Natural gas (like a lot of markets these days) is in a standoff between what ought to happen fundamentally and what is actually happening technically. It seems to be in an epic bear market which doesn't seem to stop.
Natgas is considered one of the more fundamentally driven markets where the demand and supply of the commodity are usually the main drivers of prices. It is supposed to be unlike equities and bonds where the demand/supply of money also is a key factor.
Storage is at relatively high levels. However, it was much higher in 2016 (with respect to the 5 year average) than what it is today but the price then was close to around 3$. The distinction at the time was that the trend was different. A falling surplus can be enough for ‘producer buyers’ to push up the price. Even in 2017, storage was higher but prices were near 2.5$.
To add to that, given the outlook for production and demand in the future with the Coronavirus pandemic, it certainly is a puzzle for Natty bulls as to why we are trading at 1.70$ dollar levels.
The markets these days seems to be very casually ignoring many bullish data points. For eg, NG hasn't seen an uptick from all the bullish TDD forecasts. Broadly, it either means that the physical traders are really bearish or it is the trap-of-the-century for speculators.
Currently, the futures curve in NatGas shows that producers today have two options: sell NG at spot Henry Hub at ~1.70$ or wait 6 months and sell at ~3$.
Powerburn
At the beginning of June, Powerburn hit record levels for this time of year. Despite this, NG price have only fallen since then.
Forget the estimates -- looking at where we stand as of today, if powerburn hits new record highs in July and supply stays flat, then we are likely to be drawing inventory in the coming months.
But the problem is that this whole thing is the street consensus already. A crowded trade is an easy fade.
LNG
HH Natgas can rally if we see LNG prices and European markets rally strongly. Global LNG prices are linked to Brent, so a lot will also depend on where Brent goes.
It will have a secondary effect on the storage situation in the US if LNG exports pick up a few months down the line - which opens the possibility of taking storage to a deficit with respect to the the 5 year average.
As far the EU surplus is concerned, with negligible LNG from the US, the surplus-to-last year might be gone sooner than later if the summer is hot. After that, the surplus-to-the 5-year-average is not that far away either. Infact, we can already see the surplus shrinking.
It is logical that EU storage has to come below its 5 year average before US inventories start getting hit with US LNG picking up.
Supply
Nat gas production has fallen nearly 900 MMcf/d in the past month as EQT corp, Cabot Oil & Gas and others began curtailment in response to low prices (link). Given where the prices have gone after these cuts, it is understandable why they would undertake such cuts in the first place. (The 1.4 bcf from EQT is supposed to be coming back in July though)
However, some producers are also producing (as the above chart shows). It is unclear whether they are hedging their production using far out spreads or not. If they are not hedged and the far curve also starts breaking, it has the possibility of getting real ugly.
Short term outlook from EIA
Expects a 14% drop in NatGas production
Expects storage to hit 4.1 Tcf by November. (End of storage futures on ICE are trading at 3.962 Tcf) as on 16/06/2020).
Expects oil cuts to hit Nat gas production
Expects production to hit 83.6 Bcf/Day by March 21 from a massive all time high of 96.2 Bcf/Day in Nov 19. (End of Draw futures are at 1,746)
Resources
Hourly powerburn stats: https://www.eia.gov/beta/electricity/gridmonitor/dashboard/electric_overview/US48/US48
Daily powerburn updates:
https://www.celsiusenergy.net/p/powerburn.html
Model based Supply/Demand predictions (Temperature independent):
https://www.celsiusenergy.net/p/natural-gas-supply-demand.html
EIA storage updates:
http://celsiusenergy.net/p/current-natural-gas-inventories.html
References
Supply cuts
https://rbnenergy.com/the-waiting-game-northeast-gas-production-cutbacks-take-effect
EIA short term energy outlook report https://www.eia.gov/outlooks/steo/#:~:text=EIA%20expects%20the%20share%20of,to%20higher%20natural%20gas%20prices.
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