Welcome to the “what are the traders saying” edition of Natural Gas Daily!
In our flagship daily “Natural Gas Fundamentals” reports, our headline section, “what are the traders saying” discuss what the traders’ latest moves are.
Since the end of June, the traders we talked to have been adding to bullish positions all the way to July 5 when natural gas prices fell below $2.85/MMBtu. Here’s what we wrote that day:
August contracts (UNG) are down nearly 12 cents today trading at $2.837/MMBtu. Traders we spoke to were confused by the move lower as their models showed no material changes in weather other than the bearish revision over the weekend.
“I think the move lower might have something to do with higher production figures coming out.” One trader told us while trying to decipher what’s going on.
It’s true that Lower 48 production data in July so far has averaged above 72 Bcf/d, but is this a cause for a sell-off of nearly 20 cents?
Originally, our expectation was for 71.8 Bcf/d average in Lower 48 production. At $3.30/MMBtu, this would have pushed storage to 3.9 Tcf by November. But it seems the market wants to test the boundaries of power burn over the summer as the current price incentivizes an additional 1.2 Bcf/d of power burn demand over the next two months. If power burn eclipses production growth, which appears to be the market intention at the moment, then the market is trying to push storage closer to 3.7 Tcf by the end of injection season.
We told some traders our thoughts on why prices are selling off, and they said it made a lot of sense, but it could have also been related to a “delayed reaction” to the weather revision from last weekend as most traders were out on Monday.
Nonetheless, traders we spoke to have increased desired gross long exposure from 65% to 85% on average today.
Since then, traders have now largely exited their bullish positions as prices rallied to as high as $3.09/MMBtu yesterday.
We alerted HFI Research subscribers yesterday that traders are exiting positions, and here’s what we wrote yesterday:
August contracts (UNG) are up 5 cents today trading around $3.07/MMBtu. Prices got as high as $3.09/MMBtu before tracking back a bit.
Natural gas traders we talked to are selling their long positions into this rally today. Most of them have sold most of their gross long exposure with some opting to hold just a little bit left. The rally they mostly contended got to the price target they were looking for and with September and October rallying simultaneously, spread trades and short-vol are the next area to focus on.
“The market for some odd reason realized today that Rover was going to be delayed. That was old news, but whatever. Prices got to where I’m comfortable to selling my positions.”
Most traders think there will probably be another opportunity to add to their long positions before winter time. Feb 2018 contracts are currently trading at $3.364/MMBtu, and some find it a bit pricey.
“I would like to see the winter contracts trade-off a bit. With EOS where it is, I’m surprised people are already bidding this thing up.”
One trader thought the April 2018 contracts trading at $2.896/MMBtu was appealing. The consensus end of draw forecast for April 2018 is 1.425 Tcf, which is substantially below the five-year average of 1.8 Tcf. This would at least see April trade over $3.50/MMBtu the trader argued.
In summary, natural gas traders took advantage of the rally today and sold off all of their long exposures today and are looking to trade in spreads and vol until another opportunity presents itself.
Our fundamental analysis also indicates that with prices where they are today, they are largely fairly priced. So, it makes logical sense for traders to take profits here and wait for the next opportunity.
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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.