Nat Gas Update 3/11/24: Redundantly redundant!
(Chart is the price of NG1 to USO, inlay is 15 year average WTI price, from Dec 15 – March 15, last 15 years)
These past weeks I have been discussing two major issues. One was the upward momentum of pricing going into the shoulder season, due to several effects. The other is a Sudden Stratospheric Warming (SSW) Event (I have nothing more to discuss about this issue. As of now it shows up March 20th-April 15th or it does not. You can read my past ideas and watch the videos for explanations.). I did address the Trump tariffs back on 2/10/25, indicating that Trump is more bark than bite. Maybe this needs a bit more!!!!()
But it now seems that the market is just as uncertain to this barking dog, vs afraid of the bite he can inflict. The one thing the market hates is uncertainty. It can take bad news, in stride. Being able to hedge options and reposition assets to minimize losses and see new avenues of opportunities. But Trump’s on again, off again tactics are destroying market confidence along all fronts. I believe most informed market analyst have been pointing out the fundamental reasons that I have been discussing, for a strengthening market this year (which I will address tomorrow). The four horse men are, storage, LNG exports, higher energy demand, and low rig counts. The EIA has increased the HH monthly future price every month since December, in their monthly STEO report. The has not been any uncertainty from producers in showing restraint from the lows last summer. This past week’s quarterly conference calls form the NG majors, have continued to strengthen their resolve for not oversupplying the market once again. There are only a few producers that have signaled their intent to increase rig count, and by modest amounts.
The incredible increase in price these past 8 days were influenced by Trump. His tariff rhetoric beginning with the lack of any deal with Mexico and Canada after the one-month suspension of the January tariffs. Only to be walked back later in the week, then again, walked back further for provisions to Corporations that have been compliant with the previous USCMA trade agreement. The investing community again will wait until April 2nd to see what new chaos will ensue, only to be rescinded and spun again. The European issue, with Trump supporting Russian plans for a negotiated peace deal, followed by threats of sanctions on Russian banks. We should start to tie the price of the Dutch TTF to which way the wind blows in favor of Ukraine or Russia. Talk about uncertainty!!! So if you take out fundamental, there is only one option left, and that is pure speculation. My belief, as others are, that this present market has suspended any formal ties to market fundamentals and structure and pricing.
The most recent COT report by the CBOE shows that the number of long vs short positions in the market are the highest since July 2023. The ration of longs to short have not been this high since Summer of 2022!! Not saying that this is where we are headed. Just pointing out that managed money sentiment is and has been quite bullish for about three weeks now. Getting more bullish by the week. This past weeks price move on Tuesday was due to a large fund liquidating, which possibly has dried up a large majority of the near term shorts in the market. This past Sunday night, a lot of buy stops above the opening were met last in thin night trading, a big trader or fund blew up (margin call liquidation), or a combination of both. I don’t see any good fundamental or technical reason for gas to have gotten to those levels, which means people were probably buying up there because they had to, not because they wanted to.
But what does that mean about forward pricing? Well, it was inevitable that we would see prices at these levels this trading season. But I think very few were prepared to see the price move so far, so fast. Why, we ask? And the answer just might lie in the seasonal Oil/NG trade. Most winters, with a healthy supply demand balance, the price of NG typically begins drops into the shoulder season starting sometime around the end of the year. Not exactly the end, but sometime around the end. The chart provided shows the average price of WTI for the past 15 years, and we can see that from mid-December to mid-march the average price of WTI increases. Energy traders trade energy. We trade, oil, gasoline, heating oil, NG, distillates, etc… There is a direct correlation to the drop in NG and heating oil to the increase in WTI/Brent. But not this year. This upward trend in prices has to do with refiners locking in pricing for the upcoming gasoline cycle. Not going to get into it here. But the short end. NG down, Oil up = normal seasonal trade. But this year. Oil down, NG up. I believe this is only speculative in nature, due to market dynamics and a need to park capital. See my charts above of the historic relationship vs the last three months.
So, we have a group of traders who specialize in energy, who shift allocations around all year, Spring – Oil, Summer – Gas, Fall – NG, Winter – Diesel/Heating Oil. The pattern is repetitive for allocation unless there is some kind of disruption. ENTER TRUMP!!!! There is no doubt that we will see $5.00 NG this year, but I just do not think it has staying power. My belief is that in the short term, we will have a pullback in prices, to a fair adjusted value of somewhere in the $3.90 - $4.35 level until the injection season begins. I would take every opportunity to buy pullbacks in prices below the $4.40 level. The next big energy trade will be Oil again, for the COT report shows the seasonal longs in the market to place orders for the upcoming summer driving period. They are taking long positions to have crude at the refineries in time for the summer blend to be produced. I look at the end of march each year in a bump up in Oil prices, until about April 15th (a nice once a season trade I enjoy). Has followed this path 17 out of the last 22 years, and I have no reason to not believe this will happen again. So, energy traders are going to need some allocation for the upcoming April contract in WTI, to meet May delivery, for Memorial Day gas blend. So, sell what they are running up! NG!
Again, this is a very volatile time. I do not recommend this type of trading for the novice, but since Friday’s close I have a strangle in place. Which is two OTM option position. I placed a call at $5.20 and a put at $4.05. I closed my $5.20 call Sunday night not too long after the price settled back from $4.90. It was a nice unexpected position to close. I reentered a $5.00 call again before the market closed today. I will play the volatility back and forth until fundamentals return. Tomorrow I will update the fundamental for the upcoming 8 weeks or so. Not that it matters with this Trump wrecking a pretty sure thing! But we must be ready before the other do. That is how we stay on top of our game.
Keep it burning!
