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Commodities | Market Outlook

Natural Gas - A Messy Bottom

Summary

Hotter weather over the weekend combined with no increase in Lower 48 production
propelled natural gas prices up by ~10%.

September should see LNG exports from the US rebound thanks to better economics.

But the bottom is messy because the market's concern about US storages getting close
to tank top needs to go away first.

The market will do everything in its power to avoid the tank top scenario even if it means
that it overly discounts prices in the near term.

As a result, the key ingredients for higher prices are still hotter weather and lower
production, so if these two variables continue to trend in the same direction, expect us to
turn into bulls.

This idea was discussed in more depth with members of my private investing community,
HFI Research Natural Gas. Get started today »

Welcome to the messy bottom edition of Natural Gas Daily!

Hotter weather over the weekend combined with no increase in Lower 48 production
propelled natural gas prices up by ~10%. Last week, we noted that following the closing of
the August LNG export trading cycle, September should see very little cancellation due to
much better economics. This is true for LNG exports all the way up to ~$2.30/MMBtu or
31% higher than today's price. This means US natural gas prices will be dominated by
US-related gas fundamentals, which means if the weather turns hot, prices will rise.

But the title of this article is a messy bottom because, like any bottoming market pattern,
they are usually messy. Short-sellers get wiped out on days like today following a
ridiculous surge in price, while sideline bulls get tempted to chase the rally.

It's times like this that one needs to be particularly cautious of the landscape for natural

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gas. Has anything really changed since last Friday? Are the storage concerns for the US
completely eliminated?

The answer to both questions is no, so the bottom is still taking its shape and form and
readers should be aware to call this an absolute bottom just yet.

Now looking at the fundamentals, things are going to be getting better.

Storage build concerns should be somewhat alleviated starting next week once the
fundamental balances start to reflect lower storage builds in the coming weeks. But
building at or just below the 5-year average is not enough for this market. Remember that
our article on Friday noted that if US gas storage builds exactly at the 5-year average, we
would, in fact, hit operational tank top. This is a scenario the market does not even want to
imagine as it could send gas prices deeply in the negative in some regions.

So to avoid all this altogether, the market is going to keep prices suppressed until it's sure
that we won't hit tank top. This will likely require a few more weather reports confirming a
much hotter than normal July.

Traders we survey believe that if the concerns do alleviate, we should see August
contracts trade up to $1.90/MMBtu.

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The other thing that has the market feeling a bit more relieved is the fact that with
associated gas production returning, we are still at the bottom of the production range.
Note that we said we need to see sub ~88 Bcf/d to start getting excited and with a new
nomination cycle just 2-days away, the July production reading will be very important for
where prices go.

For July, we don't even need to see a decrease to be bullish. If production is still at ~88
Bcf/d, traders will start getting bullish because that's with associated gas production
returning online.

As a result, the key ingredients for higher prices are still hotter weather and lower
production, so if these two variables continue to trend in the same direction, expect us to
turn into bulls.

Last thing, due to illiquidity concerns on BOIL/KOLD, we will be using 3x leverage on

For readers interested in following natural gas fundamentals, HFI Research Natural Gas
premium provides:

Daily natural gas fundamental updates.

For more info, please see here.

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.

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Comments (25)

katmandu100
Good data and commentary.

02 Jul 2020, 08:53 AM

Money Talks!
Lately, I'm guessing everything right. Every trade I make turns to gold. But, I have no merit; it's just luck.
Too bad I cannot say the same for the past given that I lost a massive amount of money trading this
commodity. Like the casino, it's an addiction and a major wild card is the weather forecast which prediction
after 48 hours is a crap-shoot. So go figure.

01 Jul 2020, 07:22 PM

gstrfbull
NG not going to $1.90. LOL. More like .93c-$1.35 in the next month.

01 Jul 2020, 03:56 PM

gr8trg8tr
@gstrfbull

I’m not as bearish...but L48 production is just barely tricking down and global storage is filling or will
be full in October

So many articles touting “tight” and “below record” production while the supply tsunami continues
globally

LNG export is not returning unless we get $1 NG to compete with new Russia/ME projects coming
on line late this year.

I think we see $1.40 before $1.80

Retirement of DGAZ/UGAZ is a bummer....or richer depending on your balances

01 Jul 2020, 05:15 PM

kimbillro
NG is 1.718 early this morning @gr8trg8tr .

02 Jul 2020, 04:06 AM

offtheglass

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Keep us posted about your short trade. Looks like a very good reward:risk. @gstrfbull

02 Jul 2020, 12:22 PM

kimbillro
I can't go long or short @offtheglass .

02 Jul 2020, 02:02 PM

JesseC27000
The bottom is not in.

01 Jul 2020, 01:02 PM

kimbillro
It dropped back to 1.66 @JesseC27000 .

01 Jul 2020, 02:53 PM

kenberthiaume
How much NG is shut in from CNX, EQT, etc? Any?

I think about 1bcf is shut in in the bakken from associated. Not sure.

01 Jul 2020, 09:50 AM

offtheglass
A messy bottom is the right way to say that. I was hoping for a more follow-through, but today it's -4%. It
may take a while to bottom. I hope it doesn't go lower though.

01 Jul 2020, 08:14 AM

kimbillro
I hope it does so I can buy it @offtheglass .

01 Jul 2020, 02:54 PM

IndyDoc1
The Mediterranean sea has huge reserves of natural gas. Israel, Egypt, Turkey are on board. This is just
the beginning; way too much supply.

30 Jun 2020, 08:53 PM

kimbillro
Tell the bulls that @IndyDoc1 , they're lifting NG out of my buying range and I missed the bottom
for the 5th time.

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30 Jun 2020, 08:55 PM

kenberthiaume
Has to be developed, and it won't be unless the price is high enough. And it competes against
LNG, not domestic production for domestic supply.

01 Jul 2020, 09:52 AM

ofgktc
Yea i wouldn't try time the bottom jump in now

30 Jun 2020, 08:32 PM

kimbillro
It's hard for me to jump in at 1.75 when it was 1.43 just two days ago @ofgktc . I don't mean to
sound greedy or anything like that.

30 Jun 2020, 08:57 PM

Main_Street
Premium Marketplace
@kimbillro

It's ok. Greed is good.

30 Jun 2020, 09:43 PM

AEGISBMD
@kimbillro

WB seems to have done good being greedy.

01 Jul 2020, 05:05 PM

PT Larry
Many thanks for the article.

30 Jun 2020, 08:28 PM

Andy92
This is definitely a career bear market for sure, that no one will forget. Rampant overproduction, coolest
summer in 20 years, historically mild winter (warmest winter on record), and finally, coronavirus. One silver
bullet after another. Finally, glad and majorly relieved to see closure.

30 Jun 2020, 06:45 PM

kimbillro

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Hold on to your silver bullets @Andy92 . They stop werewolves.

30 Jun 2020, 06:54 PM

Andy92
haha

30 Jun 2020, 07:28 PM

ofgktc
@Andy92 true but its keeping prices low as we go into winter with production to low

30 Jun 2020, 10:51 PM

kimbillro
It has been a messy bottom, that is for sure.

30 Jun 2020, 05:08 PM

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