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Natural Gas Outlook: First Inventory Build Is Imminent in 2015

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An early end to winter spells a bad start for summer prices

Signals of an early end to the heating season pushed the United States Natural Gas Fund LP (UNG) down 2.39%—closing at 13.49. Its benchmark May natural gas futures, traded on NYMEX, settled down 1.9%.

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Key estimates

The EIA (US Energy Information Administration) reported that inventories rose by 12 Bcf (billion cubic feet) in the week ending March 20 to 1.479 trillion cubic feet. This is an astounding increase of 65% YoY (year-over-year). The EIA estimates that natural gas production in the US may advance 5% this year to average a record of 78.39 Bcf per day, according to its monthly STEO (Short-Term Energy Outlook) report.

That may prove to be too small of an estimate. On average, the components of the Spider  Oil & Gas ETF (XOP) that produce natural gas are slated to produce roughly 10% more this year than last year. Companies like Magnum Hunter Resources (MHR) and Gulfport Energy (GPOR) are set to ramp up production by 118% and 84%, respectively.

Both of these companies have a combined market cap of just over $4 billion. However, Antero Resources (AR) is a $9 billion plus oil and gas producer. It will increase natural gas production by over 30%.

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Natural gas performance

From a price and volatility point of view, over the last ten days, the May contract experienced increased pressure on the downside. It averaged a -1.21% loss on down days versus a 0.71% gain on up days. Natural gas was one of the worst commodity performers on March 26. It only outperformed nickel prices. YTD (year-to-date), natural gas spot prices lost 7.62%. It continued its long-term decline.

Demand

Yesterday, the short-term demand from residential as well as industrial facilities showed waning demand for the fuel. With production set to increase, this fundamentally driven double-edged sword will likely push natural gas prices below the lows set on February 2 of 2.61 MMBtu (British thermal units in millions) for futures and 13.12 for UNG.

In the coming days, milder-than-expected weather has been reported. It’s a key driver of short-term natural gas price fluctuations. May natural gas futures closed well below its 20-day moving average of 2.79 MMBtu. Also, it’s well below its 50 and 100 moving average. Significant short-term pivot points developed on March 26. This includes the break of the 2.70 MMBtu support level as well as an implied support at 2.60. Given the short-term fundamental picture, a breakdown of this price level can send natural gas down even further.

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