Natural Gas Producers Aren't Buying The Recent Rally

Summary

• Natural gas producers have not rallied with the recent rally in prices.
• That's because, in our view, US natural gas situation has actually worsened in recent weeks thanks to cooler than normal weather forecasts.
• By mid-September, US natural gas storage will be the highest in the last 5-years.
• But the unwinding of DGAZ (covering shorts in the underlying derivative) is keeping the natural gas market chaotic in the near term.
• We will be looking to short EQT to play the NG pullback.
• Looking for a helping hand in the market? Members of HFI Research Natural Gas get exclusive ideas and guidance to navigate any climate. Get started today »

Welcome to the not rallying along edition of Natural Gas Daily!

Although natural gas prices continue to march higher with September contracts hitting an intraday high of $2.465/MMBtu, natural gas producers have not followed suit. In fact, our favorite natural gas producer, EQT, has managed to fail to breakout above $17 for over 2-weeks now.

Repeated failed breakouts usually lead to a move lower, and so after the DGAZ shenanigan is over on Thursday, we could be looking to short EQT to trade the downside on NG.

Fundamentally speaking, natural gas market has not exactly tightened in the last week or so to justify this move. One could argue that the LNG price ramp globally justifies Henry Hub to catch-up, but we would argue that it's for Q4 pricing, not today's prices that will benefit.

Source: CME, HFI Research

As we noted in our NGF to subscribers yesterday, there's virtually no more risk of US LNG being curtailed in Q4 thanks to much higher pricing globally. As you can see, Henry Hub would need to rise to ~$4/MMBtu to justify lower exports, and that's unlikely considering domestic storage overhang.

In fact, our latest update shows that the US natural gas storage situation has worsened largely due to falling cooling demand and rising production.

As you can see in our forecast above, natural gas storage is set to reach the highest level in recent years by mid-September.

So while the US storage situation presents a more troubling outlook for prices, the DGAZ unwinding remains at center stage for frenzied trading. We wrote about it in more detail last Friday. Many of the traders we survey are staying out of the market completely until the frenzy unfolds by Thursday.

And once the traders return to the fold, it's likely to the downside near

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a short position in EQT over 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.