UNL - Natural Gas To Consolidate And Trade Sideways But Long-Term Fundamentals Look Bullish

2023-05-01 13:52:39 ET

Summary

• On Friday natural gas futures rose to a six-week high after a fire caused the shutdown of a pipeline compressor in Mississippi.
• Although natural gas continues to trade with a well-defined ascending parallel channel, the bullish momentum seems to be weakening.
• Next week, total energy demand is projected to drop by as much as 28% w-o-w as heating demand will almost entirely disappear while cooling demand will remain relatively weak.
• Total natural gas demand should reach a seasonal low on May 13 and then should slowly trend higher. Production probably reached a new all-time high on April 30 - 102.7 bcf/d.
• The European natural gas storage surplus has been shrinking since January and we have every reason to expect higher sustained LNG exports from the U.S.

Technical Overview

Front-month natural gas futures for June delivery (NGM3) on the New York Mercantile Exchange ((NYMEX)) rose 7.93% last week (ending April 28). It was the third consecutive weekly rise and the largest weekly increase since March 3, 2023.

The largest daily increase on the continuation chart was recorded on Thursday, April 27, as the more expensive June contract became the new front-month contract. Furthermore, the amount of gas flowing to U.S. liquefied natural gas ((LNG)) export plants remained on track to hit a record high for the second month in a row, which also supported the prices. Interestingly, the price increase came despite forecasts for mostly steady weather over the next two weeks and a slightly bigger-than-expected storage build reported by the Energy Information Agency ((EIA)) for the week ending April 21.

A lot of volatility was also recorded on Friday, when natural gas futures rose 2% to a six-week high after a fire caused the shutdown of a pipeline compressor in Mississippi that had been moving gas from Appalachia to the Gulf Coast. Before Columbia Gulf Transmission told customers that it had stopped gas flows through the Corinth compressor station in Mississippi due to a fire from a suspected lightning strike, gas futures were trading down about 2% early Friday. After the news, prices soared as much as 7%.

Although natural gas continues to trade with a well-defined ascending parallel channel, the bullish momentum seems to be weakening (see the chart below). A very strong resistance area ($2.400-2.620) lies ahead. A confident break into that area requires an additional fundamental impetus, such as a more bullish weather forecast or a drop in production. A temporary pullback towards $2.250 and a consolidation in the $2.300-2.200 area seems like a more probable scenario at this point.

Still, long-term technicals look bullish. On a daily timeframe, the bearish trend, which has been in place this year, has been broken and the support zone has extended towards the $2.150 level. In fact, only a drop below $2.100 will invalidate the underlying bullish trend and only a drop below $1.95 would trigger a new bearish trend.

Fundamentals

In the week ending April 28, the weather-induced energy demand was relatively strong (see the chart below), and natural gas spot price continued to trade above $2.100 per million British thermal units (mmBtu).

This week (ending May 5), the weather conditions are expected to warm up but only slightly. On Sunday, April 30, the latest numerical weather prediction models (GFS 12z Ensemble and ECMWF 12z Ensemble) showed that the number of nationwide cooling degree days (CDDs) would rise by 10% w-o-w (from 11 to 13). In annual terms, the total "energy demand" (measured in TDDs) should increase by 12.4% y-o-y. The deviation from the norm will remain positive for the second consecutive week (see the chart below).

However, next week (ending May 12), total energy demand is projected to drop by as much as 28% w-o-w as heating demand will almost entirely disappear while cooling demand will still remain relatively weak.

If the latest short-range weather forecast remains unchanged, then the daily consumption of natural gas (in the contiguous United States) should average around 73.4 bcf/d over the next two weeks. Total demand (which includes consumption and exports) should average around 94.9 bcf/d over the same period. On the current trend, total demand should reach a seasonal low on May 13 and then should slowly trend higher (see the chart below)

The bad news (for bulls) is that in annual terms, the total supply (which includes production and imports) continues to grow faster than the total demand (see the chart below). However, the gap between supply and demand growth is not as large as it was back in January and February when extremely bearish weather pushed the demand down. Still, the latest data from EIA shows that production is not slowing down.

As of today (Monday, May 1), dry natural gas production in the contiguous United States is estimated at 101.7 bcf/d. Indeed, production probably reached a new all-time high on April 30 - 102.7 bcf/d (see the chart below). At the same time, some market participants point to improving macro fundamentals.

David Khani, Chief Financial Officer ((CFO)) at EQT Corporation recently said that "with U.S. gas prices falling well below many producer breakevens, EQT expects gas-directed upstream activity to decline." That would moderate the pace of gas storage injections. In addition, Khani said more than 7 GW of coal-fired power generation capacity also is slated to be retired nationwide in 2023, “and we are seeing gas take further share from coal and the power stack to the tune of roughly 2 Bcf/d this year.”

Conclusion

Although the technical picture for natural gas appears to be bullish, the fundamentals are somewhat mixed. Supply is still strong, whereas total demand is declining, and is yet to reach a seasonal bottom. U.S. natural gas storage surplus is still projected to expand. For example, the surplus vs. last year is currently projected to expand by 120 bcf over the next six weeks (from +525 bcf today to +645 bcf on June 9). The surplus vs. the 5-year average is projected to expand by 81 bcf over the same period.

Overall, I remain cautiously bullish on U.S. natural gas. I am long June contract and I will certainly consider increasing my long exposure - especially if we see a correction into the $2.200-2.150 range.

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