Natural Gas Prices: Comments from HFI and MY TAKE - Jan 16

[dan_s]

These comments are from HFI Research:

We've been a bear on natural gas for quite a while now. In our last week's NGF, we concluded with the following:
> For natural gas prices to move sustainably higher, Mother Nature needs to do more of the heavy lifting. While January heating degree days are finally showing up higher than the 10-year average, the trend needs to continue if bulls want to see prices average above $3.
> By our estimate, we think natural gas storage needs to fall to ~1.65 Tcf or lower for prices to sustainably average above $3/MMBtu. This means that February will also have to show much colder than normal weather.
> Fundamentals, as they are today, are not sufficient enough to keep prices here. Lower 48 gas production remains far too high, while the real demand drivers for natural gas won't be here until the end of 2024.

The bulls need more, so all eyes on the weather models going forward.

Fast forwarding to today, natural gas prices are selling off over 11% on the back of bearish weather on the horizon.

But amidst all this bearishness, something interesting is developing. Note that we pointed out last week that the implied balances were likely to meaningfully surprise to the upside. Well, with real-time production and demand data in front of us, it appears that's the case. Implied flow for this week so far is pointing to a withdrawal well over 300 Bcf.

In addition, because the withdrawal is so much larger than we had expected, End of Heating Season ("EOS") has meaningfully moved lower to 1.79 Tcf. This is getting close to the 5-year average of 1.7 Tcf.

Now before you get overly excited, this storage level is still insufficient to revive the natural gas bulls. We would need to see this estimate fall below ~1.65 Tcf at minimum before the bulls can somewhat rejoice.

The reasoning for such a large revision upward in withdrawal is due to 1) a large freeze-off in natural gas production and 2) a major surge in demand.

Looking ahead, US gas production will be impacted for the rest of the week, while demand continues to remain strong. We are, however, past the peak cold, so we should start to see demand taper off going forward.

As for supplies, Lower 48 gas production won't make a full recovery until the end of next week, so this will likely result in a tighter-than-expected balance going forward.

Why the large price sell-off?
Everything we've written so far is bullish, so readers must be wondering why prices are selling off so much.

The cold blast is not expected to last. In the latest ECMWF-EPS update, we will see much warmer than normal temperatures in the 6-10 day period. Our estimate today is likely too conservative as demand is likely to be much weaker than we expect.

For the natural gas market, an EOS storage level of 1.79 Tcf is still not enough to sustainably move prices higher.

There's also no risk of a shortage come injection season, so from the trading perspective, there's no incentive to keep bidding prices higher. In addition, we know Lower 48 gas production will recover back to ~104 Bcf/d, which would make the market oversupplied.

As we wrote in our NGF last week:

From my standpoint, I look at the US gas market as oversupplied still. Taking the weather element aside, we still estimate the US gas market to be ~2 Bcf/d oversupplied. As a result, traders buying up natural gas today are betting that 1) either the weather models get colder or 2) there's more prolonged cold post this cold blast.

Neither of these scenarios are sound bets, especially considering the run-up in prices today. And even after taking into account the cold weather scenario, we still see the storage situation as being bloated.

With all that said, the interesting thing happening in natural gas now is that storage is becoming less bloated. Although one could argue that the 6-15 day weather outlook is bearish, if the 15-day trend points to colder than normal weather again, we could easily see a scenario where storage falls below the 5-year average.

In essence, Mother Nature needs to bail out the bulls, and you can never say never. With prices selling off so steeply today, traders are now swinging too much to the pessimistic side.

Opportunity?
Is today a buying opportunity then? No. It's still a weather roulette game being played. Fundamentals remain bloated despite the cold blast, just less so following the storage revisions. Bulls will need more sustained cold to get out of the bloated storage situation, and if that materializes, then natural gas producers look more attractive. Until then, you are taking on unnecessary weather risk and should stay on the sidelines until storage estimates move low enough to warrant long positions.
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MY TAKE
If you've been following Joe Bastardi as I have for over a decade you know that he believes (and it has been proven before) that the U.S. natural weather service's forecast models have a bias toward forecasting warmer temperatures. They don't seem to pick up major cold waves until they are just a few days away.
Joe forecast a Major Cold Wave in mid-January over a month ago and he is now forecasting that February will be much colder than normal due to a stratospheric warming event over the north pole. Stratospheric Warming Events are what cause "Polar Vortex". Watch Joe's last Saturday Summary here: https://www.weatherbell.com/premium/

U.S. natural gas prices will not move significantly higher until a lot more LNG export capacity comes online. However, all of our gassers are profitable as long as HH ngas prices average more than $2.50. They are all going to report solid Q4 2023 results.

The long-term outlook for U.S. natural gas prices remains bullish, but near-term as HFI points out, the U.S. market is more than adequately supplied. In my opinion, the "Right Price" for U.S. natural gas is ~$3.25/MMBtu this year with rising price coming in 2H 2024. Beyond 2024 the "Right Price" should drift up to $5.00.