Goldman Sachs: Continue NatGas Shorts Amid Lowest October Demand in Over Six Decades

Mild Weather Impacts Natural Gas Demand

The mild weather across the Lower 48 has limited natural gas demand, keeping futures in a bearish sideways trend, unable to exceed the $3 per million British thermal units level. Thomas Evans from Goldman Sachs issued a note on Monday regarding the US NatGas market. He noted that the unusually warm weather in the Lower 48 during October has resulted in the third-lowest Heating Degree Days (HDDs) for October since 1963.

Forecast Predictions for Winter

Evans mentioned that while there have been some gains in HDDs with a secondary trough moving into the East, it remains warm. This warmth could extend into the first half of November, according to long-range European models. However, Evans explained to clients that there is still uncertainty about winter weather and production. He added that producers are being asked not to increase gas supply until at least December. Despite this, total demand is expected to recover by the end of the month.

Trading Advice for December

In the NatGas markets, Evans advised clients on how to trade through December. He suggested that given the success of the bear trend for November, traders might continue pressing shorts into December. However, he warned that this would only work if the weather remains warm. Evans also mentioned that selling December $2.25 puts to own $3.25/$3.75 call spreads does not seem unreasonable, especially as Z 95-75d call skew appears a bit rich.

Concerns for the Next Shoulder Season

If traders believe that winter is over and gas is in trouble, or that any increase in weather will result in a flood of production, they might be concerned about cash pricing in the next shoulder season. This concern might also arise due to the continued deployment of solar and battery technology. In this case, Evans suggested that the April/October spread might be a better sell than the January/April.

Colder Winter Weather Trends Forecasted

A separate note from the Energy Information Administration and the Natural Gas Supply Association predicted colder winter weather trends for the Lower 48. The EIA stated that this winter will likely be colder than the last, particularly in the Midwest. The NGSA wrote that November-March will be 7% colder than last year. Based on these colder temperatures, the group projects a 14% increase in residential and commercial demand and a 7% increase in industrial demand.

NatGas Futures Trading

NatGas futures trading in New York has been range-bound for nearly two years, mainly due to lower demand and abundant NatGas supplies. The latest data from Bloomberg shows that the average temperatures for the Lower 48 are following the 30-year trend line downwards.

Bottom Line

As winter approaches, the demand for natural gas is expected to rise. However, the current warm weather and abundant supplies have kept the market bearish. It will be interesting to see how these dynamics play out in the coming months. What are your thoughts on this situation? Do you agree with Goldman Sachs' advice to keep pressing NatGas shorts? Share this article with your friends and let us know your thoughts. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.