By: Jason Scarbrough
The market ran toward $5.00 today breaking through the resistance from yesterday’s report and reeking of a margin call not met. Sellers rushed to the market though, pushing prices back down below the $4.62 resistance. This is the level we will continue to watch.
See below for the March/November spread. Come on, man….someone is getting obliterated. This spread is up 286% since last Thursday.
The bulls are flexing their muscles in the midst of extremely high heating demand throughout the country (east of the Rockies). The strongest is the very densely populated northeast. This will be an issue for our primary heating fuel, natural gas. Yes, the commodity whose price has been completely ignoring massive increases in demand that are already here from exports and industry – with even more demand slated to pile on in the coming years. Choice! Energy Management has been warning of this scenario of a pending bull run with any kind of early winter weather since August/September – and advising management of this scenario in our client action plans. Complacency was a natural fit for this market given the decade of plentiful natural gas and low steady prices barely ever above 3.00 for the past 18 months (save a few pops to the upside).
One must keep in mind that the average storage level heading into winter for the past 10 seasons is ~3.82 TCF. Currently the EIA reports a total of ~3.2 TCF – 620 BCF (16%) below the five year AVERAGE end of season level.
Estimates this week are ~+47 BCF (as of today). Much higher than normal and should help keep prices lower with the overall narrative of winter storage as we get to the thick of it. However, given the amount of heating demand the U.S. is experiencing this week and next, a bearish storage injection this week will likely hit the market like a fart in the wind (for you Shawshank fans).
Weather: This week, key markets in the northern latitudes are in the midst of a wake up call from old man winter. Overnight temperatures in the midwest to the northeast are likely to be in the low teens to low 20’s. Additionally, the south will be adding to the demand with overnights in Atlanta and Birmingham below freezing (and even below freezing tonight in Houston, TX).
Looking forward, this front should be completely out of the U.S. by the end of next week; and warmer than normal temperatures are predicted beyond that. The NOAA has updated the chances of an El Nino this winter from 70-80%, which would likely bring a very mild winter once we get into the actual winter. This would seem to be a stark reminder that winter is coming and it can get cold out there – not that it is actually here.
Curve: The natural gas market has been extremely complacent in 2018 (especially in Q3 and Q4) when the EIA was consistently lowering end of season estimates every month. “Record production” was the chant from the bears every single month, tamping down prices, but that production didn’t show up in the paltry injection refills we were seeing this season. There was demand coming from somewhere new; and there was a whole lot of it.
We feel that this demand has found its stride and will likely continue to grow for the foreseeable future in the U.S. (two caveats being economic disasters and trade agreement gaffs with our LNG export buyers). This demand is coming from a number of places, but the key components that are shifting the whole system are exports and industrial demand. Just like economic indicators through the federal government, this demand will take some time to show up in the EIA reports. We feel it is dramatically underestimated even though it is eating up production NOW.
On the other hand, as complacent as the market can be, it can also be a little dramatic. Right now, the size and speed of the rise in the next four contracts says just as much as the lack of price increase in the contracts beyond there. The backwardation in the March/April contracts doubled today alone. The remainder of the 2019 prices are cool as ice (averaging far below $3.00 ), while the front of the curve is on fire. This too shall pass.
Be patient, but vigilant. Even though the most recent moves to the upside seems suspiciously like a massive short squeeze (at least started the move), it shows a market stretching its legs. Likely for a long overdue (much more sustainable and reasonable) move higher over the next several years.
- Continue to take advantage of market prices that allow locks below $2.80. While this likely isn’t as low as it will go, it is close enough to take some chips off the table.
- The market is extremely overbought, but has a great deal of momentum. We are showing the longer term chart with a Fibonacci retracement from the polar vortex high of 6.493 to the 2016 low of 1.612. This shows the market broke and closed above the 50% level of $4.053. The market also broke through the $4.00 level for the first time since 2014, which busted the door down for a move to the mid 4’s and beyond $4.62 on the current long term resistance level I am using. The natural gas market has been hinting at a move like this for some time. See below for an excerpt from a 8/21/18 report.
Bullish indications 8/21/18–
(1) Possible breakout today to the upside. With some very serious follow through, this could be the basis for some movement back above $3; however, a real breakout of this cup and handle formation would be above $3.05 with heavy trade.
(2) Golden cross is nearing formation. Once the 100 day moving average crosses the 200 day moving average that indicates a strong reversal to the upside.
(3) Shorter term trade indicator is the MACD that turned bullish about three weeks ago. This along with the parabolic indicators are both pointing to trade to the upside.