Last Week and This Week
U.S. Energy Information Administration should report a larger change in natural gas storage this week compared to the week prior. We anticipate seeing an injection of 109 bcf (5 bcf larger than the comparable figure in ICE’s latest report for the EII-U.S. EIA Financial Weekly Index, 45 bcf larger than a year ago and 22 bcf larger vs. 5-year average for this time of the year).
Last week, the number of total degree-days (TDDs) dropped by 10% w-o-w, as heating demand plunged (by as much as 48% w-o-w), while cooling demand increased by a third, albeit from a relatively low base. Total energy demand (for heating and cooling combined) was some 20% below last year’s level but did not depart much from a long-term norm. Heating degree-days (HDDs) have reached the point, where they are no longer relevant and have no effect on natural gas consumption. Cooling degree-days (CDDs) now have a disproportionately stronger effect on consumption, and traders will be paying attention to changes in CDDs.
This week, weather conditions continued to get warmer: the number of CDDs rose by 17%. Surprisingly, however, the number of HDDs also increased by as much as 10%, which pushed total energy demand up by 15% w-o-w.
Total energy demand (TDDs) is expected to weaken, but so far by only 4% w-o-w (see the chart below). CDDs are projected to rise by a miniscule 2% (mostly as a result of seasonal factors), while HDDs will drop by 10% and will disappear almost entirely. The seasonal bottom in terms of projected number of TDDs has already been reached. Consumption-wise, the weather models are starting to look neutral-to-bearish.
Source: Bluegold Research
The latest numerical weather prediction models are returning some bullish results.
- ECMWF extended-range model (issued on May 14) projected above normal CDDs in all five forecast weeks (May 25 – June 22) – however, the results were not as bullish as in the previous update (issued on May 10);
- The latest CFSv2 long-range model is projecting above normal CDDs in May and in June;
- The latest ECMWF 00z Ensemble and GFS 12z Ensemble mid-range models are both projecting above-normal CDDs over the next 15 days (May 16 – May 31).
However, there is one very important factor that you need to take into account. Absolute values (CDDs, HDDs, and TDDs and their deviation from the norm) may not matter much in trading. Absolute values determine the price regime, while the changes in absolute values determine the price direction. It is therefore assumed that absolute values are already reflected in the current prices, whereas changes are not and thus a trader should pay a special attention to the actual changes in the forecast if he or she wants to anticipate the price direction.
Our subscribers receive daily (early morning) update on the latest weather forecast as well as afternoon (12z model runs) update on any additional changes. We also provide a regular update on extended-range ECMWF model. Consider signing up, if interested (see the link below).
Long-term weather forecast continues to indicate strong cooling demand (above normal CDDs), while structural and economic coal-to-gas switching still yield a rather bullish end-of-injection-season storage index figure. Our very latest outlook for EOS is only 3,365 bcf, which is 464 bcf below 5-year average as well as 180 bcf below market expectations (which currently stand 3,545 bcf).
Source: Bluegold Research
An important part of our trading strategy is to maintain a net-long exposure as long as EO(i)S storage index remains below market expectations. Therefore, we have been net-long in natural gas futures since mid-February and have been recommending our subscribers to buy dips and try to maintain a disproportional bias on the long side of trade. However, natural gas is inherently an extremely volatile commodity. It can produce strong rallies while being in a downtrend and deliver sharp declines while remaining in an uptrend. Since natural gas is such an “unstable” commodity, one can always make money on the short side even in a bullish trend, which is what we did also.
Short exposure looks particularly attractive today for the following reasons:
- Energy demand forecast (as measured in TDDs) has been weakening over the past few days;
- The price is near 3-month highs and facing strong resistance ahead (2.864, 2.871);
- There is “bearish gap” between our storage projections and ICE weekly figures (it has widened since yesterday);
- Weather/consumption forecast is already bullish and, therefore, there is a lot of scope for “bearish changes” ahead, while the probability of new “bullish changes” is declining.
However, we will be monitoring daily changes in weather models and EO(i)S storage index very closely and will be ready to close our short positions and buy the dip.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.