Natural Gas Production Fully Recovers As Market Weighs Price Upside Ceiling

Summary

• Natural gas prices in the near term are pricing in perfection.
• Production maintenance combined with higher heating demand resulted in larger deficit, but as production returns and heating demand wanes, so too will prices.
• While we agree the market balance will be tighter going forward, especially versus last year, summer gas trading usually sees limited upside due to gas-to-coal switching.
• Looking for a helping hand in the market? Members of HFI Research Natural Gas get exclusive ideas and guidance to navigate any climate. Learn More »

Photo by baona/E+ via Getty Images

June natural gas prices are down day as the market starts to weigh the impact of higher gas prices to power burn demand while production makes full recovery.

According to our model update, we have natural gas storage builds lower by 14 Bcf with 4/30 week showing a build of +65 Bcf. As you can see in the chart above, we are going to see a 21 Bcf deficit over the next 5 reports versus the 5-year average.

But despite the small deficit, we are seeing the market loosen a bit as production makes a full recovery back to ~92 Bcf/d. The deficit has narrowed to just -0.6 Bcf/d.

Looking at the fundamentals, production has fully recovered which would put pressure on prices near term. The market is somewhat overlooking this because total gas demand is at an all-time high for this time of the year.

The elevated demand is the result of these four variables:

Power burn demand has improved due to better economic activity and early start to cooling demand in key regions. Industrial demand is materially higher y-o-y due to mandatory lockdowns last year. And the exports continue to be at all-time highs for this time of the year.

One thing to note is that power burn demand will be the biggest demand contributor during the summer cooling season, so if prices get too high, utilities will switch from gas to coal dampening demand and reducing the upside. Traders we surveyed indicate we are already approaching this price ceiling as utilities look to use more coal. If so, this could present us with a short opportunity down the road. We continue to urge to wait for the set-up to become too obvious before taking a short position.

On the production side, you can see that we are going to be seeing massive y-o-y increases. With production now at ~92 Bcf/d and all the related maintenance over, we are a bit hard-pressed to not see prices come down a bit near term.

The market is pricing in near perfection for this summer with much warmer than normal weather in the curve. Again, we are not shorting just yet, but it's something we are watching closely.

Analyst’s 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.

Comments

[Brian Cellars]

Thanks for the update. I can't remember the last time you were going short.

[coppercoin]

@Brian Cellars Today's latest ENSO report is predicting warmer than average temps for MJJ for the L-48. If this prediction is wrong and the latest seasonal predictions by the American and Canadian models are correct then the market is likely off balanced by being over bought. Add to that, rising Crude and, thus, more associated NG production and there could be the unique situation of over supply and under demand.

www.cpc.ncep.noaa.gov/...

[Henri DeToi]

@coppercoin, furthermore, the price of natural gas in way too high for the time of year compared to recent years. It is bound to go down, and it is as I write, before it bounces again. Short is written all over it!

[coppercoin]

The American and Canadian weather models are predicting cool/mild temps for the eastern USA from now to July 31.

https://twitter.com/judah47

[ofgktc]

Very tight trading range on sidelines for now

[Henri DeToi]

The bulls are trying hard to get the price of natural gas over $3, but it's sticking under. Just a matter of time before it really tanks. There is no way the price of natural gas should be near $3 at the beginning of May.
The Beta Pro contract is starting to roll into July with a 1.6% contango @ 25% per day.

[Andy92]

@Henri DeToi Was it going to tank?

[stag15]

@Henri DeToi 21 strip at ~$3, way above everyone's guidance. Due to hedges, no one is using the strip to add rigs and grow. Very bullish as it sets a new floor for price.

[Henri DeToi]

@stag15, the price will tank before a floor is set. It;s too early in the spring and associated gas will see to it. No floor before at least July or August.

[katmandu100]

Good data and COMMENTARY.

[shortnattytozero]

Analyst on BNN Bloomberg today discussing downside risks to WTI, which included stuff like increased OPEC+ production coming on, shale oil producers coming back on, etc; but his most interesting comment was that the DOWNSIDE risk for nat'l gas is much bigger if shale gas comes back on.

[jgtjr]

I just cannot accept that gas prices are too often determined by day-traders who are completely void of substantive knowledge of the industry. Huge lessons about the production of fracked shale formations were learned the hard way by small and medium producers (and their banks) last year. Frack zones rapidly off-loaded freed up gas within the first few months of production, a characteristic which slaughtered prices from too many naive producers following the same pattern. Many such producers lost their shirts; and there is no better guarantee that they won’t make the same mistake again. I see the natural gas market moving much higher, based on supply, demand and (better) production decisions. Glenn Turner, natural gas producer

[ofgktc]

@jgtjr day traders have alot of money trade 10,000 mbtu each contract remember that gas has to be physically delivered to Henry hub in louisiana

[terziev]

The author is both right and wrong at the same time. The demand for NG during next several months is articulated correctly. However, we're in the midst of the Everything rally and hyperinflation.

[Henri DeToi]

@terziev, the author is right across the board. Short all the way down to Hades!

[Trggr]

Short into inflation is not that great of an idea right now.

[Henri DeToi]

@jminni with natural gas near $3, I say it is!

[Wimal]

@HFIR Energy Is it likely utilities will be more reluctant to switch to coal this year compared to previous shortages of nat gas for ESG reasons?

[HFIR]

@emthree It's usually economics, but don't think ESG will actually be material for the switching.

[paradox1]

@HFIR Agree, ESG visibility not a factor in switching decision, but ongoing coal fleet retirements should be. At what point will coal generation capacity be so low that switching won’t move the needle on nat gas price? Somewhere down the line switching will be a non-factor. Not a concern for a trader, but something to ponder for an investor.

[ofgktc]

I agree not time go short yet but keep and eye on it...to my fellow bulls remember market likes keep prices down until oct than price spikes

[Henri DeToi]

@ofgktc, short it now! Short it now!

[albertosf90]

2.750 in less than 2 weeks

[Ted Mason25]

Didn't you say 2.7 for June. Should go ahead and short.....or maybe there is something else pushing this higher.

[HFIR]

@Ted Mason25 haven't done anything yet, still waiting.

[Andy92]

LMFAO!

We have the most bullish spring rally in years, and I mean YEARS!

That weather and production won't mean much once summer begins and then we will have the first +3 plus prices during summer in 2016. Exports are at all-time highs and will stick around for the summer.

Bears are constantly sweating now and can't get a break despite everything they throw at traders to kill the rally.

Gas to coal switching was worse than it is now during 2016 by the way. I'm not that worried about it pulling the plug on the rally.

Production is stagnating at 92 bcf/d and states are reopening more and more for this summer.

[Henri DeToi]

@Andy92, the bulls had the same story last year, and the year before and the year before. Bears were in control. This year will be no different.

[Andy92]

@Henri DeToi Doesn't look like it.

[Henri DeToi]

@Andy92, natural gas at $2.95 at this time of year is a short. I dare anyone to go long.

[K C]

"but as production returns and heating demand wanes, so too will prices."
Bingo...