The bears keep pointing to 111.4 Bcf per day of production as the reason this market cannot sustain a rally. That number is real. But 19.2 Bcf per day leaving the country is also real and the net balance is what matters. Production minus LNG exports leaves a smaller domestic supply pool than the headline number suggests.
Summer Heat Has Not Arrived Yet and the Base Is Already Built
Weather demand through June 24 is expected to be light to moderate with cooler systems crossing the northern United States and hotter conditions across the South and West. That is not the setup that drives a breakout. But Vaisala is forecasting above-normal temperatures across much of the Lower 48 between June 28 and July 2 and that is when the demand picture starts to change.
The higher bottoms all formed before the worst of summer demand. Buyers have been building this base on relatively mild weather. Verified heat is the catalyst this base has been building toward.
Hedge Funds Are Betting Against the Buyers
Hedge funds added to their bearish bet again this week. The net-short position in natural gas is above 34,000 contracts now, the most aggressive short exposure in more than two years. Meanwhile the market has not broken below its April 30 low once. Four higher bottoms and the largest short position in two years on opposite sides of the same trade.
Short positions of that size become fuel when sentiment shifts. A couple of below-consensus storage prints paired with verified heat forecasts and this short-covering rally does not stop. The exit for the net-short contracts is narrow and the buying that comes from forced covering is the kind of volume that triggers the acceleration into the 200-day moving average.
What to Watch
Storage injections and weather forecasts are the two variables that determine whether the base-building phase ends and the breakout begins. The weekly storage print came in below consensus and below last year. Another below-consensus injection next week paired with verified heat forecasts and the supply-demand balance tilts further toward the bulls. LNG at 19.2 Bcf per day is pulling gas out of the country at a pace that offsets a significant portion of the production gains.
July natural gas is holding above the 50-day moving average at $3.120 and the progression of higher lows is intact. The trigger is $3.387 to $3.396 and a move through that zone on volume opens the 200-day at $3.586. The 34,000 net-short contracts are the accelerant. The storage trend and summer heat are the match.
More Information in our Economic Calendar.
