Welcome to the get ready to go long edition of Natural Gas Daily!
Itchy fingers, that’s the problem when you know the incoming outlook is really bullish, but the near-term fundamentals will be weak.
If you are wondering why natural gas prices in the front end remain so volatile and weak, we have pointed this out over and over again in our NGFs. The culprit are very weak natural gas cash prices.
Source: Natural Gas Intel
As you can see, November futures are currently trading at $2.445/MMBtu, while cash is below $1.50/MMBtu. This staggering difference is attributed to the fact that current natural gas storage is very bloated, and there’s no “space” to do the cash carry trade.
Rationally speaking, those with storage space can buy the gas on the spot market and hedge it by selling a November future to pocket the difference. So for there to be such a stark difference, it’s evident that storage capacity just isn’t available. A similar thing happened to the oil market in April (remember negative $38/bbl?).
So what’s keeping November futures still so elevated today? Falling lower 48 production and higher LNG exports guaranteeing that the winter supply and demand balance will be in the deficit.
By November, lower 48 production will be averaging ~86 Bcf/d, while LNG exports will be averaging ~9.5+ Bcf/d.
This fundamental supply/demand difference will likely result in a market that’s -5+ Bcf/d as we detailed here.
But even with this superb deficit outlook, it won’t necessarily prevent November futures from falling further. That’s because if the weather outlook turns out to be bearish in November, then storage will barely draw, leading to much lower December futures and weak cash prices.
You can see this via the chart above with where we are headed for storage.
The game plan will be two-fold.
1) Watch the weather outlook to look for signs of early heating demand. Alaska ridge and negative PNA will help with this signal.
So far, there’s no sign of that for mid-October.
2) Watch for cash price reaction to higher LNG exports (9+ Bcf/d later in October). A rebound back above $2 would be viewed as very positive and a bottom is near for November futures.
For now, the weather outlook is bearish, and Henry Hub cash remains very weak. We will be on the sidelines waiting for these signals to turn, and once it does, we will go long.
The long thesis is well known from what we wrote here two weeks ago, these fundamental variables have not changed, the question is just getting the timing right. Stay tuned.
HFI Research Natural Gas, #1 Natural Gas Service
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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.