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Natural Gas: Upside Potential To Increase Amid An Attractive Valuation Coupled With Some Cold Weather Support Next Week

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

Natural gas prices rebound Monday after Friday's massive sell-off; lowered prices making the commodity attractive for investors to begin initiating long positions.

Weather pattern overall remains mild and variable, but next week's cold provides some support for the bulls to at least keep upside potential limited.

Forecast models differ in the 11-15 day.

Monitoring potential for the pattern to turn colder late month.

Investment Thesis

Upside potential is poised to increase amid low prices, colder weather next week, and the potential for additional cold late December.

Natural gas futures rebound amid an attractive valuation and additional cold inserted into the weather outlook for next week

On Monday, the front-month January contract settled up 4.8 cents ($0.048) to $2.329/MMBtu, the February contract settled up 4.6 cents ($0.046) to $2.308/MMBtu, and the March contract settled up 4.4 cents ($0.044) to $2.242/MMBtu. Figure 1 below is a chart depicting the price trend of the front-month January contract over the past 24 hours.

Source: Investing.com

On Monday, the United States Natural Gas ETF (UNG), which is the un-leveraged 1x ETF that tracks the price of natural gas, finished up 0.84% to $17.95.

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 0.86% and 1.06% at $9.35 and $9.53, 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 4.41% and 2.39% at $161.39 and $35.57, respectively.

Mild and quiet this week, but the cold returns next week in a pattern that's been variable; monitoring the potential for additional cold coming in late December into the New Year

The weather pattern over the next couple of weeks will overall be mild (continued bearish), but varied or progressive with a shot or two of cold air intrusions punctuated here or there across the central and eastern U.S. Signs are pointing to the potential for the pattern to turning colder late December into the New Year.

Additional cold/HDDs were added to the outlook in the 6-11 day time period or for the week ending December 13. During this time frame, the pattern is expected to become more amplified with upper level ridging returning to the western North America allowing for colder air to seep into the central and eastern U.S. This cold shot looks to span from Tuesday to Friday of next week. So the sequence will be this week being warmer than last week and next week projected to be colder than this week.

There are big differences amongst forecast guidance during the 11-15 day time frame in the handling of upper level troughing vs. ridging over the Gulf of Alaska and western North America. The GEFS ensemble supports ridging over western North America. This would support increased cold air intrusions and ultimately a colder solution during this time period across the central and eastern U.S. Meanwhile, the ECMWF and CMC ensembles support upper level troughing over the Gulf of Alaska and western North America that would support a milder solution overall. Figure 2 below is a map from the 12z European ECMWF ensemble depicting the 1-6 day (December 3-8) temperature pattern.

Source: WeatherBell

Figure 3 below is a map from the 18z GFS ensemble depicting the 6-11 day (December 8-13) temperature pattern.

Source: WeatherBell

Figure 4 below is a map from the 12z European ECMWF ensemble depicting the 10-15 day (December 12-17) temperature pattern.

Source: WeatherBell

Figure 5 below is a map from the 18z GFS ensemble depicting the 10-15 day (December 12-17) temperature pattern.

Source: WeatherBell

Final Trading Thoughts

The weather pattern will be mild and variable over the next couple of weeks, but the adding on of cold/heating demand next week provides the bulls some support and should at least result in upside potential being limited. From a technical/valuation standpoint, the commodity looks attractive and therefore could be poised to move higher after last Friday's massive sell-off. Longer term, the weather pattern could turn colder/more bullish late December into the New Year. With all of this said, I expect for upside potential to increase in the days ahead.

Expect a price range between $2.30 and $2.50 over the next week for the front-month January futures contract. UNG will trade between $17.00 and $20.00.

Figure 6 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 6: Natural Gas Weekly Storage Injection/Withdrawal Projections over the next four weeks.

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

Finally, Figure 8 below is the current storage deficit level and my four-week projected deficit levels.

Figure 8: Observed and four-week projected natural gas storage deficit.

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.