Natural Gas: Bearish Weather Persists, But Production Drop In Permian Starting To Get Meaningful

Summary

• For the week ending 2/28, we have a storage draw of 110 Bcf. This compares to the 5-year average of -107 Bcf and last year's -149 Bcf.
• Weather models proceeded to lose all of the HDDs they gained over the last 48 hours. ECMWF-EPS once again turned really bearish in the 10-15 day outlook.
• With no bullish weather in sight for the time being, the recent natural gas price rally may be a head-fake and more related to the oil rally we are seeing.
• Keep in mind global LNG prices are Brent price linked, and the recent rally in oil price has also pushed LNG prices for April back above $3/MMBtu.
• For us, the trade is still to play the bull side once the weather impact gets reduced towards the end of March. The tight supply-demand balance should persist into summer, with power burn hitting a new record high, while production continues to fall. The main point of execution here is figuring whether or not a short-term retest is coming. Given the weather models remain bearish for now, we think that's likely the short-term move.
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Welcome to the mixed bag edition of Natural Gas Daily!

For the week ending 2/28, we have a storage draw of 110 Bcf. This compares to the 5-year average of -107 Bcf and last year's -149 Bcf.

Bearish Weather Persists, But Production Drop In Permian Starting To Get Meaningful

Weather models proceeded to lose all of the HDDs they gained over the last 48 hours. ECMWF-EPS once again turned really bearish in the 10-15 day outlook.

The reduction in heating demand has once again pushed EOS to 1.9 Tcf.

As the market stands today, the surplus to the 5-year average in gas storage is expected to persist. With no bullish weather in sight for the time being, the recent natural gas price rally may be a head-fake and more related to the oil rally we are seeing. Keep in mind, global LNG prices are Brent price linked, and the recent rally in oil price has also pushed LNG prices for April back above $3/MMBtu.

Source: CME

As you can see in the 15-day outlook, the East Coast is expected to remain warmer than normal.

Source: WeatherModels.com

In addition, the control member continues to be more bearish than the mean.

As a result, this leaves open the possibility of a retest of the recent lows of $1.7/MMBtu if this bearish outlook persists.

But one caveat to this analysis is that the Permian gas production is taking a big hit due to pricing now turning outright negative.

Source: PointLogic

There's no release valve coming on anytime soon for the Permian, so negative gas pricing may subdue associated gas production, which would further tighten fundamental balances.

Source: PointLogic

We are likely to see Lower 48 gas production continue to trend lower throughout the year as Northeast gas producers are guiding towards lower overall production volumes.

But even the tight fundamental balance is no match for bearish weather, with implied supply-demand now in equilibrium.

For us, the trade is still to play the bull side once the weather impact gets reduced towards the end of March. The tight supply-demand balance should persist into summer with power burn hitting a new record high, while production continues to fall.

The main point of execution here is figuring whether or not a short-term retest is coming. Given the weather models remain bearish for now, we think that's likely the short-term move.

We will wait to go long.

Analyst’s 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.

Comments

[Joe China Puppet]

For how often the government is wrong (always), ya gotta wonder if the eia is wrong about ng prices.

[jdgpro57]

Easier counting when the government is correct.

[Joe China Puppet]

@HFIR

Please prove "power burn hitting a new record high"

[HFIR]

"EIA expects U.S. natural gas use in the electric power sector to increase 1.3% in 2020 as a result of natural gas-fired generation additions that continue to displace coal-fired generation."

www.eia.gov/...

[Joe China Puppet]

@HFIR

Thank you.

[patchadams]

Before we have our own Fukushima, we should start decommissioning electric producing nuclear reactors. This would double the price of NG in short order--everyone wins. Why is it not on the table?

[Retired_Oilman]

From SA, Kinder Morgan uncertain about future of Permian Pass pipeline...

•A Kinder Morgan (NYSE:KMI) executive says he cannot be certain that the company's proposal to build a third natural gas pipeline serving the Permian Basin will move forward, due to continued pressure on global gas markets and challenges in winning commercial support.

•Chief Strategy Officer Dax Sanders says talks with potential shippers continue for Permian Pass, but no contracts have been signed so far, and the project would not be sanctioned without solid take-or-pay contracts that carry terms of at least 10 years.

•Kinder Morgan, which already transports more than a third of the natural gas consumed in the U.S., has been planning for three gas pipelines to serve the Permian Basin: Its Gulf Coast Express pipeline entered full commercial service last September, the Permian Highway pipeline is under construction and targeted to start up in early 2021, and the Permian Pass would be Kinder Morgan's third gas pipeline in the Permian.

Makes sense since a third pipeline from the Permian would further glut the nat gas market and put more pressure on prices. The PHP may even do that next year when it goes into service!!

[Brian Cellars]

I certainly don't understand the logic behind waiting, especially when NG finally fell to the targeted low and then had a good chance of bouncing. And especially after chasing it most of the way down instead of holding DGAZ. Now, UGAZ has given +25% since Friday, plus pretty good day trades for extra gain. I can't remember such a perfect V on a day, like it did today, looking at the 15 minute chart. With a bit of luck, NG will push back over $2 again, at which time I'll sell my longs and go short again.

[snowgooseflying]

Brian,

I agree. I remember one of your posts where you've recommended taking a small position just before a bounce happens. I believe that time has arrived for DGAZ, as I don't see much more gain in UGAZ (Just a little more, maybe)
I don't understand waiting for a bullish set up either. My account grows regardless if I made my money as a bear or as a bull.

[Brian Cellars]

@user 435678
For sure, there's nothing to gain by being a bear or a bull. Today has provided nice trades both directions and there will likely be more. Just sold DGAZ and bought UGAZ 36.20 moving up and have stops in to switch if NG breaks lower.

[Brian Cellars]

@user 435678
Hope you were on board again for that easy ride. :)
I sold my UGAZ and went with DGAZ this morning and was a little nervous when it reversed from the 10am drop, but now we're looking good. It may reverse again, but profits will have already been locked in. I suspect NG will continue to fall though with oil rising again, perhaps a lot and sharply if the Russians and Saudis agree to play a bit nicer.

[Andy92]

Permian production is at the least keeping prices down by a dollar.

[Derek Teed]

Yes, Permian producers are taking a price hit on low NG, but you have no proof that it will result in an associated gas production decline. This is just another assumption to add to your pile of continuously wrong assumptions. Did production drop in the Permian last time waha went negative? No.

[Andy92]

Fewer oil wells mean less associated with gas production. That's the reason associated is in the name it's a by-product of oil.

[Derek Teed]

@Andy92 We all understand what associated gas is. Now prove to me that there are fewer oil wells being completed in the Permian when the data does not state that.

[Andy92]

EIA.gov

[ckarabin]

Just takes time. By April 1, weather will not have any influence on gas demand anymore. Then we'll just be exposed to the YTY increase in demand due to low price (fuel switching) and exports. Supply meanwhile is on a steady track to decline for the next year. This slowly climbs off the floor as time progresses and there's no way to stop it either. The situation will keep tightening for a year now.

[ofgktc]

like a slow moving train proof is in the rigs 195 to 110 rigs dont lie..

[stonkless]

battle of the fibs

[katmandu100]

Excellent data and commentary,thanks.

[ofgktc]

looks like heading for 3 straight up days...been awhile since that happaned

[ofgktc]

wow dgaz 352$ to 275$ ouch

[beezwaxxxx]

it will split soon

[caracer]

Not near like UGAZ going from $203 in Nov to $35 now.

[ofgktc]

ugaz at 40$ but i get your point

[beezwaxxxx]

EOS 2000 1999 bulls looking for an early spring other wise we fall back to1.745

[Radtech02]

I am feeling an early summer this year. We are already in the mid 70's in Dallas in early March. We will be in the 90's by May at this rate.

[beezwaxxxx]

well early spring massive shorts cover 2.7

[beezwaxxxx]

any hint of an early spring and this sucker goes back to 2.3 today profit taking

[Andy92]

@beezwaxxxx early spring is on the way if the weather stays like it is.

[Radtech02]

86 degrees in Dallas Thursday! 83 Wednesday.... Way above the 68 degree normal for this time of year. Might be an early start to cooling season and NG consumption with electricity use.

[beezwaxxxx]

beezwaxxxx
Comments1463 | Following
will resume buying under 1.8 and 1.788 wait for thursdays profit taking before going bull
03 Mar 2020, 12:27 PM Edit/Delete

[PT Larry]

Need some help.

Associated natgas is gas that comes up with oil. Have heard that it can then be re-injected back into the well. So, why then is it flared? Is the re-injection process too expensive, or perhaps limited by the volumes that can be returned?

[HFIR]

Good question. Producers need to have the ability to inject gas into wells. Some don’t.

[ofgktc]

its the law nat gas has to be flared

[PT Larry]

So, it's just the capital cost to be able to do this? @HFIR

Is there a limit to how much gas can be injected?

[stonkless]

no buy signal yet. still right underneath fib ext @ 1.825
should pull back to one of the fibs below these.
keep in mind. historically the momentum has taken it down past the previous macro low
i would not be surprised to see it repeat this pattern and tag somewhere between 1.6 and 1.485
fib ext down from thnxgiving

23.6% - 2.246
38.2% - 2.165
50% - 2.1
61.8% - 2.035
78.6% - 1.943
100% - 1.825 <--- x
161.8% - 1.485 <--- ???

(Edited)

[ofgktc]

i disagree with your forcast but i appreciate the info as far as price and time...forgot how fast price fell only 2.24 during thanksgiving...we might end up wuth 1950eod but if not for low prices and every nat gas power plant running full throttle could been around 2500bcf

[stonkless]

lot can happen from here to mid March tho

[Radtech02]

@ofgktc
Imagine if we actually had a cold winter.. We would be in the 1200-1300bcf range.

[TK8500]

Natural gas is devoid of all value.

[PT Larry]

Thanks for the undated article.

[PT Larry]

@PT Larry Should be UPDATED.

[Tom1947]

Thanks HFI. You’re the first to acknowledge the production declines. Good job!

[Leftshark]

Production has been flat at 95 bcf/day for the last month. I’m bullish but facts are facts.

[ofgktc]

last 4 weeks production has averaged 94.6...