Natural Gas: Warmer Than Normal Weather Supports Higher Prices

Welcome to the warmer than normal edition of Natural Gas Daily!

This week saw EIA report +89 Bcf for the week ending June 28. This was higher than our forecast of +85 Bcf and higher than the consensus average of +88 Bcf.

Source: EIA

Next Week’s Estimate

For the week of July 5, we have a preliminary estimate of +70 Bcf. EOS is now 3.62 Tcf.

Natural Gas: Warmer Than Normal Weather Supports Higher Prices

Trading Position

Natural Gas: Warmer Than Normal Weather Supports Higher Prices

We did not make any new position changes this week. We remain long UGAZ.

Warmer Than Normal Weather Supports Higher Prices

Natural gas prices jumped upward today as the weather outlook continues to improve. There is, however, still a big disagreement between GFS-ENS and ECMWF-EPS after the 10-day outlook:

Natural Gas: Warmer Than Normal Weather Supports Higher Prices

GFS-ENS is suggesting the warmth to be short lived, while ECMWF-EPS is showing a much more bullish outlook.

The market started to price in some possibility of a warmer than normal risk today, but it did not price in the entire warmth. The reason we say that is because the projected fundamental balance is now showing a market that’s going to be in deficit:

Natural Gas: Warmer Than Normal Weather Supports Higher Prices

Thanks to power burn surprising to the upside and all-time US natural gas exports, fundamental balances have tightened materially over the last month.

One thing going against the bulls at the moment, however, is that lower 48 production hit its year-to-date highs over the last three days. While the production reading is still early, strong production volumes could lower the “balancing” price.

On a technical basis, the breakout also supports a move higher to the $2.50 to $2.6 region.

Natural Gas: Warmer Than Normal Weather Supports Higher Prices

In our view, for prices to sustain a move above $2.50 would require the weather outlook to remain supportive. So given the latest outlook today, the easy money is made going to that $2.5 resistance level.

Lastly, given how skewed the positioning is to the short side today, we think a short squeeze is very likely if the end of July to early August weather outlook remains bullish. This could easily push prices to $2.6 to $2.75.

For us, our game plan will be updated real-time to subscribers. For now, we are looking for a near-term target of $2.50-plus.

We will be watching weather models closely, so if you are trading natural gas and need guidance on weather, fundamentals, and trader positioning, we think you should sign-up for HFI Research Natural Gas.

Disclosure: I am/we are long UGAZ. 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.