Welcome to the Get Ready To Go Long Edition of Natural Gas Daily!
It stings your fingers, that’s the problem when you know that the outlook ahead is really bullish, but near-term fundamentals will be weak.
If you are wondering why upstream natural gas prices remain so volatile and low, we have pointed this out time and time again in our NGFs. The culprits are very low natural gas spot prices.
Source: Intel Natural Gas
As you can see, November futures contracts are currently trading at $ 2.445 / MMBtu while cash is below $ 1.50 / MMBtu. This astounding difference is attributed to the fact that the current storage of natural gas is very inflated and there is no “space” to carry out cash transport.
On a rational level, those with storage space can buy the gas in the spot market and hedge it by selling a November futures to pocket the difference. So for there to be such a difference, it is obvious that the storage capacity is just not available. A similar thing happened in the oil market in April (remember a drop of $ 38 / bbl?).
So what is it that makes the future of November still so high today? Decrease in production 48 and increase in LNG exports ensuring that the balance of supply and demand in winter will be in deficit.
By November, the decline in production will be around 86 Bcf / d, while LNG exports will average ~ 9.5 + Bcf / d.
This fundamental supply / demand difference will likely result in a market of -5+ Bcf / d we have detailed here.
But even with this brilliant deficit outlook, that won’t necessarily stop November futures from falling further. Indeed, if the weather outlook turns out to be bearish in November, storage will barely decrease, resulting in much lower December futures and low spot prices.
You can see this via the table above with where we are going for storage.
The game plan will be twofold.
1) Watch the weather forecast for signs of an early heat demand. The Alaska Ridge and negative ANP will help with this signal.
So far, there is no sign of this for mid-October.
2) Watch for the reaction of spot prices to the surge in LNG exports (9+ Bcf / d later in October). A rebound above $ 2 would be considered very positive and a low is near for November futures.
3) Once we have confirmed the first two, then we will seek to go long one of the producers of NG. It will either be EQT (NASDAQ: EQ) or range resources (NYSE: RRC) depending on the technical configuration.
For now, the weather outlook is bearish and Henry Hub’s cash position remains very weak. We’ll be on the sidelines waiting for those signals to turn, and once we do, we’ll go a long way.
The long thesis is well known from what we wrote here two weeks ago, these fundamental variables have not changed, the question is simply to find the right timing. Stay tuned.
HFI Research Natural Gas, natural gas service n ° 1
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Disclosure: I / we have no positions in the mentioned stocks, and I do not plan to initiate any positions within the next 72 hours. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.