While we wait for more news from Mongolia, the future for world gas prices continues to look very positive according to Seeking Alpha.............

GAZ: The Rally In Gas Is Likely To Continue

Summary

The market is waking up to the bullish gas fundamentals as seen by a strong rally in the price of natural gas.

Gas fundamentals are likely to remain bullish through 2021 due to declining production.

GAZ is a strong ETP for trading natural gas in that its rolling methodology minimizes roll yield.

As you can see in the following chart, the iPath Series B Bloomberg Natural Gas Subindex Total Return ETN (GAZ) is on a hot streak with shares reversing much of the year’s decline over the past week.

It is my belief that we are currently at a turning point in gas fundamentals and price. Specifically, I believe that while GAZ is likely to fall over the next few days due to mean reversion, over the next few quarters an uptrend in price will continue.

Natural Gas Fundamentals

As you can see in the following chart, gas inventories have actually been brushing against 5-year highs over the past few weeks.

While investors may see the above chart and think that fundamentals are bearish, I believe we need to look deeper at the data. Specifically, my favored approach is to simply examine the rate of change of weekly inventory figures.

Seen from this perspective, the numbers look quite different. While inventories are building, the pace of builds has continued to shrink versus the 5-year average with all but 1 week over the last two months seeing figures either at the 5-year average or below it. The last week witnessed the smallest build as compared to the 5 year average over the past few months.

Put simply, this is actually quite bullish. The reason why this is the case is that natural gas fundamentals by nature are fairly cyclic, so we need to take out the cyclical component in the data to figure out what is actually happening that is normal or abnormal. In this case, inventories are building at slower and slower rates which means that supply is unable to keep up with demand at this point. Let’s dig in to see why this is the case.

First off, the clearest reason why we are seeing inventories weaken is production losses.

As you can see, we are witnessing very large declines in gas production across the productive regions. Seen from another perspective, we are well into year-over-year declines in most areas.

It is very important to study history during these moments. Falling prices cause declines in production, but declines in production also tend to presage rises in price. For example, in the prior chart you can see that the last time we witnessed broad-based declines in gas production was during the middle part of 2016. Here’s what happened to the price of natural gas during this time period.

Put simply, decline in production is one of the fastest ways to fix a low price environment for natural gas. We are witnessing a historic collapse in drilling activity which is leading to plummeting production and historically speaking, plummeting production tends to be followed by rising gas prices.

I believe that this relationship is set to continue. I view the declines in production as a long-term situation which will be in place until gas prices have sufficiently corrected to the upside. However, as a check on my analysis, here is the EIA’s Short-Term Energy Outlook data.

What this chart shows is pretty clear: gas production is expected to remain weak through at least 2021. From a balance perspective, the EIA sees inventories continuing to weaken against the 5-year average through at least next year.

Put simply, these fundamentals are quite bullish in that they show that diminished supply is set to outpace any weaknesses in demand which will likely result in rising prices. I believe the recent surge in gas price was reflecting a market which is starting to price this in. I’m somewhat bearish gas over the next week or so based on the fact that markets normally don’t move in straight lines and you need trading and churning somewhat for a healthy trend to emerge. But over the next few quarters I am quite bullish gas because of the decline in production.

Conclusion

The market is waking up to the bullish gas fundamentals as seen by a strong rally in the price of natural gas. Gas fundamentals are likely to remain bullish through 2021 due to declining production. GAZ is a strong ETP for trading natural gas in that its rolling methodology minimizes roll yield.