Welcome to the potentially more downside edition of Natural Gas Daily!
Despite large heating degree day gains overnight, natural gas futures are unable to muster any sense of recovery. ECMWF-EPS 00z added well over ~10 TDDs this morning, but December futures are barely holding on. The key reason for this is that the 15-day outlook remains decisively bearish, and while there are some cold shot risks, the duration is short, and the trend remains bearish.
The key variable to watch for the continuation of the bearish weather trend is the Alaska trough, or blue in Alaska. This is considered to be a very bearish weather set-up going into the winter months as it usually foreshadows a warmer than normal Northeast followed by colder than normal West. This is not bullish for heating demand and it’s important to remind readers why this is so important to watch.
Now what you will notice from the GIF we share below is that the TDD gains came largely on the back of a colder than normal shot in the East coast, but quickly goes away.
Again, the key for the natural gas bulls is not only for the weather to turn colder than normal but also for it to stay there. And sadly, based on all of the forecasts we’ve seen so far including the ECMWF-EPS 46 day extended outlook, December also may turn out to be much warmer than normal.
As you can see, the first week of December is expected to be very warm in the Northeast and almost spring-like conditions.
This does not bode well for natural gas prices irrespective of the fact that we are undersupplied today. The recent return of shut-in production from the Northeast has propelled natural gas production back to ~90 Bcf/d, which is very bearish and limits the deficit from 5-6 Bcf/d down to 1-2 Bcf/d.
So although the weather outlook remains bearish, and production came in higher than expected, the market is still in a deficit, and the draws we are going to see will match the five-year average.
What does this mean for price?
As it pertains to price, if the bearish weather projections actually turn into reality as we get into December, it’s hard to see natural gas not sell-off more. The onslaught of bearish weather could push January contracts to $2.45/MMBtu, which is where we think the lows will be for this winter. This is factoring in the idea that weather will remain warmer than normal throughout, as we think fundamentally $2.45 will likely be supported.
If the set-up does come to this, then you will see us take a long shot. For the time being, we are still waiting for the weather signals to turn bullish before we go long. In the meantime, we’ve been long Cenovus (NYSE:CVE) in our NG trading portfolio while we wait for the set-up.
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Disclosure: I am/we are long CVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.