Velocityshares 3X Inverse Natural Gas Etn (DGAZ)

[surehands]

Over the past six years, November contract (as a prompt month contract) has been cheaper than it is today only once – back in 2015 (see first row in the table above). The average futures price over four storage weeks in October 2015 was $2.443 per MMBtu. However, there were good reasons for depressed prices at that time. First of all, international weather models were on El Nino watch and as you probably know, El Nino is usually associated with warmer winters. Secondly, supply was very strong – just under 81.50 bcf/d – which at that time represented an all-time record. Indeed, large speculators were already net short in October (-152,000 contracts in NYMEX and ICE) as they anticipated market balance to remain loose and for prices to continue to decline. Thirdly, storage level was above the five-year average (+4.52%) and the surplus was expanding. In fact, average storage flows were +93 bcf, which at that time were some of the largest injections in history.

This year, however, the situation is very different. First of all, notice that the vast majority of cells in the column for the Year 2017 are quite greenish. Indeed, only supply is depressingly red (82.36 bcf/d). However, these strong supply figures fail to place a significant dent in the market balance and it remains relatively bullish compared to history. Unlike in 2015, speculators are net long by a great degree, anticipating a cold winter. Storage is expected to remain below the five-year average while forecast average flows are the most bullish on record (so far). Most remarkably, however, is that despite the fact that 2017 prices are higher than 2015 prices, the NG/coal spread is still lower, providing a lot of stimulus for natural gas consumption in the Electric Power sector. Finally, international numerical weather prediction models are on the La Nina watch, meaning that the upcoming winter is likely to be cold.

At the very minimum, this historical study clearly illustrates that this year, the natural gas market fundamentals for November contract are more bullish than they were in 2015 and therefore it is unreasonable to expect that price can drop below $2.800, let alone below $2.500 per MMBtu. Quite frankly, the price has probably already dropped too much. At this point in time, it seems that traders are focusing on the “apparent” short term, still refusing to price in the “probable” long term.