Seeking Alpha

Natural Gas: Supply Loss Disappoints As Weak Cash Drags Futures Lower

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Includes: BOIL, DGAZ, DRIP, GAZ, GAZB, GUSH, IEO, KOLD, NDP, PXE, UGAZ, UNG, UNL, XOP
by: HFIR Energy
Summary

Mother Nature has given the natural gas market a boost over the last 2 weeks. April was much colder than normal, with May starting off colder as well.

But even though TDDs were close to doubling the seasonal average, the cash market remained weak.

Today's cash price was ~$1.6 and tomorrow's is pegged at $1.5/MMBtu.

Although on the oil side we've seen a drop in US oil production to ~9.44 mb/d, we have not seen a similar drop in Lower 48 gas production.

Our view is that with weather and demand reaching their seasonal lows in the coming week, if the cash market starts to bottom around $1.5/MMBtu, that will be the time to go back being long natural gas. For the time being, cash remains weak near term and could move even lower next week, which should give pause to anyone adding longs here.

Welcome to the weak cash market edition of Natural Gas Daily!

Mother Nature has given the natural gas market a boost over the last 2 weeks. April was much colder than normal, with May starting off colder as well.

But even though TDDs were close to doubling the seasonal average, the cash market remained weak.

(Source: PointLogic)

Today's cash price was ~$1.6 and tomorrow's is pegged at $1.5/MMBtu.

The weakness in cash is what's been dragging futures lower. The supply loss disappointment so far, combined with concerns over LNG exports, is pushing the entire curve lower as well.

Although on the oil side we've seen a drop in US oil production to ~9.44 mb/d, we have not seen a similar drop in Lower 48 gas production.

(Source: EIA, HFI Research)

(Source: PointLogic)

In addition, Cushing storage is now unlikely to hit tank top with EIA reporting a storage draw of 3.5 mbbls last week. As the shale oil production shut-in nears its peak, natural gas bulls (including us) that were betting on a massive drop in associated gas production are being disappointed.

The lack of a material production drop near term has tempered the upside case for natural gas. Given that LNG economics will be putting a cap on natural gas prices, bulls have a defined range to trade within.

Our view is that, with weather and demand reaching their seasonal lows in the next coming week, if the cash market starts to bottom around $1.5/MMBtu, that will be the time to go back being long natural gas. For the time being, cash remains weak near term and could move even lower next week, which should give pause to anyone adding longs here.

We did, however, initiate a short on XOP and will remain short until the near-term gap of $37 is filled. That's our current price target.

Disclosure: I am/we are short XOP, DGAZ. 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.