On August 27 when we published our controversial directional call to get super bullish natural gas for the long-term, we saw a lot of backlash. But thanks to the sentiment feedback, I knew we were onto something. I've never seen a sector so hated before (more than oil). Fast forwarding to today, natural gas prices have recovered nicely from $2/MMBtu. A large portion of the rally is due to contango, but with the storage surplus set to go away, the sentiment is starting to change again just as production is about to surge.
The market has a funny way of swaying sentiment with price, so it's important to remain objective and stick to fundamentals. In the case of natural gas, the worst is not over just yet.
Lower 48 gas production will surge back to ~106 Bcf/d by year-end. Producers that have throttled back production in the near term will be bringing on TILs into year-end. Matterhorn is now online and expected to deliver an additional ~1.9 Bcf/d of gas (0.6 Bcf/d in the data already).
Storage surplus has been eliminated, but we are not in a deficit. Any downside surprises to the weather outlook in November will push prices lower again.
Our natural gas storage projection shows that the injection season is expected to finish between 3.8 to 3.85 Tcf, which is only marginally higher than the 5-year average of 3.75 Tcf.
The market has done a fabulous job of eliminating the surplus, but bulls shouldn't rejoice just yet. We are going into the most volatile trading period for natural gas, and Mother Nature will wreak havoc (as usual) on the trading community. A bullish weather setup early this winter will push prices well above $3.50/MMBtu as traders assess the mismatch in production ramp and bullish heating demand.
Similarly, a bearish start to this winter coupled with the production increase we see will push prices back down to $2.5/MMBtu.
The binary outcome makes it unattractive to trade natural gas for the time being.