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Replies to post #2119 on ETFs, Leveraged ETFs, Sector Funds
04/19/22 7:01 AM
Madness In The Natural Gas Sector: Prices Briefly Top $8.00/MMBTU & Settle At Fresh 13-Year High As Bullish Momentum Trumps Fundamentals; Drilling Activity Ramps Up In Response To Higher Prices; Gas Demand To Inch Slightly Lower Today But Storage Deficit Continues To Widen As Unseasonably Cool Temperatures Dominate Lower 48
6:00 AM EDT, Tuesday, April 19, 2022
Natural gas prices surged at the open on Monday, briefly trading above $8.00/MMBTU, before settling up a still-solid 52 cents or +7.1% at $7.82/MMBTU.
It was the highest settlement since September 23, 2008, on the backend of that year’s commodities bubble collapse. Natural gas prices are now up +185% versus 2021, when the commodity was trading at a mere $2.73/MMBTU, as shown in the Figure to the right.
The rally can be chalked up to one thing: Momentum. The near-term temperature outlook may have cooled slightly over the weekend while production may have risen slightly as well. However, investors are speculating more long-term that, thanks to robust global demand for LNG exports and a sluggish recovery for production as E&Ps have become more cash conscious, inventories may not be sufficient come next Winter, especially if we see a hotter-than-expected Summer.
I am clearly fighting against the grain here, but I continue to firmly believe that natural gas is very overvalued at these levels. LNG exports are up, yes, but these gains are largely countered by losses in exports to Mexico. Production growth has been slow, but it has been augmented by robust imports from Mexico and there are signs that output will soon pick up, and in time for the cooling season and upcoming winter.
For example, in Monday’s monthly Drilling Productivity Report for the month of March, the EIA announced that wells drilled in the Haynesville Shale—one of two primarily natural gas basins along with Appalachia—reached 72 wells during March, which is the single most ever drilled in a month, or at least since data became available in December 2013. This was up a steep 13 wells from February. 60 wells were completed and put into production during the month, tied with August 2021 for the most ever. In contrast, in March 2021, a mere 47 wells were drilled and 39 completed in the basin, as shown in the Figure to the right. In the larger Appalachian Basin, 89 wells were drilled, up 3 from February and the most since April 2020. Finally, in the Permian Basin, which is primarily oil but has extensive associated gas production, 362 wells were drilled, up 15 from February and up +126 wells from March 2021. And remember, this occurred with prices averaging $4.98/MMBTU during March, 24% below the April to-date average of $6.57/MMBTU. The point is: production may be slow to respond to higher prices but drilling activity is clearly ramping up. Over the next 1-3 months, I expect to see these new wells begin to overwhelm decline rates and for production to reach new all-time highs above 97 BCF/day, pushing year-to-date gains consistently above 3-5 BCF/day and loosening imbalances.
This is not to say that prices will not ride momentum higher and $8.00/MMBTU or even $8.50/MMBTU gas is certainly possible. As a suffering short-holder, I probably won’t build my position any more so as to manage risk. However, if I had cash to spare and was willing to wait and even take near-term unrealized losses, I would have a low threshold to build a bearish position here as I continue to see downside risk outweighing upside potential over the next 1-3 months at these levels. I am maintaining a $5.00/MMBTU downside price target.
Natural gas demand will dip slightly today as temperatures remain broadly below-average east of the Rockies, but the magnitude of the anomalies decreases and the location of the coldest temperatures is less favorable for heating demand. The chill will extend into the Deep South where Atlanta, GA will only reach the mid-60s, Raleigh, NC near 60F, and Washington, DC in the upper 50s, each 5F-10F below-average. However, these readings are demand-neutral, with suppression of early-season cooling demand canceling out any heating demand loss. Anomalies will be a bit more impressive across the Ohio Valley and Midwest where Indianapolis, IN will top out near 50F, Chicago, IL in the upper 40s, and Pittsburgh, PA the mid-40s, each 10F-20F below-average. A potent late-season Nor’Easter will bring heavy wet snow to interior New England with areas like Binghamton, NY and Syracuse, NY picking up 6-12 inches with highs only in the upper 30s today, 15F-20F below-average. Warmer-than-normal temperatures will again be restricted to the Rockies with Albuquerque, NM reaching 80F and Denver, CO the mid-70s, each 10F-20F above-average. These temperatures will begin to move out onto the Plains over the next 2 days.
Overall, today’s forecast mean population-weighted nationwide temperature will cool another -0.2F to 52.9F, -5.6F below-average, thanks largely to demand-neutral below-average readings across the Deep South. Total Degree Days (TDDs) will fall to 14.2 TDDs today, still the 2nd most for April 19 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 that inventories will hold flat today, around 1.5 BCF smaller than yesterday’s withdrawal but still nearly 8 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will hold at 1437 BCF while the storage deficit versus the 5-year average will widen to -336 BCF. The year-over-year deficit will grow by 2 BCF to -453 BCF. Click HERE for more on today’s projected withdrawal and Realtime inventories. Beginning tomorrow, look for natural gas demand to begin a more rapid decline as temperatures warm, with bearish, double-digit injections returning by Thursday.
04/19/22 3:23 PM
Natural gas markets have been hammered during the trading session on Tuesday losing over 10%.
Natural Gas Technical Analysis
Natural gas markets have gotten crushed during the trading session on Tuesday to break down and test the $7.00 level. While I would not go so far as to say this is the end of the trend, it is obvious that this is a massive bearish engulfing candlestick, or something close to it. The question now is whether or not there is more momentum with this type of negativity? I think that is more likely the case than not, but as you know, I have been waiting for a nice shorting opportunity. It is confirmed in my opinion once we get below that $6.50 level.
I warned that even if we continue to go higher, we may get a day like this. Within the first couple of hours, we have seen this market lose $0.75 rather quickly, and quite frankly there is nothing on this chart to suggest that we will not continue to go lower. It will be crucial to pay close attention to this market, but it is also probably worth noting that this is the first full day of liquidity, as Monday was a carryover from Easter for a lot of major central banks around the world as well as institutional banks.
It will be interesting to see the market reaction to the $6.50 level, as it was such a major area previously. The market closing towards the bottom of the candlestick for the session does suggest that we are going to test that area, but even if we get down to that area, I will wait to see what the daily close tells us. Because if we do break down from here, then it is likely that we have quite some distance to go.
04/23/22 6:47 PM
04/25/22 3:52 PM
AI
