Weekly Natural Gas and Weather Update May 26, 2015

Weekly Natural Gas and Weather Update May 26, 2015 Executive Summary: Temperatures in week 1 rise significantly above average across the eastern US, stoking additional cooling demand. A brief cool down late in week 1 into week 2 brings some heating demand into the upper Midwest but limits cooling demand elsewhere before the entire country heats back up in week 3, including in major nat gas demand regions. Weather through the coming month will thus be slightly supportive, but may not significantly move the market. Click Buttons Below to View Executive Summary Week In Review Week 1 (May 25-31) Week 2 (June 1-6) Week 3 (June 7-13) Technical Direct Trading Bearish Bearish Bearish Bearish Bearish Bearish Losses Bullish Bullish Bullish Bullish Bullish Bullish Profit 1

Cubic Feet (tln) Executive Summary: SLIGHTLY BULLISH May 26, 2015 Key Takeaway: A cold front moving through mid last week will allow for a slightly above 5-year average injection, as total supplies continue approaching the 5-year average. Future weather will keep injections around the 5-year average. Weather indicators overall point only very slightly bullish in the coming week for natural gas prices. A drawdown slightly above the 5-year average this coming week should let prices react to other short-term deviations in weather models and other fundamentals, such as production expectations and exports, though it will still add some pressure to prices. Meanwhile, warmer than average weather across much of the nation will spur cooling demand that is above average, creating a short-term bullish case for natural gas. There still does not appear to be a major weather catalyst, however, with any heat waves being confined to areas that are typically cooler this time of year and thus not significantly spiking cooling demand. The trade longer-term has become more muddled recently as well, as weather models have begun to show heat easing into the second week and middle of June. This should keep natural gas prices fairly range-bound moving forward with no significant demand-related catalyst to drive prices, though as will be shown in the technical analysis prices are approaching a stronger long-term support level that was established over the winter season despite short-term technical weakness beginning last week. This all combines to give a slightly bullish outlook on a market that currently has slightly more room to the upside than the downside, but outside factors, like new production estimates, will continue to play an even more significant role in price action. 4.0 US Natural Gas Inventories: Current vs. Average Since 1994 3.5 3.0 5-Year Average 2.5 2.0 1.5 1.0 2015 Inventories Average Since 1994 0.5 1/2 3/2 5/2 7/2 9/2 11/2 2

Cubic Feet (tln) Week In Review: SLIGHTLY BULLISH May 26, 2015 Key Takeaway: Total gas stockpiles continue to approach the 5-year average, but with increased cooling demand to start last week and some heating demand to end it, it is highly unlikely that we overtake the 5-year average on Thursday. This past week began with warmth building across the eastern half of the nation and colder than normal weather across both the northern Great Plains and the Southwest. The cold across the Great Plains gradually expanded east behind a gradually weakening cold front, resulting in temperatures in the upper Midwest cooling off by May 19 th, with most areas west of the Mississippi at that point below average for temperatures. Wednesday the front crashed through New England, sending temperatures there as all the rest of the country besides the Southeast below average. Into the 20 th temperatures remained quite cool across most of the nation, with the Pacific Northwest gradually heating up, and by the 22 nd it is only Washington state and the far northern parts of the country that were above average, with much colder than average weather dominating elsewhere and into the weekend. The energy implications of this mid-week flip across the east coast are very mixed, as we began the week with above average cooling demand across southern areas and ended the week with above average heating demand in northern areas. Southern areas ended the week cool enough to not need much cooling or heating, however, and thus there likely is not a significant deviation from average with demand last week. The gap between this year s stockpiles of natural gas and the 5-year average continues to close as production remains far above average, and though production is gradually slowing, it does not look to be enough to keep us from overtaking the 5-year average unless the weather becomes significantly more extreme than predicted. Still, strong shifts between warm and cold across the country like we saw last week will still require heightened amounts of natural gas, and accordingly it is not expected that we overtake the 5-year average this week even if we do move closer to it. Gap Between 2015 Year and 5-Year Average Stocks 0.25 0.20 0.15 0.10 0.05 0.00-0.05-0.10 1/2 3/2 5/2 Week In Review Continued 3

Week In Review: SLIGHTLY BULLISH May 26, 2015 Key Takeaway: Both cooling degree days and heating degree days were slightly above the seasonal average last week, leading us to believe that the injection on Thursday may be below market expectations and closer to the 5-year average. Demand for both heating and cooling looked slightly above average when analyzing the National Weather Service s population-adjusted HDDs (gas utility-weighted) and CDDs. This can be slightly misleading, however, as a significant portion of natural gas demand comes from the south central, which saw demand around average to even slightly below average. The most significant increase in HDD s did come across the North Central/Mountain region and replaced lost HDD s across New England, which indicates higher nat gas demand areas saw weather more conducive to spurring said demand. Past/Future EIA Data This analysis of CDDs and HDDs thus yields a conclusion that weather across the nation was very close to the 5-year average, and that it is production remaining above both last year and the 5-year average that should lead to an injection into storage on Thursday that is above the 5-year average. Market expectations put that injection around 110bcf, a significant 15 bcf above the 5-year average. Based on the significant number of HDDs across the North Central region, we believe that the market expectation may be slightly too large, especially given the unseasonable strength of the cold that moved through. The result is an expectation of an injection closer to, but still above, the 5-year average, somewhere around 103 bcf. Instead of the expected bearish reaction to such a number, our expectation is that the market reaction is more neutral. Last Week s HDD and CDD s to Climate Average May 7 May 14 May 21 May 28* Actual 76 111 92 -- Market Expected BWS Expected 75 117 97 110 -- 110 95 103 5-Year Avg 86 82 89 95 Market Reaction *estimate Bullish Bullish Region HDD to Avg. CDD to Avg. New England -19 1 Middle Atlantic -15 6 East North Central 7 8 West North Central 34-6 South Atlantic -7 20 East South Central -2 7 West South Central 6-2 Mountain 34-24 Pacific 10-7 United States 6 3 4

Week 1 (May 25-31): SLIGHTLY BULLISH May 26, 2015 The week is beginning with a strong wave of heat hitting the Eastern United States with a generally warmer than average flow dominating everywhere east of Texas. The Southwest is starting the week below average, but then is likely to rise above average through the week as a warmer flow off the Pacific Ocean begins to dominate, and a weak western ridge begins to form as well. As that ridge across southern California and the southwest pumps up, a strong cold front will again begin to move across the center of the country. As the front progresses across the country, the Midwest will drop significantly below average, with the coldest temperatures remaining west of the Mississippi. This will initially warmer air to flow across the east until later in the weekend, around May 31 st, when the cold front will swing through the east. The image on the right shows the GFS ensemble mean 2-meter temperature expectation for Saturday, showing the significant heat in the New England and Ohio River Valley, the significant cold in the Midwest, and the heat building across a significant portion of the West with the Southeast remaining right around average. The expectations from this are that the EIA injection next week will be right around the 5-year average, or even slightly under as demand for cooling in key late May/early June locations, such as New Jersey, Pennsylvania, and California will be above average, and demand for heating will be above average across Minnesota, Wisconsin, and the Dakotas. However, Texas will remain slightly below average, limiting cooling demand in one of the largest nat gas demand regions in the nation. Accordingly, deviations from the 5-year average are likely to be fairly minimal, and thus the short-term weather patterns look to be only slightly bullish to the overall market despite the extremes on the coasts. Key Takeaway: Sizable heat across the Eastern US will increase electricity/cooling demand through most of the week, but cooler conditions in the Southwest and across Texas will limit the extent that demand varies from the average. 5

Week 2 (June 1-6): NEUTRAL May 26, 2015 Weather in the medium-range is dominated at first by the cold front that swings across the country from Week 1, with temperatures beginning slightly below average across the Midwest and Northeast with the Southeast right around average. Through the entire week it looks likely that the West will be sitting significantly above average, though there is some model disagreement on that as well. Model agreement on the overall cold front strength and path is fairly strong, as they generally agree on the extent of the cooling that will occur behind it and the amount that it will limit cooling demand. After the cold front moves through, a southwesterly flow will return to much of the nation and work to really heat things back up later in the week. Shown to the right is the GFS ensemble 2-meter temperature mean for June 5 th, where a heat wave is ongoing for Pennsylvania, New York, and the Ohio River Valley. The Southeast, as will be the trend here, is sitting right around average, with Texas the only state to see temperatures below average. The West is still heating up as well, though temperatures have temporarily cooled off across Arizona and southern California before the next round of heat moves in. The timeframe thus is likely to begun with below average demand for natural gas nationally, as cooling demand is significantly limited but very little heating demand is stoked, but by the end of the week demand is back above average, essentially equaling a neutral week for demand overall. Models have been waffling back and forth on the exact strength and size of this heat wave June 4 th -7 th, and a stronger heat wave could spike demand above what is currently expected, leading to a slightly bullish outcome for the week. Confidence is not yet there in this outcome, however, and instead an overall neutral assessment has been given to week two. Key Takeaway: The strong cold front moving through late in Week 1 dies down early Week 2 featuring minimal heating demand in the upper Midwest, still acting to curb much of the eastern cooling demand despite the West heating up. Week 2 Continued 6

Week 2 (June 1-6): NEUTRAL May 26, 2015 Key Takeaway: Models disagree on extent that the West and Southwest heat up through week 2, but they have trended towards more significant heat that could spark additional cooling demand across an already high-demand region. Another reason why the neutral assessment has been given to this week is that significant disagreement remains as to the extent of the western heat late in the timeframe. Shown below is the 500mb upper level pattern on the GFS Ensembles late on Thursday June 4 th. The model shows a southwesterly flow moving off of the Pacific Ocean into much of the West, heating temperatures up significantly above average. Shown on the bottom right are the CMC Ensembles for the exact same time. The U-shape over California indicates that a very weak trough will attempt to keep temperatures more seasonable for the time of year across the region, resulting in significantly less demand for cooling when compared to average. The GFS guidance has been performing strongly thus far, and is slightly favored over the CMC guidance, but not so much so as to discount the CMC s cooler Western scenario. Both models clearly agree on significant warming across the East and especially the Northeast, with the CMC ensembles even warmer there than the GFS ensembles, but it is primarily the Southwest that most disagreements exist. Future model runs through the week should focus more on a specific scenario, but with the highly accurate ECMWF ensembles agreeing more with the GFS ensembles, it is forecast at this time that the West will see fairly significant heat that will help pump cooling demand above average for that time of year. 7

Week 3 (June 7-13): SLIGHTLY BEARISH May 26, 2015 The forecasts in this timeframe remain by far some of the most volatile, as can often be the case, as weather models significantly disagree on where the pattern is likely to go from here. The GFS ensemble guidance remains some of the coolest, as seen over to the right for June 9 th, with much of the eastern US seeing temperatures around or slightly below average. The model also shows extreme heat moving through the western half of the country; this is an ensemble mean, and any mean that shows heat that strong two weeks out will only show it get it stronger and stronger as the event gets closer and all the individual ensemble members begin to agree more. Thus, the two stories through this timeframe look to be the western heat and the potential for the east to cool down compared to what is being seen the final week of May into the first week of June. Other guidance, as will be shown, is not yet as convinced about the east cooling off, and still shows a pattern with temperatures at or slightly above average. If this were to occur, instead of the weather being slightly bearish for natural gas, the pattern could turn slightly bullish, as there would be no below-average demand in the east to cancel out what is likely to be above-average demand out west. Key Takeaway: Model agreement has recently broken down as to the overall pattern as we enter into the second week of June, with multiple models now showing much of the Eastern United States potentially cooling off. Week 3 Continued 8

Week 3 (June 7-13): SLIGHTLY BEARISH May 26, 2015 To the right is the CMC ensemble 500mb upper level pattern expectation late on Tuesday, June 9 th. What sticks out first should be the very strong signal for a ridge across the west coast this far out. That represents very strong agreement with the GFS ensemble mean, which is showing the exact same thing, and the ECMWF ensembles agree as well, representing very high confidence in the forecast for temperatures above average across the western United States heading into the middle of June. The other feature here is the very, very slight U shape that the upper air pattern is shown making in the middle of the country. This represents a brief intrusion of some very slightly cooler air, but the model shows much of this air flowing right in from the West coast, which is above average. The result is the CMC ensembles not being as convinced about the cooling that the GFS ensembles show in the East, and instead showing temperatures right around average with a zonal flow. The ECMWF ensemble model guidance agrees more with the CMC ensembles than the GFS ensembles in showing temperatures remaining at to slightly above average across the eastern half of the nation, but recently the GFS ensemble guidance has been verifying well and it is very hard to discount its recent success. Should the ECMWF ensembles verify, we again could be looking at a slightly bullish scenario for natural gas prices, but given the potential for a cool and less humid east, the bias for now in this timeframe will have to tilt slightly bearish. Key Takeaway: Climate models continue to disagree on the extent of warmth into mid-june, with American climate models showing temperatures returning close to average, and international guidance showing much more warmth. Week 3 Continued 9

Week 3 (June 7-13): SLIGHTLY BEARISH May 26, 2015 Shown below is the MJO forecasting for the GFS ensembles (GEFS), which generally show the index moving through phase 8 and 1 in the coming 15 days before returning into the center circle. These two phases are relatively cool for much of the United States, and the MJO sitting in these phases would be unlikely to sponsor any major sustained heat wave for the eastern two third of the country. This type of setup can support a positive PNA ridge, however, which is why we see forecasts for such impressive sustained heat along the West coast. Key Takeaway: Upper atmospheric indicators of major models remain mixed in the long-range as well, with the ECMWF ensemble guidance showing the potential for sustained heat, and the GFS ensemble guidance much less convinced. The ECMWF ensembles shown below show a pattern more conducive to sustained heat. They begin in phase 1, supporting the western heat idea, but then transition the MJO into phases 2 and propagate it around likely into phase 3, which are warmer phases for the eastern half of the nation. This is a longterm indication that there remains at least some model support for the idea of sustained heat for almost the entire nation into the middle of June. However, recent verification rates of the GEFS for the MJO are extremely high, making it exceedingly difficult to discount the cooler GEFS output and accordingly that is weighted most in the long-term forecast. 10

Technical: NEUTRAL May 26, 2015 Key Takeaway: Weakness through the entire week has quickly turned natural gas prices from looking overbought to oversold on the 5-day chart, but follow-through price weakness on Monday indicates we may have further to fall. Natural gas prices started the week just above $3, and many began discussing whether prices may be overbought at such levels, especially as Tuesday the daily RSI hit 70 for the first time this year. Prices then proceeded to sell off through the week, with major midday reversals Tuesday, Wednesday, and Thursday that can be clearly seen. The forecast on Wednesday that the injection would not hit market expectations validated Thursday when a build of 92 bcf did not meet market expectations of 97-99 bcf, and prices spiked quickly, jumping almost 9 cents initially. However, as is circled, prices remained elevated for only a few hours until falling back into the range they began the day at, a very bearish signal following a bullish EIA report. Prices then sold off further on Friday, crashing through the previously noted $2.90 support and leading the way for a gap downward in electronic trading on Memorial Day. Established last week is a clear short-term downtrend, with new lows set Monday, Tuesday, Wednesday, and again on Monday in electronic trading. The $2.90 level acted as support on Wednesday in the second major intraday selloff, and briefly acted as intraday support on Friday too before prices broke through it on high volume, leading the way for downward momentum to carry over into the day on Monday. The downward channel indicates that support is likely around or just below the $2.80 level on the May contract, and it is likely that we hit that level with the downward momentum observed thus far. There is no other clear support level on the short-term chart, but on the next slide the long-term chart develops clear support that we may be nearing as the market continues to wander further downward. Most moves downward were accompanied by significant volume and any rebounds much weaker, indicating that these are likely new shorts being established in the market and will continue to pressure prices until we hit clear support. Natural Gas 5-Day Intraday Chart 3.10 3.05 3.00 2.95 2.90 2.85 2.80 2.75 Technical Continued 11

Technical: NEUTRAL May 26, 2015 On the monthly chart, we see the two key levels that natural gas has generally traded within over the past 4 months, along with the upward channel established at the beginning of May that has now been broken with last week s sell-off. That upward channel was going to be short-term regardless, but was clearly broken when the sell-offs Tuesday and Wednesday lowered prices fairly significantly and stole all upward momentum from the market. This should not be much of a surprise, as the market was near the long-term key technical level of $3. The level shown below is approximately $3.02-3.04; a level that historically prices have tested either after hours or on weak volume and fallen back from. This level first acted as support back in December when the initial major natural gas sell-off was occurring, and then proceeded to act as resistance in January, again in February, and again in March. Prices tried to break significantly above this level last Tuesday, and that is likely what contributed to such a major intraday sell-off. 5.00 Natural Gas 6 Month Daily Chart Key Takeaway: The daily nat gas chart shows strong support around the $2.73-$2.75 level which should support prices through the week. Resistance has been set at $3.10, with a recent upward channel and the $2.90 support being broken. 4.50 4.00 3.50 3.00 2.50 2.00 The other key level to watch lies between $2.78-$2.80, and this should act as significant support for the May contract. This level did not become significant until mid March, when prices continued to bounce off of it multiple times. In late March, prices finally broke through the level to the downside, and it proceeded from there to act as resistance through the month of April, until finally in May we were able to break back above it. This level should act as key support, and will determine whether this short-term downtrend is a response to prices rising too quickly without the fundamental basis earlier this month, or whether the fundamentals have truly changed enough for us to try and retest some of the April lows. Still, being so close to one of these critical technical levels could allow for a good entry point long into the market, giving the long-term technical view a slightly bullish undertone that cancels out the bearish short-term undertone. 12

Direct Trading: PROFITABLE (Up 18%) May 26, 2015 Key Takeaway: A very strong beginning to the trading week saw profits begin to slide away as the market only continued to sell off, virtually ignoring moderately bullish EIA data on Thursday into a choppy trading day on Friday. Monday (5/18): Buy @ $2.990, Sell $3.016 Tuesday (5/19): Buy @ $2.945, Buy @ $2.976, Sell @ $2.976, Buy @ $3.020, Buy @ $3.040, Sell @ $3.045, Sell @3.090 Wednesday (5/20): Buy @ $2.91, Sell @ $2.924, Sell @ $2.939, Buy @ $2.945, Buy @ $2.98, Sell @ $2.983, Sell @ $3.05 Thursday (5/21): Buy @ $2.954, Buy @ $2.988, Sell @ $2.922 Friday (5/22): Sell @ $2.887, Sell @ $2.889, Sell @ $2.890, Sell @ $2.894, Buy @$2.894, Buy @ $2.910, Buy @ $2.915, Buy @ $2.955 Weekend/Holiday: Flat 3.10 3.05 3.00 2.95 2.90 2.85 2.80 2.75 = net long = 2x long = 3x long = net short = 2x short = 3x short 13