For Natural Gas, The Market Is Doing The Right Thing

On August 8, we published an NGF titled, "Natural Gas Approaches The Top Of The Range, More Is Needed To Balance The Market." At the time, natural gas prices started to rally with October contracts surpassing the $2.25/MMBtu area. We thought the rally was approaching the top end of the trading range, and we sold out of our BOIL long position.

Since then, the entire curve has compressed.

Most of the weakness is happening in the winter months and we think this should continue as the market does its job.

What readers need to realize is that despite the drop we are currently seeing in Lower 48 gas production, natural gas storage remains bloated. The only way to balance the market today is by keeping prices low.

Today's storage report from EIA doesn't offer the bulls any comfort as the injection of +35 Bcf is ~10 Bcf higher than our estimate. The implied deficit has fallen to -1.46 Bcf/d down from ~2.74 Bcf/d last week.

As a result, the only way the market can get to the end of injection season unscathed (better than expected storage) is by keeping prices low, and thus keeping Lower 48 gas production low.

But for readers, this will eventually give you an opportunity to go long.

Timing...