Natural Gas: Oversupplied But Prices Could Still Double In 2019

Despite today's low gas storage, the market is oversupplied.

The market consensus has priced in continued oversupply going forward, but early evidence suggests a meaningful production slowdown in 2019.

As slow supply growth undershoots consensus expectations, I see high odds of a tighter market and higher prices in the second half of 2019.

Today, the natural gas (UNG) market is oversupplied and prices remain stubbornly around $3 - about the same price as 6 months ago. However, I still believe prices could soar as we move through 2019. The reason? Production will fall short of market expectations.

In this article, I'll explain why natural gas production growth will slow dramatically in 2019. This slowing production will meet the new demand growth in the second half of the year, tightening the market and sending prices much higher. But first, let's see where the market stands today.

Despite Low Storage, Natural Gas is Oversupplied

Natural gas storage currently sits 30% below the five-year average - the largest deficit in over four years:

On the surface, this storage deficit might seem to indicate an undersupplied market. But today's deficit is purely a function of a low starting point. You see, we entered last winter with the lowest natural gas inventory in 13 years. This low starting point combined with an early-November cold blast to ignite an epic short squeeze, fueled by offsides traders - like the now-infamous OptionsSellers.com.

(And don't let the weepy-eyed apology video fool you. Anyone with even a cursory knowledge of derivatives knows the immense risk of selling naked commodities options on leverage. OptionsSellers.com did not suffer from a "rogue wave." They could have easily hedged their risk by selling call spreads instead of naked calls. But that would have given up their potential upside. So they sold naked call options for maximum gains and thus exposed their clients to catastrophic risk. T