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Natural Gas: Production Hits All-Time High, But Prices Supported By Bullish Weather

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Includes: BOIL, DGAZ, GAZ, GAZB, KOLD, UGAZ, UNG, UNL
by: HFIR Energy
HFIR Energy
Contrarian, hedge fund manager, commodities, oil & gas
Summary

Natural gas prices are finally reacting to the bullish weekend forecast 10-15 days out.

Both ECMWF-EPS and GFS-ENS are trending more bullish now in the 10-15 day range, with GFS-ENS, once again, leading the charge on the cold front.

Over the weekend, there's a potential for more bullish surprise in heating demand, so we will be watching the weather models closely.

Production is now at an all-time high, and while we expect Lower 48 gas production to fall in H1 2020, this bodes bearishly for balances going forward.

While the weather in the short term will continue to drive the direction of natural gas, bulls should be aware of where fundamentals are as to appropriately assess the proper upside potential.

Welcome to another record edition of Natural Gas Daily!

Natural gas prices are finally reacting to the bullish weekend forecast 10-15 days out.

Source: HFIRweather.com

Both ECMWF-EPS and GFS-ENS are trending more bullish now in the 10-15 day range, with GFS-ENS, once again, leading the charge on the cold front.

Another major weather model divergence has occurred, which the market is currently taking with stride. The GFS-ENS has been quite volatile as of late, with ECMWF-EPS remaining stable throughout the week. We saw GFS-ENS whipsaw last weekend resulting in a gap lower, which also pushed us to be stopped out of our long position. We currently do not have a position at the moment, but the traders we surveyed are long a small position in the December contracts.

Over the weekend, there's a potential for more bullish surprise in heating demand, so we will be watching the weather models closely.

But the bullish news today was somewhat offset by the record production of ~96 Bcf/d.

Source: PointLogic

Production is now at an all-time high, and while we expect Lower 48 gas production to fall in H1 2020, this bodes bearishly for balances going forward.

We estimate the production required to balance the natural gas market today to be ~93.5 Bcf/d, which means we are about ~2.5 Bcf/d too high at the moment.

And despite Canadian gas net imports being displaced by higher production, total gas supplies remain materially higher y-o-y due to increasing production.

As a result, natural gas bulls expecting prices to surge to $4/MMBtu this winter may be disappointed, given the elevated production level.

While the weather in the short term will continue to drive the direction of natural gas, bulls should be aware of where fundamentals are as to appropriately assess the proper upside potential.

For now, early December outlook is bullish, and we could see more surprises this weekend.

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.