Cycle Trading

[No-Quarter]

This morning's NatGas update FYI. I am still holding KOLD. GLTY

Natural Gas Plunges On Friday On Pre-Weekend Profit-Taking & Production Recovery—But Still Finish The Week In The Black; Look For A Bounce This Week, But Bulls Will Need To Find New Catalysts If Prices Are To Reach Fresh Highs; Money Managers Aren’t All-In On Natural Gas Here; After Weekend Heat Wave, Gas Demand Set To Slowly Fall This Week As Warmth Shifts From The Deep South To The Northern Tier

6:00 AM EDT, Monday, May 9, 2022

After a week of relenting upward momentum that saw the commodity reach new 13-year highs on three consecutive days, natural gas finally took a breather on Friday.

The front-month June 2022 contract plunged 74 cents or 8.4% to settle at $8.04/MMBTU on Friday to wrap up the week. It was the largest single-session loss since February 3. Despite the sell-off, natural gas prices still finished the week with a +4.4% gain, the ninth in the last eleven weeks.

The rally was likely driven largely by profit-taking heading into the uncertainty of the weekend following a massive rally, although a long-awaited rebound in production likely also played a role. After falling as low as 93 BCF/day in late April into early May thanks to expanded maintenance across Appalachia, output finally climbed back above 95 BCF/day on Friday and held in this range over the weekend, up more than 2 BCF/day higher than last year though still off nearly 2 BCF/day from year-to-date highs.

Investors have also been closely eyeing the near-term temperature outlook. Over the weekend, gas demand rose to near term highs as record heat across the Deep South drove powerburn demand higher while unseasonably cool conditions across the East, Rockies, and Pacific Northwest squeezed a last little bit of late-season heating demand out of the market. Beginning this week, however, temperatures will remain hot across the South, but residential & commercial demand will fall sharply as temperatures warm across the North.

Despite the impressive Deep South heat, it is just a bit too early for a warm pattern to drive significant cooling demand across the northern half of the nation. As a result, my Consensus Model—which integrates a performance-based average of GFS OP, GFS ENS, and ECWMF ENS data—was calling for a modest 124 GWDDs for May 9-22 as of Sunday evening, 24 GWDDs greater than long-term averages but the third fewest for the period in the last 5 years. And over the weekend, this forecast was little-changed. Temperatures will be hot but it’s just a bit too early for such a set-up to be THAT bullish. As a result, thanks to a looser supply/demand imbalance due to higher production, soft LNG exports, and strong imports from Canada, I expect the storage deficit versus the 5-year average to begin slowly contracting later this week. At this point, I project that the storage deficit versus the 5-year average will fall back below -300 BCF in the next 10-14 days.

Don’t be surprised to see natural gas prices bounce to start the week. However, unless production takes another dip, I would be surprised for the bulls to have the catalysts or buying power to take prices back above last week’s intraweek highs just under $9.00/MMBTU. That said, the ongoing heat will likely keep prices supported above $7.50/MMBTU, at least for the near-term. It will take a move by production—which I expect to be a primary driver of sentiment this Summer—above 96 BCF/day or 97 BCF/day to trigger the next leg lower.

On Friday, the Commodity Futures & Trading Commission (CFTC) released its weekly data detailing natural gas money manager long and short positions through last Tuesday, May 3. As has been the case throughout this entire rally, the big money hasn’t really wavered. In fact, open long positions inched lower by -3,433 contracts last week to 216,320 contracts while shorts gained +1,956 contracts to 195,790 contracts. And despite natural gas prices being up a steep +172% year-over-year, short positions are actually UP +20,168 contracts versus 2021 while longs are DOWN -9,596 contracts. The Bullish Sentiment—the percentage of open positions held long—stands at 52%, down -4% year-over-year. During previous price spikes, such as in 2014 and 2018, Bullish Sentiment had neared 90% while it has remained remarkably stable this Spring. This further suggests that the natural gas bull position might not be quite as it might appear. Click HERE for more on the latest money manager holdings.

As discussed above, natural gas demand rose over the weekend. After a +12 BCF/day daily storage injection on Friday—right at the 5-year average—builds decreased to +9 BCF/day on Saturday and +7 BCF/day on Sunday, both slightly bullish. Gas demand will fall today as the Deep South remains very hot, but milder conditions overspread the Midwest and Eastern Seaboard. Dallas, TX, Oklahoma City, OK, and Topeka, KS will all reach the mid-90s today, a scorching 10F-20F hotter-than-normal. These areas will drive very strong powerburn cooling demand today. On the other hand, highs will be comfortable further north with Detroit, MI reaching 70F, Minneapolis, MN the lower 70s and Chicago, IL the upper 70s, 5F-10F above-average but insufficient to generate much in the way of heating or cooling demand. For many of these areas, it will be the warmest day of 2022 so far. Both coasts will see another day of cool conditions with Washington, DC, Philadelphia, PA, New York City, Fresno, CA, and Sacramento, CA all stuck in the lower-to-mid 60s, 5F-15F cooler-than-normal.

Overall, today’s forecast mean population-weighted nationwide temperature will warm by +2.5F from Sunday to 63.4F, thanks to the warm-up across the Northern Tier, though this is still a slight -0.6F cooler-than-normal. Total Degree Days (TDDs) will fall to 9.4 TDDs, still the 7th most for May 9 in the last 41 years since 1981. Click HERE for more on today’s temperature and degree day outlook.

Based on this forecast and early-cycle pipeline data, I am projecting a +10 BF/day daily natural gas storage injection, 3 BCF larger than Sunday’s injection but still 2 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will rise to 1675 BCF while the storage deficit versus the 5-year average will widen slightly to -316 BCF. This will likely be at least a near-term peak for the storage deficit. The year-over-year deficit, meanwhile, will hold nearly steady at -374 BCF. Click HERE for more on today’s projected injection and Realtime inventories. For the rest of the week, look for natural gas demand to slowly fall as temperatures heat up across the Northern Tier but dip across the Deep South where such anomalies are most meaningful this time of year. Projected daily withdrawals will reach the 5-year average +12 BCF/day tomorrow and then potentially as high as +17 BCF/day by Friday.