Natural Gas: Volatility Set To Surge Into Winter Months On Falling Production

Aug. 21, 2020 4:06 PM ETUNG, DGAZ, BOIL, KOLD, UNL33 Comments28 Likes

Summary

  • Increasing natural gas volatility is just the start of things. Winter gas trading volatility this year expected to be significantly higher than before.
  • As Lower 48 production falls further into year-end, the start of withdrawal season will usher in much higher volatility this year with bias to the upside.
  • In the near term, however, lackluster cooling demand forecasts will weigh on the recent price surge and we are positioned for a pullback via a short in EQT.
  • But once we get closer to the winter months, we favor playing primarily the long side as we believe lower production and dwindling storage will fuel prices higher.
  • This idea was discussed in more depth with members of my private investing community, HFI Research Natural Gas. Get started today »

Welcome to the make volatility great again edition of Natural Gas Daily!

Natural gas is back at it again being the widowmaker that it is. After crashing to $2.28 earlier in the day, September contracts are now closing near the recent highs at $2.458/MMBtu right into the weekend. Traders we surveyed were cashing in on their shorts earlier today, but the sudden surge is catching the market's attention again. Volatility in natural gas is starting to surge again after rangebound trading for most of the summer, but all the fundamental signs going forward suggest natural gas volatility will remain very elevated with high upward bias in price moves.

Source: HFIR

The number one source of the heightened volatility will be an absolute lower level in US natural gas production. For those trading natural gas, you have not seen what real volatility looks like yet (we are talking 6-7% swings daily). The reason being is that natural gas storage remains ample for the time being, and natural gas only gets out of control when there's a shortage in storage or way too much (price reckoning).

And so with the natural gas storage expected to be very elevated going forward, the real upside volatility isn't even here yet.

Now looking at the near-term demand outlook, things aren't great, which puts more burden on the recent price rally.

Source: Weathermodels.com

As you can see in the 10-15 day outlook, the cooler than normal temperatures expected in the central US to the Northeast will tamper cooling demand.

Source: HFIRweather.com

You can see this in the TDD chart where projected demand is expected to fall to the 30-year average. Given that the weather isn't supportive of a very bullish narrative going forward, we remain cautious on natural gas in the short term and remain positioned in our EQT short position.

In summary, we are short EQT to play the pullback in natural gas prices. We find the risk/reward to be favorable given the set-up and we are short EQT at $16.80.

As for the winter playbook, we will be playing primarily on the long side as we see lower production levels as a key catalyst for higher volatility in natural gas trading, but in particular, lower production would be the tailwind for higher upside volatility vs. downside. And while weather forecasting is far from always being accurate, Farmer's Almanac has a higher hit ratio than 65%, so we would pay attention to its winter forecasts.

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This article was written by

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Disclosure: I am/we are short EQT. 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.

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