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Daily Commentary

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Welcome To The Shoulder Season: Volatility Set To Decline As Natural Gas Fades On Moderating Temperature Outlook; Brutal Rollover For Leveraged Gas ETFs Now Underway; Natural Gas Demand To Hold Nearly Steady Today As Unseasonably Chilly Temperatures Remain In Place For One More Day


6:00 AM EDT, Tuesday, May 12, 2020
Monday's trading action in the natural gas sector was a microcosm of last week's disappointing performance in which prices initially surged by more than 13% in the first two trading days, only to end up with a weekly loss as the commodity sold off.

Natural Gas Futures Prices

Figure 1: Click here for more information on on natural gas investing.

Similarly, natural gas rallied more than 3% early Monday morning to top $1.89/MMBTU only for the sellers to jump back in during the afternoon as the commodity gave up nearly all of its morning gains to settle up less than a penny or 0.2% at $1.83/MMBTU. Of note, the popular 3x ETF UGAZ continued its monthly rollover, selling out of June 2020 contracts and buying July 2020 contracts. As of last night, the fund had completed 60% of this roll, which will likely finish by Wednesday. This is rather unfortunate as the rollover is taking place in a state of steep contango with the July 2020 contract trading at $2.08/MMBTU, an ugly 14% premium to June. This is unusually high for this time of year and is equivalent to selling low and buying high and will undoubtedly favor price-independent rollover-induced losses in the fund. It is for this reason that I have been avoiding adding to my natural gas long ETF positions (via short DGAZ) despite my sentiment that natural gas is undervalued and have instead focused on long natural gas E&Ps such as SWN and COG. As the Figure to the right, this contango flattens out over the next several months (but could widen back on further near-term weakness in the sector), before rising again as wintertime prices jump over $3.00/MMBTU. Just remember, the 3X natural gas ETFs are designed to track 3x the daily performance of natural gas--not 3x the weekly or monthly performance of the commodity. They are great day-trading and swing-trading tools, but make poor long-term buy-and-hold investments unless natural gas makes a very large move.

10-Day Average Natural Gas Volatility

Figure 2: Click here for more information on on natural gas volatility.

Monday's bumpy trading was likely attributable to natural gas finally settling into the Shoulder Season. Volatility in the sector has been anomalously high this spring due to a combination of COVID-induced demand losses, record moves in oil and, recently, a record-setting cool start to May. However, temperatures are set to warm dramatically over the next 5 days and heating demand will likely fade for good this season as cooling demand slowly picks up. This will likely result more stable daily demand and much smaller day-to-day price moves in response to near-term computer models. Additionally, natural gas production will likely continue to fall while industrial and commercial demand slowly recover but, with oil inventories increasingly less likely to reach capacity, the tightening of supply/demand imbalance is likely to be slow and steady rather than abrupt. This all means that natural gas volatility is likely to fade, something we are already seeing. Over the past 10 days, volatility has averaged +/-3.5% per day, down from a late-April peak of over +/-5.5% peak day. However, volatility remains nearly 3x higher than last year's +/-1.0% per day. I expect volatility to continue to decline, though with so many driving forces influencing the sector this Spring and Summer, I expect it to remain elevated relative to last year, probably in the +/-2.0-2.5% per day range..

Today's Forecast Departure From Normal High Temperatures

Figure 3: Click here for more information on on the near-term forecast.

Natural gas demand will hold nearly steady today as unseasonably chilly conditions remain in place across most areas east of the Rockies. The largest anomalies will be across the Central Plains extending eastward into the Tennessee Valley. Highs from Kansas City, MO south to Nashville, TN westward to Oklahoma City, OK will all be around 20F colder-than-normal, generally in the upper 50s to lower 60s, after morning lows in the low-to-mid 40s. Further north, Freeze Warnings are in place this morning from Buffalo, NY to Detroit, MI to Columbus, OH to Minneapolis, MN with lows in the upper 20s to lower 30s and afternoon highs from near 50F to the upper 50s, 10F-15F colder-than-normal. Warmer-than-normal temperatures will be nearly absent from populated areas today, restricted to parts of the Rockies with Denver, CO reaching the upper 70s and Albuquerque, NM the lower 80s, 5F-10F warmer-than-normal. Overall, today's forecast mean population-weighted nationwide temperature will inch higher by 0.1F to 57.5F, still a frigid 7.6F colder-than-normal. Total Degree Days (TDDs) will dip slightly to 10.9 TDDs, 4.0 TDDs greater than normal and the 3rd most for May 12 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.

Projected Realtime Natural Gas Inventories

Figure 4: Click here for more information on natural gas inventories.

Based on this forecast and early-cycle pipeline data, I am projecting a +9 BCF/day daily natural gas storage injection, up around 0.5 BCF from yesterday but still 3 BCF bullish versus the 5-year average. Of note, during the heart of the winter, today's anomalies would typically result in a daily storage withdrawal 15-25 BCF bullish. Even during a typical shoulder season when demand wasn't being curtailed by COVID-19, we would be seeing injections more like 5-10 BCF bullish. By tonight, projected Realtime natural gas inventories will rise to 2448 BCF while the storage surplus versus the 5-year average will narrow slightly to +387 BCF. The year-over-year surplus will contract by 5 BCF to +764 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. Look for temperatures to finally begin moderating tomorrow, beginning a steady string of day-over-day declines in daily heating demand.


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