Welcome to the don’t get cute edition of Natural Gas Daily!

Natural gas prices are falling today as the market reassesses the fundamental supply and demand outlook going forward. Henry Hub cash price is currently trading around $2.50/MMBtu, and that’s with higher than normal CDDs.

Source: HFIRweather.com

But just as CDDs start to fall and with the outlook more or less neutral at the moment, cash prices will likely fall as demand drivers pull back. This should see October contracts get closer to the current cash of around $2.50.

While prices have done well over the last week, we see the near-term rally ending and a pullback in the making.

With that said though, we believe the correct play is to be long natural gas in the coming months. While our call is for a pullback in the near term, don’t confuse this with our view that upside volatility is coming into the winter months just as production starts to fall.

If you take a look at the current production trend, there aren’t any signs of reversing.

In fact, the weakness into month-end despite the full restart of shut-in production is notable. Based on our trend, we should be crossing below 2018’s production by late September. Keep in mind that total demand is expected to be much higher than 2018 thanks to the addition of new export capacity.

One key strength into year-end this year will be Mexico gas exports. You can see that we will be about ~1.5 Bcf/d higher into September versus 2018.

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In addition, given the LNG export nominations, September exports are going to be about ~7 Bcf/d, which is ~3.5 Bcf/d higher than 2018 levels.

So, all the while production is set to cross below 2018 levels, export demand alone is ~4.5 Bcf/d higher. This will be a driving tailwind for natural gas prices into 2021. And why we said it’s best to play the long side.

As a result, we have also exited our EQT (NYSE:EQT) short at a small profit. Instead of being positioned in the natural gas market, we are choosing to play oil equities instead in our NG trading portfolio. Subscribers were notified in real-time that we went long Penn Virginia (OTC:PVAC) again yesterday at $11.23, and we are looking for a retest of the coiling pattern.

If PVAC breaks and holds, we are looking for upside near $19, which is a gain of ~61.7%.

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Disclosure: I am/we are long PVAC. 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.



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