Energy Market Outlook – June 28, 2017

ENERGY NEWS AND MARKET INFORMATION FOR THE WEEK OF 6/28/2017

Author: Jason Scarbrough

Come on bulls!  $3.084

you can do it

Today is expiry day and tomorrow is the second of what looks to be several low storage reports – guiding the underground storage number further towards the five year average every week and widening the gap from last year.  As of this afternoon, estimates range from 34 BCF to 56 BCF injected for the week ending June 23rd, 2017.  Last year there was an injection of 37 BCF reported – but the five year average is 72 BCF – so the report is likely to be bullish in that regard.

You can clearly see where the injections took a smack in the face last year right as the dog days of summer arrived in the chart below.  It would be very bullish if the same pattern occurs this year, dipping the storage towards the bottom of the range – something we haven’t seen in years seasonally.  But given the increase in production we have seen recently – today, I find it more likely that this year’s chart passes over last year’s.  Some caveats would be August heat that is higher than currently expected, or perhaps some major increases to Mexican exports that are currently unforeseen.

 

If trade breaks out from the 3.08 level with any conviction – Buckle your chinstraps sort of – this could mark the beginning of the speculative bulls’ run for the summer.  As pointed out all over the place, it is likely that this will yet again be a record setting summer unless El Nino decides to form early (currently running at ~55% chance of forming in the fall).  This market is well sold and was sitting at an oversold level last week – now with what is rumored to be a private weather service as well as some internal predictions from producers (of nat gas) – this July is expected to be much hotter than previously expected.  That sets up as nice as a slice of apple pie this weekend for the bulls.  The cheese on top would be the fact that with everyone on vacation, if they like, the bulls can push their way around a thinly traded market – especially starting with the July to  August contract roll.

Many of the runs higher in the natural gas market over the past several years have come from short squeezes (largely because fundamentals simply don’t support the prices and supply floods the market towards $3.50).  It would seem that the market is shaping up to go at it again –

  • As of last Tuesday, Wall Street longs fell 2.8% to a 9-week low of 546,279 NYMEX and ICE futures, options and swaps. Since hitting a 152-week high eight trading days ago, length is down 9.3%.  Speculative shorts climbed by 3½% to a (second straight) 7-month high of 215,761 contracts.
  • Since hitting a 526-week low six sessions ago, shorts have more than doubled (+111%).  Therefore, over the last month-and-a-half, the ratio between spec longs to shorts fell from an all-time high of 5.9 to 2.7. 

If/when the heat comes this July – the market movement to the upside on the six month strip will be a pretty good barometer of what traders and producers alike think is actually happening fundamentally and more intermediate term (vs short) with storage and production in the near term – ignoring the noise of the prompt contract (trade at the front of the curve looks like it is trying to get the market to return to a clear backwardation – pumping up near term prices).  This is nothing new for summer trade over the past 3-5 years – however, we are paying a little more attention this summer because there seems to be a fundamental shift happening in the amount of non-fossil burned power production and therefore, air-conditioning (while nat gas is basically replacing coal as the #1 power producing fuel in the US (ie more demand) – there is something in the air with smart grids, wind, solar, etc. that could make a real case for a net zero effect there)

Key demand for natural gas is still there in the power producers, but, along with the renewables and tech –  it looks like it may be time to finally bring LNG exports, industrial demand, and Mexican exports into the calculable fold – or at least start paying attention to them.

I would expect most of the movement higher to stick to 2017/ and winter 2018 contracts  as those have gotten hammered this in June – any significant movement higher beyond that would make us take another look what we expect intermediate term).

Technicals: bullish

Trade gapped up from 2.92 on Friday to 2.99 on Monday opening.  Follow through has been rather benign, but it is follow through none the less.  It is likely traders are not pushing higher given the holiday weekend, expiration today, and storage tomorrow am.  If the bulls don’t move this market right now, I think it will be tough to get it going after next week.  The market is set up for a short squeeze that so far hasn’t materialized – and trade is sitting perfectly between the short term 50% fib retracement and the long term AND SHORT TERM 38.2% fib retracement at $3.08.  this would seem to be a very key level of resistance and likely many stop orders.  The next level up would be looking at the $3.25 mark where this selloff started – then to $3.32.  I don’t see a ton of resistance to these levels but once we get into the $3.32 range I would think a bunch of supply will come into play staving off the rally.  That is all IF the bulls can make a move – I would think they do, but ?

All indicators are bullish – parabolic are positive over the past two sessions and MACD clearly turned bullish Monday – but still not super strong.

The downside I still see $2.50 and the “death cross seems to have formed pretty nicely so far as well – so we saw a test of $2.85 so far from this indication, we will keep an eye on how strong this gets.

Continuous with Fibonacci retracements: