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Natural Gas Market Anomaly: The Fundamentals Are Bullish, But The Price Is Going Down

Jun. 10, 2020 1:27 PM ETDGAZ, UGAZF, UNG, BOIL, KOLD, FCG, GAZ, UNL, NG1:COM, MLPG26 Comments


  • This Thursday, we expect the EIA to report 2,801 bcf of working gas in storage for the week ending June 5.
  • We anticipate to see a build of 87 bcf, which is 20 bcf smaller than a year ago and 7 bcf smaller vs. the 5-year average.
  • Annual storage "surplus" is projected to shrink by 170 bcf by July 10.
  • EIA still projects that U.S. dry gas production will continue to decrease until March 2021.
  • There is now a major bullish divergence between the number of projected TDDs and the price level. Natural gas is significantly undervalued.
  • This idea was discussed in more depth with members of my private investing community, Natural Gas Fundamentals. Get started today »

The Weather

Last week

Last week (ending June 5), the number of cooling degree days (CDDs) jumped by 19.1% w-o-w (from 53 to 64). We estimate that total energy demand (as measured in total degree days, or TDDs) was 9.4% above last year's level and as much as 14.4% above the 30-year average.

This week

This week (ending June 12), the weather conditions are warming up. We estimate that the number of nationwide CDDs will rise by 9% w-o-w (from 64 to 69). Total average daily consumption of natural gas (in contiguous United States) should be somewhere between 69 bcf/d and 73 bcf/d. Total energy demand (measured in TDDs) should be some 15.0% above the norm and as much as 25% above last year's level.

Next week

Next week (ending June 19), the weather conditions are expected to warm up again, but only slightly. The number of CDDs is currently projected to edge up by 3% w-o-w (from 69 to 71). Total energy demand (measured in TDDs) should increase by 8% y-o-y, while the deviation from the norm will remain positive at +10.6% (see the chart below).

Source: Bluegold Research estimates and calculations

The latest numerical weather prediction models (Wednesday's short-range 00z runs) agree that, over the next 15 days, TDDs should remain mostly above the norm (on average) - see the chart below.

Source: NOAA, ECMWF, Bluegold Research

However, there is a minor disagreement between the models in terms of scales: the latest GFS model (06z run) is projecting 71.0 bcf/d of potential natural gas consumption (on average over the next 15 days), while the ECMWF model (00z run) is projecting 71.4 bcf/d over the same period. Projected TDDs are trending higher and remain above the norm (+10.3%) as well as above last year's level (+14.7%). Indeed, there is now a major bullish divergence between the number of projected TDDs and the price

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Comments (26)

EIA shows natty spot at 1.43 last Tuesday.


I think that is a record in their time series (going back to late 90s). Not just inflation adjusted, but absolute.
The fundamentals are bullish? Have we looked at the demand side? There is also a demand destruction. The inventory will be high by November, probably over 4 TCF, so I am not ready to jump in yet. Long term I am bullish, but not right now. Just my opinion of course.
RickcarinoNYC profile picture
People constantly talks about Prices manipulated. I heard it for 2/3 years now. I believed it for some time, but now I know that is not truth. Truth is inventory level.
For so long, it never got low enough to have any longer impact. Increase in production and high Capex was always been the culprit. Gas producers never got cap on it. Market will only discuss growth of production, it was a race that only created debt & no profit.
This won’t change, it’s a culture and addiction that will last until bankruptcy. It’s a sad story so best strategy is stop buying and sell when you can. End of story.
ckarabin profile picture
@RickcarinoNYC I agree! People always talk about prices being manipulated, meaning that they are pushed higher or lower than the market would deem that they should be. When that happens, why wouldn't fundamentally based traders representing producers and large consumers of gas just see the disparity and enter the market in quantity. After all if they see gas was manipulated down to say $1.60 when it really should be at $2, why wouldn't they be buying contracts long as fast as possible as long as they could make a 40 cent profit? And their buying would continue as long as the disparity existed. The guy who manipulated the price down by selling short would then take a horrible bath on his manipulation. So why would someone try to manipulate then? Does he just assume the large players are stupid?
ckarabin profile picture
If manipulation were possible, then it implies I could force the price of say IBM down to $10 thru my manipulation and make a fortune. Nobody would see the "too low price" and buy! Righto!
It's changed as companies ran out of money and stopped drilling. Gas rigs are down 2/3 in 2 years. Production has rolled over and is falling. Associated gas in oil drilling is plunging too as drilling all but stops.
To further the bullish argument - oil keeps showing surprise builds. Cuts from OPEC+ haven't really been fully done and only last until end of July at this point. Could mean even more shale goes offline and therefore nat gas production will fall even further.
Cuts from OPEC last through 2021. The amount they are cutting is reduced after July and then again at YE. But large reductions stay in place for 18 months. US production will also decline due to (1) the huge decline in drilling and (2) the steep decline after 1 yr from Shale. That will start kicking in this fall
Before the "COVID-19 reductions" shale was already flooding the market. After July the market will not have as much support from the extra OPEC+ cuts. Lower for longer and probably range bound from $30-$40 until November and December. The Feds have been too optimistic about the recovery.
Royal Dutch Shell (RDS/A) announced a significant and historic dividend cut and a scaling back of operations.


The Energy tide is shifting.
PT Larry profile picture
Thanks for the article.

Am waiting with patience for the inevitable bullish move in natural gas.

As an older gentleman, I can say regarding gas (not natural gas), NEVER trust a fart. @kimbillro
Justy72727 profile picture
Good article, and thanks for the update. I’m long UGAZ and down a lot atm.

Pardon my ignorance, but what is NG1:COM???
Does that correspond to a certain month of nat gas or just nat gas in general?
I have the same question...
stonkless profile picture
NG1 is the continuous chart which is most commonly used.
Gas production should average 85.5 bcf over next 3 months and be down to 81 bcf by year end. My opinion.
Thank you very much for the article. It is interesting to see that 2016 had the highest gas storage records, but also during 2016 the price of natural gas increased significantly. The low rig count in 2016 does not seem to reduce gas in storage in 2016, but the price went up. Interesting to see if the same will happen in 2020.....Any clarifications regarding this are welcome. Thanks again.
I didn't think the lower rig count ever has any impact on gas in storage fast enough to make a difference in a year.

But I could be wrong, someone let me know if I am.
ckarabin profile picture
@Andy92 Rig count only matters as a lead indicator to a decline in production. Production is now falling, so screw rig count, supply is drying up and prices will eventually rise as a result.
When rigs are shut in, as you'd expect, they're always the least producing rigs. So, there's only a marginal reduction in production. You can't count all rigs as producing equally.
And this is why I have been saying that price of natural gas is totally manipulated.
yes, by leveraged shorts. I keep adding to UNG all the way down to zero. we'll see who smiles in the end.
JesseC27000 profile picture
It is not heavily shorted, roughly 1.4-1.5:1, which is much healthy than 3.1:1 couple month ago, what eats bulls alive is the tag team of contango and COVID19
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