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Natural Gas - Markets Remain Highly Skeptical Of Incoming Cold Trend As Fundamentals Flip Into Deficit

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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

Weather models continue to flip-flop over the weekend, but this time, it's not on whether or not we are trending colder than normal, but just how cold.

GFS-ENS remains far more bullish than ECMWF-EPS at the moment, but both models show a cooling trend appearing in the 10-15 day outlook.

The incoming trend is colder, but like the adage, "Fool me once, shame on you. Fool me twice, shame on me." None of the bulls are buying this outlook for-now.

This fundamental tailwind has pushed the natural gas market into an undersupply, which is in stark contrast to the ~3 Bcf/d oversupply two months ago.

This also coincides with money manager short positioning hitting a record high and net long positioning hitting a record low.

Welcome to the still skeptical edition of Natural Gas Daily!

Weather models continue to flip-flop over the weekend, but this time, it's not on whether or not we are trending colder than normal, but just how cold.

GFS-ENS remains far more bullish than ECMWF-EPS at the moment, but both models show a colling trend appearing in the 10-15 day outlook. There's also something else that's pressuring the TDD outlook and that's the difference between the 2m temperature anomaly outlook and the 500mb height anomaly outlook.

We will save you time by just saying that the natural gas market has historically always followed the 500mb height anomaly change for the incoming trend and not the 2m temperature anomaly. Although do keep in mind that it's the 2m temperature anomaly that calculates the changes in heating demand.

Source: WeatherModels.com

The incoming trend is colder, but like the adage, "Fool me once, shame on you. Fool me twice, shame on me." None of the bulls are buying this outlook until there are more weather model confirmations in the coming days.

There are reasons to believe this time is "different", but if you are the cautious type, you can wait for additional incoming confirmations.

Weather aside, the market is moving in the right direction in terms of fundamentals. EOS is projected to be ~1.84 Tcf.

Storage will remain in surplus versus the 5-year average into EOS unless we have much higher TDDs for the end of Feb and March.

Lower 48 production continues to trend lower while US natural gas exports hit new all-time highs.

This fundamental tailwind has pushed the natural gas market into an undersupply, which is in stark contrast to the ~3 Bcf/d oversupply two months ago.

So while the natural gas market remains fixated on the short-term weather model changes (as it should during winter), the fundamental background is starting to shift.

This also coincides with money manager short positioning hitting a record high and net long positioning hitting a record low.

Source: CFTC

The set-up for prices to shoot up is there, but in the near-term, we need colder than normal weather to continue. We are currently long 2/3 in UGAZ and will look to add only if weather models continue to confirm the incoming cold trend.

Disclosure: I am/we are long UGAZ. 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.