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Natural Gas: If You’re Long, Be Afraid...Be Very Afraid

Published 03/19/2020, 12:11 PM
Updated 09/02/2020, 02:05 AM

For some longs in natural gas still shuddering at finding themselves at 25-year lows after this week’s 14% price collapse, I hate to be the bearer of this news: the worst isn’t over.

The coronavirus pandemic and its systemic destruction of the oil market and Wall Street has found another victim — natural gas.

Last week’s consumption of gas likely fell by 88% from the week prior as more Americans began working from home and fewer businesses operated full hours, reducing the need for heating in buildings and other commercial locations. 

Natural Gas Futures Weekly Price Chart

The U.S. Energy Information Administration’s weekly gas storage report, due at 10:30 AM ET (15:30) today, is expected to show that U.S. utilities pulled just 6.0 billion cubic feet from storage for the week ended March 13, to burn for heating. The previous week’s drawdown was 48 bcf.

Last week’s gas consumption was even lower when compared to year-ago and seasonal levels. During the same week in 2019, gas storage fell by 91 bcf. The five-year (2015-2019) average for draws was more modest but still higher at 63 bcf.

Spring Brings Gloom For Gas, Not Hope

And with spring officially kicking off from today, there’ll be even milder temperatures, after what has already been a disastrous winter for gas bulls. Add to that the full or partial lockdown of New York, San Francisco and most major U.S. cities from the pandemic and you have a perfect storm for demand and gas prices.

For this week, estimates show draws not to be very different from last week, probably hitting around 9 bcf or so because of a slightly colder start to the week.

That’s not all. Analysts are now anticipating that there’ll only be two more weeks of gas withdrawals, after which the pre-summer injection season into storage will begin. 

Typically, the so-called shoulder season between spring and summer is a tepid period for gas consumption and longs in the market are usually happy to wait for the arrival of hotter weather and demand for air-conditioning. 

But this year’s summer outlook for gas might be even worse than we had for winter. If work-from-home and social distancing remains the new normal by June and beyond, then commercial demand for cooling will almost be decimated.

More Storage Builds Likely 

Already at the current level, gas in storage stands at around 2.0 trillion cubic feet — about 16% higher than the five-year average and 76% above where it stood a year ago. Aside from unseasonable warmth through many phases of the 2019/20 winter, one reason for the outsize storage build is record high production of gas since the start of this year. 

Given the current situation, gas longs should be afraid, very afraid of any more swellings in the inventory.

“The natural gas market’s capitulation has reached a new stage,” said Dan Myers, analyst at Houston-based consultancy Gelber & Associates. Said Myers:

“Ongoing developments will eventually help prices set a new floor that could stand for many years.”

In Wednesday’s session, the front-month gas contract on the New York Mercantile Exchange’s Henry Hub fell to as low as $1.56 per million metric British thermal units — marking a bottom since August 1995, when it traded at $1.39 per mmBtu. 

There are various $1 level pricings in 1995 and 1994, meaning the next milestone for the market’s low might not be that great.

Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, agrees with Myers that the current selloff in gas is virtually unprecedented in recent history. 

But he also says bids at the low level could come in to create volatility, amid spreads play on the difference between spring and summer pricing of gas.

“Until we get some clarity on the demand side (which isn’t that bad), the path of least resistance is lower for spreads,” Shelton wrote in a market commentary on Wednesday. He added:

“And front-end flat price and volatility should continue to rise as there is no concept here of what spreads are actually worth.” 

Some Reprieve If A Few Energy Drillers Go Bust

There could be a silver lining for gas too from the pandemic and the demand destruction it has wrought.

Some of the most debt-laden energy drillers in U.S. shale fields are likely to go bust in coming months from the impact of $20 oil versus production costs. Gas is often a by-product of oil drilling in the shale patches and if these companies go down, a chunk of the record high in gas production now could be wiped out.

Drillers like Chesapeake Energy (NYSE:CHK) and Whiting Petroleum (NYSE:WLL) were already facing financial difficulties before this month’s near 50% drop in U.S. crude prices resulting from the pandemic and ill-timed output hikes by oil producing titan Saudi Arabia.

Pioneer Natural Resources (NYSE:PXD), one of the leading producers in the Permian Basin of Texas and New Mexico, is running a series of models to decide its next steps and is likely to plan for a worst-case scenario, where oil prices might remain low for two years.

West Texas drillers Diamondback Energy (NASDAQ:FANG) and Parsley Energy (NYSE:PE) pledged on Monday to curb activity in response to the oil price decline.

“Probably 50% of the public E&Ps will go bankrupt over the next two years,” Pioneer’s CEO Scott Sheffield told the Wall Street Journal in an interview on Monday.

Latest comments

Hey Barani nice article.,..15% drop year to date seems a little low don't you think? those guys joking around saying ng will drop to 1.4 maybe it's possible but I never would have believed it. Seems inevitable except we may not see an injection norm this year due to covid 19. That should help prolong the drop. But everytime Trump talks he moves the price with hopefull promises. Just sayin beware of his fake promises if you are shorting. Politics can override your research in factfull numbers. Anyway I'm sure your thoughts are two month short term. Love reading your expertise thanks keep em coming.
nat gas prises may not go the same way all over the world. Russia has supplied Europe with approximately 50%. I don't get it how trump can sanksjons Germany to get gas from Russia. I do not see Russia will have any problems as Chaina has recovered from corrona. However, even with the lockdown in Europe , it will be hard to get nat gas. Germany will be Ok, but the second pipeline into hannover will not increase production overnight. it seems clear there will be a shortage of nat gas in Europe. secondly nat gas is different. any machinery that runs on nat gas need adjustments. cooking and heating does not matter. who is gaining on trump's sanctions. the big looser is us with regards to nat gas. period.
Nat gas production is set to decline...Demand is set to incline...currently at a 20 year low...3 out of last 4 years the low is in feb/march...yeah im not very afraid. great time to load up...
On a side note, net shorts by institutions on NG are at all time highs, which makes sense giving the situation, but even more so, if those institutions decide to cover their shorts to get liquidity, especially as opportunities in the market are rising, we might see a bull run started by such a volume. That's my take, I'm in the waiting zone, there is still some downside, but risk return on the upside is great with all things considered
I'm long with some insurance. upside is MASSIVE longer term. you should be more afraid of selling/short.
these guys always late to gameand i mean always, no clue
 No clue? Excuse me, we called under $2 waaaaaay back. I know it hurts when the market moves against you. Doesn't give you a license to demean others.
 He's just like that sometimes....
I think your exposure short will be burned soon...your article is plenty of bad ideas
I have zero exposure to this market or any commodity/asset for that matter. Blissfully happy, just writing things as I see and told by people like Myers/Shelton who've followed gas much longer than me.
 if you are so good why are you just writing things not trading
Because that's my job -- I write. I don't trade. Stay tuned for today's (March 26) piece.
I called golds collapse a month ago, and I'm calling ng recovery now. long ng with a tight stop
Lol, did the the opposite here and got some Call contracts for the Fall. Well underpriced and can't pass it up.
More storage builds are not likely as wells shut down and companies go bankrupt. $1.39 in 1995 = about what NG is selling for now or even more based on inflation.  Kindly post disclosure. As for me I have no position in NG.
* price call
 In 30 years you never posted disclosure?
 My disclosure has never been an issue through my time with pure media outlets in the past (newspapers/AFP/Reuters). Investing.com is the first real investor platform I've contributed to and I've discussed having a disclosure with the administrators, and I think I should press for it now. Thanks for your well-meaning reminder :)
Not convincing at all! Your assumptions are built on worst scienarios ever and you are not seeing a recovery of the economy and the market going back to normal and even to a super state of growth, corona will eventually end even if it lasts for a few months and the market come back stronger than before
It seems more and more countries are starting to enable martial law. We've already begun to do that in the U.S. I'm hoping the flu season ending puts this virus to slumber so we don't go into complete lockdown like the others.
I honestly can't tell if this is serious.He took the difference between 2 weekly reports and attributed it all to coronavirus... 6 vs 48 = 88%.
 Thanks Matt. We have mutual respect for each other and I've always appreciated that. Everything you say is valid -- as much as the "unknowns" out there. In fact, it's the unknowns that make any prognosis extremely difficult, with the tendency of most (Myers/Shelton) to err on the cautious side. And we have injection season coming. But waiting out the next 2 reports will be key as you say.
 the seasonal forecast came out today and Summer looks much hotter than last year. I have loaded May calls and will likely buy June calls later on. Prod is not falling off like I'd like so I'll wait.
 Prudent call there, Matt. Wish you the best, mate!
On the bright side, US households will be burning more electricity and natural gas by just by staying home all days long.
Gas is a byproduct of oil...big companies use way more electricity than household people.
Everyone is home - shouldn't this increase natural gas use?
Time to double down.
I'm bankrupt and have loans to pay back. Curses to USA Russian and Saudi Arabia oil and gas
1) Never make big bets, especially on one stock or commodity. 2) Never chase a bad trade. 3) Never deviate from these 2 rules.
25% of natural gas production in US is byproduct of oil production. Oil production will go down fast, natural gas production will follow. This will offset big part of all the aforementioned bearish issues.
10-20 million Americans will lose their jobs if Trump refuses to support America's oil and gas industry.... Natural gas prices will skyrocket if someone puts Trump in a headlock and forces him to help the energy industry and the American people....
300 houses with 1000 people use MORE gas and electricity than 1 school with 1000 people
Yes! But only if its cold enough!! And it hasnt
  exactly its the temps thats the issue more than working from home. heat is not turned off in vacant building nor people turn off heat at home when they leave for work but set at min level.
While thats true, businesses use way more energy than households. Major plants like the big automakers probably make up a sizable percentage of energy consumption in the cities they are located.
SO MANY FACTORS in play right now - so difficult to make any call one way or another - but - I strongly believe the 'corona virus effect' (working from home, airlines not flying, borders closed) will end MUCH SOONER than many are predicting.  Canada and the US both so far have very few deaths from the virus - Italy has had significant deaths - but I am reading at some websites that they were mostly elderly (over 80) with underlying health problems - and not representative of  the population of Canada or the USA.
db cooper, the full effects of the pandemic and its longevity are still unknown. We'll just have to sit this out.
Last week I see bull article about effect of low price oil. And when gas price down ... the point of view is bear haha.
Things are evolving at such intensity that it's hard to make an absolute call, other than heed the timeline for each forecast as given. Most certainly, gas pricing and fundamentals looked better than oil's last week. For now though, the lockdowns across cities -- if extended beyond June -- could decimate commercial demand for gas. On that note alone, it's a bearish outlook, though you need to balance the longer-term bearish outlook with the possibility of production crumbling from rig slashes and potential bankruptcies.
 I read shale oil industry in the next 3-4 months, assosiated gas-oil may reduce 400-800 mmcf per day. I don't see bull and also bear. However, the mild weather this year is the hottest during 70 years.
Kusoli, the numbers are changing by the day. As I told db cooper above, we'll just have to sit this one out. But until America returns to work and play as per normal, we can expect to see reduced demand for energy.
love the doom and gloom, time to buy , the bottom is in with doom and gloom piece
thank you for an objective analysis and letting the chips fall where they fall. As you know, oftentimes, the bearer of distressing news is not welcomed by all but should be thanked for their courage!
 Thanks much. It's readers like you who keep me going. Much appreciated.
just keep on keeping on!
This serves as your official notice to go long guys. You know what I mean.
Good Day. See my reply to Ronald.
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