Replies to post #2050 on ETFs, Leveraged ETFs, Sector Funds

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Unbridled Bullishness In The Natural Gas Sector: Futures Rally On Friday After Thursday’s Expiration Spike & Look To Build On Those Gains To Start The Week; Gas Demand To Dip Early This Week As Warmth Temporarily Returns Before A Reinforcing Blast Of Arctic Air Sends The Storage Deficit Soaring Above -300 BCF—But Is It Enough To Justify $5.00/MMBTU Gas?

6:00 AM EDT, Monday, January 31, 2022

After the February contract expired with a stunning display of bullish abandon on Thursday, the March 2022 contract picked right up where February had left off in its first day as the front-month contract on Friday.

The contract gained an impressive 36 cents or 8.3% to settle at $4.64/MMBTU to wrap up the week. On the week, the front-month contract—even with Thursday’s February expiration in a state of steep backwardation—closed up an impressive 16.0%, its third weekly gain in the last four weeks. It was the highest settlement since January 12, and the second highest settlement of 2022. The rally wasn’t restricted to the front-month with each contract for the remainder of 2022 rallying at least 5%, impressively broad-based for the middle of Winter, when the near-months usually outperform (or underperform) the latter months dramatically based on the whims of the temperature models. As the Figure to the right shows, all contracts for the rest of 2022 are now trading above $4.50/MMBTU, quite impressive given the current storage deficit versus the 5-year average is less than -200 BCF.

The rally was driven by the near-term computer models continuing to emphasize a bitterly cold airmass sinking into the Deep South late this week and through the weekend. Not only will this drive very strong demand but, like last year, could lead to extensive production shut-ins across Texas and other parts of the South Central Region. The combination of cold temperatures and a tight supply demand imbalance thanks to these production losses and near record LNG exports will likely lead to a record 5 straight -200 BCF or larger weekly withdrawal through February 11, with an off chance of another -200 BCF draw the following week. This very bullish near-term outlook was enough for investors to overlook continued indications in GFS and ECMWF as well as the CFS climate model that the back half of February will be milder across the eastern half of the country, although the timing of that warm-up does keep getting pushed back. At this time, I project that the natural gas storage deficit versus the 5-year average could top -320 BCF by the week ending February 18.

Over the weekend, there was no significant change in the near-term models. This weekend’s arctic outbreak will still be intense. The models are a bit divided on what happens thereafter. The ECMWF ENS suggests that the pattern will steadily moderate to below-average by February 10. The GFS operational, while inconsistent, introduces the possibility of yet another wave of arctic air in the February 12-14 range. The GFS ENS is somewhere in between. Despite the fact that no model cooled significantly over the weekend, natural gas futures continued to ride the seemingly unstoppable range of bullish momentum and gapped up another 8% in Sunday evening electronic trade to eclipse $5/MMBTU. The remainder of the 2022 strip all topped $4.70/MMBTU. While the near-term environment is undoubtedly bullish, I do feel that prices are a bit overextended here and will be unsustainable once we get a more clear indication of a warm-up, even if by that time the storage deficit has topped -350 BCF or even -400 BCF. While prices could continue to spike given the current unbridled bullishness in the sector, I feel that the $5.00/MMBTU level will act as an upside price ceiling for the remainder of the winter.

Over the weekend, natural gas demand reached a near-term high on Saturday as a record-setting blizzard pounded New England and sent frosty conditions into South Florida. After a -38 BCF/day daily storage withdrawal on Friday, I projected a -41 BCF/day draw on Saturday, 20 BCF/day bullish versus the 5-year average. As temperatures began to moderate on Sunday, draws fell to -34 BCF/day. Demand will fall for a third straight day today as unseasonably warm temperatures expand across the central US and the Northeast begins to see meaningful warming. After a chilly morning that will see lows across much of the Mid-Atlantic and Northeast drop to 10F-15F colder-than-normal, highs along the I-95 corridor will generally warm to within 5F of normal today. This includes Washington, DC reaching the upper 30s, Philadelphia, PA and New York City the mid-30s, and Boston, MA near 30F. On the other hand, highs across the Central US will be unseasonably mild. Bismarck, ND will see the upper 40s, Omaha, NE the upper 50s, and Oklahoma City, OK the upper 60s, each 20F-25F warmer-than-normal.

Overall, today’s forecast mean population-weighted nationwide temperature will warm by +3.5F from Sunday to 39.0F, just -0.9F colder-than-normal. Total Degree Days (TDDs) will fall to 25.3 TDDs, still the 14th most for January 31 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 -28 BCF/day daily natural gas storage withdrawal, 6 BCF smaller than Sunday’s draw but still 7 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will fall to 2222 BCF while the storage deficit versus the 5-year average will widen to -182 BCF. The year-over-year deficit will grow by a slight 4 BCF to -421 BCF. Click HERE for more on today’s projected withdrawal and Realtime inventories. Gas demand will fall further on Tuesday to reach a weekly low as the warmth expands eastward with a preliminary -20 BCF withdrawal expected, potentially the last bearish draw for the next 7-10 days as arctic air begins to expand southwards across the Great Plains.


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