SUMMARY

• Today, the fundamental signals are relatively neutral: the weather factor is still rather bullish and production is down, but these factors are not new for the market.

• In the short-term, the bulls are in control, but not as confidently as before. As long as the price remains above 1.841, the short-term trading bias will remain bullish.

• A break below 1.841, could cause a fall into the 1.830-1.780 range. A break above 1.880 could lead to a gain into the 1.900-1.950 range.

• Fundamentally, the long-term trends are bullish, but 1.924 is a very strong resistance and LNG feedgas flows are yet to start recovering. Still, annual storage "surplus" is projected to shrink by -130 bcf by August 7.

• It makes sense to buy the dips – particularly, in the 1.780-1.730 range.

TRADING VIEW

Exposure

• We currently have no active positions in progress;

• We are planning to re-enter the market in July or August.

• In the short-term, the bulls are in control, but not as confidently as before.

• As long as the price remains above 1.841, the short-term trading bias will remain bullish.

• Today, the fundamental signals are relatively neutral: the weather factor is still rather bullish and production is down, but these factors are not new for the market.

• As the same time, LNG feedgas flows remain near multi-month low.

• A break below 1.841, could cause a fall into the 1.830-1.780 range.

• A break above 1.880 could lead to a gain into the 1.900-1.950 range.

• It makes sense to buy the dips – particularly, in the 1.780-1.730 range.

• Fundamentally, the long-term trends are bullish because annual storage “surplus” is still projected to shrink + we believe that LNG feedgas flows are unlikely to set a new low and should be rising in mid-July, in August and in September.

• At the same time, we think that in the very short-term, natural gas is slightly overvalued, but we would not recommend going heavily short. It is best – to carefully buy the dips.

• Also, it is clear that 1.924 is a very strong resistance. Projected TDDs will start trending lower soon (due to seasonal factors) and if production recovers while LNG feedgas flows do not, then it will be extremely difficult to break above 1.924 and reach 2.000 level in the short-term. Technically, however, 2.000 is now a major target for the bulls given that they have managed to break above the upper bound of the descending wedge (from May 5 high to June 26 low).

Bullish factors

• Projected TDDs remain above the norm (+23.7%) as well as above last year's level (+8.1%).

• Natgas consumption (7-day average) is projected to increase by 2.8% over the next 7 days (from 78.5 bcf/d today to 80.6 bcf/d on July 15).

• Natgas production growth potential has been severely damaged. Daily production rate is not expected to set a new all-time high for several years. EIA expects dry gas production to continue falling until April 2021. CAPEX remains depressed.

• Pipeline nominations are temporarily reduced due to "force majeure" on Columbia Gas Transmission’s Mountaineer Xpress pipeline.

• Annual storage "surplus" is projected to shrink by -130 bcf by August 7.

• Storage "surplus" vs 5-year average is projected to shrink by -64 bcf by August 7.

• EOS storage index is 97 bcf below market expectations.

• Weekly "expectations gap" for the next three reports is bullish.

• The net impact of non-degree-day factors is bullish (vs 2019) - primarily thanks to robust coal-to-gas switching. Electricity generation from renewable sources will be getting weaker from now on (until September) due to seasonal factors.

• Technically, the bulls are in control.As long as the price remains above 1.841, the short-term trading bias will remain bullish.

Bearish factors

• COVID-19 cases are still rising - preventing the states from fully reopening.

• Projected TDDs have stabilized and are actually starting to trend lower (slowly).

• Some producers began restoring output.

• LNG feedgas flows are down 2.6 bcf/d y-o-y and global LNG demand remains relatively weak so far.

• Natural gas consumption is projected to reach a "seasonal high" on July 22.

• Market's EOS storage expectations are ostensibly bearish (estimated at 3,980 bcf) and although we believe that these expectations are excessively bearish, the market does not care what our beliefs are. The market will act in accordance with its own beliefs and expectations not in accordance with our estimates and calculations. 

TECHNICALS

August Contract >>

• Support: 1.841, 1.829, 1.800, 1.781, 1.772, 1.750, 1.734. 

• Resistance: 1.876, 1.900, 1.918-1.924, 1.950, 1.971.  

MARKET DATA (CHARTS AND TABLES)

SD Balance

Latest Figures (daily)

Forecast (weekly)

Forecast Deviations (weekly)

DEMAND

WEATHER

GFS Model (raw TDDs)

ECMWF Model (raw TDDs)

Projected TDDs: GFS vs ECMWF

ECMWF Model: long-range vs short-range (raw TDDs)

Projected TDDs (hybrid; running aggregate)

This chart DOES NOT show "historical actuals". This chart shows "historical forecasts".

Consumption

Natgas consumption (7-day average) is projected to increase by 2.8% over the next 7 days (from 78.5 bcf/d today to 80.6 bcf/d on July 15).

In relative terms, total demand is projected to remain mostly above the total supply curve until August 21 (at least).

Consumption in the Electric Power sector is above last year's level (the data is derived directly from the "continuous emissions monitoring systems").

Coal-to-gas switching remains strong: 10.7 bcf/d, +1.8 bcf/d vs 2019. The net impact of four non-degree-day factors on natural gas consumption in the Electric Power sector is +6.6 bcf/d (+1.4 bcf/d y-o-y).

Exports

LNG feedgas flows are at 3.1 bcf/d.

Net exports (calculated as imports minus exports) are currently estimated at 3.7 bcf/d (-1.7 bcf/d y-o-y).

SUPPLY

Production

Latest dry gas production estimate (for contiguous United States): 86.6 bcf/d.  Pipeline nominations are temporarily reduced due to "force majeure" on Columbia Gas Transmission’s Mountaineer Xpress pipeline. 

• -9.8 bcf/d from an all-time high;

• +0.1 bcf/d from a 3-week low;

• -0.3 bcf/d from Tuesday's results.

We currently expect dry gas production in contiguous United States to average 87.86 bcf/d over the next three months (July-August-September). Annual growth rate is projected to be negative.

EIA has revised lower its U.S. dry gas production forecast by -0.93 bcf/d (on average). EIA currently expects U.S. dry gas production to average 84.92 bcf/d over the next 18 months (July 2020 - December 2021). EIA projects that U.S. dry gas production will continue to decrease until April 2021.

Net supply (calculated as dry gas production minus net exports) is currently estimated at 82.8 bcf/d, 3.4 bcf/d below last year's level.

STORAGE

Our long-term storage level outlook remained relatively unchanged (vs Tuesday's results), but only in the long-term. Currently, EOS storage index is at 3,888 bcf (97 bcf below market expectations).

Our EOS storage index is below market expectations, but the index is very unstable due to its long-term nature.

Weekly "expectations gap" for the next three reports is bullish.

Annual storage "surplus" is projected to shrink by -130 bcf by August 7.

Storage "surplus" vs 5-year average is projected to shrink (by -64 bcf over the same period).

Next Six Reports and EOS

Indices

Charts

Deviations

PRICES

Average spot price (latest survey across seven locations): $1.78 per MMBtu. HH spot was at $1.76 per MMBtu.

FAIR VALUE

"Fair value" – a rational and unbiased estimate of the potential market price of natural gas. It is totally hypothetical in nature and is derived entirely from historical observations over a certain time period. FV is a statistical experiment, not a fundamental indicator. FV can deviate substantially from the market price.

Forecasting the price of natural gas is exceptionally difficult, especially in the long run. The purpose of the “fair value” model is not to provide an exact price projection, but rather to show a theoretical trend potential based on fundamentals. It is equally important to remember that market is forward-looking and near-term price level can be determined by price expectations several weeks from now.

Extreme sentiment (which is quite common in natgas market) can easily drive the price below or above the "fair value". Overall, the concept of a "fair value" - even if it is econometrically sound - may not be particularly useful in trading.