Natural Gas Trading: Not The Best Time To Be Long

Summary

• Currently, we expect the EIA to report a draw of 125 bcf next week (a final estimate will be released on Wednesday).
• If the latest weather forecast remains unchanged, total natural gas demand should edge up by 0.8 bcf/d y-o-y (on average) over the next two weeks.
• Dry gas production has recovered and has even managed to rise above last year's level.
• Storage deficit vs. 5-year average is projected to shrink by 35 bcf by April 2 (from -205 bcf to -170 bcf).
• We should have held our short positions for longer.
• Looking for a helping hand in the market? Members of Energy & Currencies Trader get exclusive ideas and guidance to navigate any climate. Get started today »

Supply-Demand Overview

For the week ending February 26, we estimate that the aggregate demand for U.S. natural gas (consumption + exports) totaled around 797 bcf (or 113.8 bcf/d) (down as much as -29.8 bcf/d w-o-w (week over week) and down some -3.3 bcf/d y-o-y (year over year)). The deviation from the norm remained positive but narrowed substantially to +11.8 bcf/d (from +34.4 bcf/d a week earlier).

We estimate that the aggregate supply of natural gas in the contiguous United States (production + imports) totaled around 678 bcf (or 96.9 bcf/d) for the week ending February 26 (up +9.6 bcf/d w-o-w but down -5.2 bcf/d y-o-y). The deviation from the norm turned positive (+7.2 bcf/d).

Here's our latest forecast for the next two weeks:

March 5

• Total supply: 98.3 bcf/d (-2.9 bcf/d y-o-y)
• Total demand: 107.9 bcf/d (-0.9 bcf/d y-o-y)

March 12

• Total supply: 97.4 bcf/d (-3.0 bcf/d y-o-y)
• Total demand: 103.3 bcf/d (+2.4 bcf/d y-o-y)

Notice that total supply is projected to decline (in annual terms), while total demand is projected to increase slightly (although the forecast is uncertain due to the weather factor). If the latest weather forecast remains unchanged, total natural gas demand will edge up by 0.8 bcf/d y-o-y (on average) over the next two weeks. Please remember that natural gas demand is a highly volatile market variable due to the frequent (and often, sporadic) changes in the short-range weather models.

Please note that these forecasts are updated daily.

Source: Bluegold Trader estimates and calculations

Storage

Currently, we expect the EIA to report a draw of 125 bcf next week (a final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average -65 bcf over the next three weeks (four EIA reports). Annual storage deficit is projected to expand by 77 bcf by April 2. Storage deficit vs. five-year average is projected to shrink by 35 bcf over the same period (from -205 bcf to -170 bcf).

Source: Bluegold Trader estimates and calculations

Fundamentally, with all other things being equal, we think that today March contract price will attempt to rise above $3.050 and may even try to touch $3.100 but should stay below $3.140 per MMBtu.

Trading Strategy

As you know, we closed our short positions on Wednesday (see previous article). However, we now regret it because it appears that natural gas shortage is increasingly unlikely this year.

Below is the list of the latest bullish and bearish factors. We will wait for lower prices before initiating any long positions.

BULLISH FACTORS:

• Weather-neutral SD balance is tight (bullish) vs 2020 and is projected to remain mostly tight for another 13 weeks (at least)
• Total demand is projected to be mostly above last year's level (over the next three months: March-April -May)
• Annual storage deficit is expanding (5-week outlook)

BEARISH FACTORS:

• In absolute terms, the latest short-range weather forecast is bearish
• In relative terms, the latest short-range weather forecast (ECMWF 00z Ensemble) is bearish vs yesterday's 12z results (-5 bcf) and is very bearish vs yesterday's 00z results (-23 bcf)
• Dry gas production has recovered and has even managed to rise above last year's level (see the chart below)
• Our short-range storage level outlook was revised higher (vs yesterday's results)
• Storage deficit vs 5-year average is shrinking (5-week outlook)
• Implied "expectations gap" for the next two reports is bearish (+123 bcf)
• End-of-Season storage indices are above market expectations (see the table below)
• Natural gas price is above last year's level (5-week forward curve +$1.008 y-o-y)
• The monthly net impact of non-degree day factors on natural gas consumption in the Electric Power sector is bearish (vs a year ago) - currently estimated at -5.1 bcf/d (primarily due to lower coal-to-gas-switching and stronger wind generation)
• Historically, Apr. contract has been a "bearish contract" (12-year av. return is -1.64%)

Source: Bluegold Trader estimates and calculations

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.