Velocityshares 3X Inverse Natural Gas Etn (DGAZ)

[No-Quarter]

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http://ir.eia.gov/ngs/ngs.html

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Todays update -

(T)he slow bleed continue(s) in the natural gas sector. The front-month November 2019 fell 5 cents or 2.4% to settle at $2.23/MMBTU, the lowest settlement since August 27. The popular 3X ETF UGAZ continued its rollover, with 60% of funds having been transferred from the front-month to the December 2019 contract. That contract closed Wednesday at $2.44/MMBTU, a brutal 21 cent or 9.4% contango. Natural gas continues to be weighed down by the combined impact of record production, larger-than-expected EIA-reported storage injections, and a late October and early November outlook that has changed little and continues to look warmer-than-normal. Like oil, natural gas is trading at a steep undervaluation versus its Fair Price even with the recent transition to a storage surplus versus the 5-year average (-12% versus a Fair price of $2.56/MMBTU). However, thanks to the large contango and expected widening of the storage surplus, natural gas, unlike oil, quickly becomes overvalued by early November. It is for this reason that, despite an outsized 31% year-over-year decline, I would still not be surprised to see further downside in the sector with prices falling perhaps as low as $2.15/MMBTU, especially if the EIA continues to report larger-than-expected storage builds.

Speaking of which, the EIA will release its weekly Natural Gas Storage Report for September 28-October 4 this morning at 10:30 AM EDT. I am projecting a +102 BCF natural gas storage injection, a third straight triple digit build despite record-setting heat throughout the week. Such an injection would be 13 BCF bearish versus the 5-year average and 11 BCF larger than last year's injection.
Projected Natural Gas Storage Injection For September 28-October 4: 5-Year Historical Comparison

As the Figure to the right shows, it would be the second largest injection in the past 5 years, behind only 2014's +104 BCF build. It would also be the third largest injection all-time for the week, behind only 2014's +104 BCF and 2011's +106 BCF builds. Over the past 25 days for which I have been making projections for the week, this is near the top of the range of projections which have been as low as +82 BCF back on September 20--before the recent spike in Permian takeaway send production to record highs--and +106 BCF late last week. Should a +102 BCF injection verify, natural gas inventories would rise to 3419 BCF while the long-standing storage deficit versus the 5-year average would slump to just -5 BCF. Click HERE for more on last week's projected injection.

With three weeks of larger-than-expected storage injections, investors are undoubtedly heading into today's report with poor sentiment. This does leave the bulls some potential for upside surprise should the EIA report a smaller-than-expected injection, particularly one in the double digits, though any report-driven spike would likely be temporary. I therefore expect that a reported storage injection under +99 BCF would be viewed with relief as, while still bearish, better than expected and could result in a near-term bounce to $2.30/MMBTU--or $2.50/MMBTU for the December 2019 contract. Barring a change to the near-term outlook, I expect that the bears would pounce on such a spike and aggressively add to their short positions. On the other hand, a reported injection of +108 BCF or larger would be further reinforcement of a loosening supply/demand imbalance and would likely result in prices dropping below $2.20/MMBTU near-term. A reported injection between +99 BCF and +108 BCF would be neutral versus expectations with prices equally likely to rally or pullback.

NG reaching $1.805 (see chart below) before a turn around is unlikely, but we could be something under $2.00 printed before the winter heating season is upon us(Oct-Nov start). NatGas @ ~$2 puts DGAZ at ~$200. DGAZ closed yesterday at $149.