

Source: WeatherBell

Final Trading Thoughts - Predicted cold pattern early December to yield bullish draws

The weather pattern earlier this week was admittedly viewed as complex and one that was subject to change. That change has taken place from a warmer outlook to a colder outlook in favor of natural gas bulls and investors in UNG, UGAZ, and BOIL. All of the main forecast models, led by the American GFS , continue to advertise the return of a highly amplified jet stream pattern over North America that supports the risk for cold air outbreaks and an overall cooler than normal pattern during the opening week of December. As a result, natural gas prices are poised to move higher in the days ahead.

Expect a price range between $2.50 and $2.75 over the next week for the front-month December futures contract. UNG will trade between $18.50 and $22.00.

Figure 12 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 12: Natural Gas Weekly Storage Injection/Withdrawal Projections over the next four weeks.

Source: Andrei Evbuoma

Figure 13 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 13: Observed and four-week projected natural gas inventory levels.

Source: Andrei Evbuoma

Figure 14 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 14: 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.