October 1, 2019

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Bear Season: Natural Gas Extends Losing Streak To 10 Straight (But Finishes Up For September!) On Unseasonably Mild October Outlook While Crude Oil Sells Off On Saudi Output Recovery; End-Of-Season Natural Gas Storage Projections Continue To Rise; Natural Gas Cheap, But Respect The Falling Knife


6:00 AM EDT, Tuesday, October 1, 2019
The unrelenting sell-off in the natural gas sector continued into the new week on Monday with the front-month November 2019 contract sliding 8 cents or 3.1% to settle at $2.33/MMBTU. On the one hand, the commodity finished the month of September up +2% but on the other, it ended the month absolutely abysmally, falling for 10 straight sessions, the longest losing streak since 2001. Front-month prices are now down 23% versus the same week last year when the contract traded at $3.01/MMBTU. The close marked a 14% retracement from the mid-September highs was the lowest close since September 2. The sell-off continues to be driven by anticipation for an unseasonably mild October stretching into November that could bolster and prolong the natural gas storage injection season. Monday's runs of both the ECMWF-EPS and CFSv2 models reflect this. The latest CFsV2 model is forecasting mean population-weighted nationwide temperatures to be +2.9F warmer-than-average for the 6-week period ending November 11 while the ECMWF-EPS is forecasting a +2.7F anomaly. As the Figure to the right shows, apart from a brief period during the first five days of October, my hybrid model--which integrates a performance-based weighting of the ECMWF-EPS and CFSv2 as well as the short-term GFS and ECMWF ENS--is calling for consistently warmer-than-normal temperatures for the remainder of the period. With heating demand quickly predominating over cooling demand by mid-month, such a set-up will likely lead to consistent triple digit weekly injections. Click HERE for more on the near- and long-term temperature outlook on my Advanced Modeling Page.


As a result of these forecast warmer-than-average temperature, I am currently projecting that the long-standing natural gas storage deficit versus the 5-year average will flip to a surplus for the first time in 2 years on or around October 12. Longer-term, I am projecting that inventories will peak near 3830 BCF. This would be 102 BCF bearish versus the 5-year average and a massive 585 BCF larger than last year. It would be the highest season-ending inventory level since 2016 when inventories reached a record 4047 BCF. It would be the third largest build in the past five years--behind only the all-time high in 2016 and 4009 BCF in 2015--and the seventh largest all-time. Over the past 2 weeks--during the same period when natural gas prices have pulled back--this projection has steadily risen, climbing by nearly 100 BCF from 3735 BCF to the 3830 BCF as of Tuesday morning. Should the warmest scenarios verify and the EIA continue to report larger-than-expected injections, it is certainly possible that inventories could peak as high as 3900 BCF which would be the fourth largest on record. Click HERE for more on my long-term natural gas storage projections.


As a result of Monday's sell-off, natural gas has reverted to overall undervalued according to my Fair Price Model. Based on current inventories alone, the commodity is trading at an 11% discount versus a Fair Price of $2.60/MMBTU. With a storage surplus versus the 5-year average likely to reach triple digits early in the heating season and Futures prices seeing their seasonal rise to $2.60/MMBTU for the January 2020 contract, the commodity becomes overvalued during the winter months by as much as 8%. Natural gas then flips back to a small undervaluation in the spring as Futures prices retreat. Overall, the contract is undervalued by 0.5% when averaged over the full 8 month period with an average Fair Price of $2.43/MMBTU versus a Futures price of $2.42/MMBTU, as shown in the Figure to the right. However, I would still be reluctant to jump feet-first into a natural gas long position right now. It will be extremely hard for natural gas bulls to kickstart a rally no matter how undervalued the commodity becomes should the near- and long-term models continue to support above-average temperatures in the setting of record production. A falling knife is a dangerous thing and, with such bearish momentum, it is tough to fight gravity. At this time, I am stubbornly holding onto my long position, which stands at a robust 12.2% of my holdings via partially offsetting UGAZ and DGAZ short positions. However, I have no interest in adding to the position at these levels and with such dreadful sentiment. But as I discussed in Monday's commentary, the short trade is very overcrowded--per the CFTC, 61% of open money manager positions are held short--and the commodity is susceptible to a sudden spike if an when computer models trend back colder. Should prices fall under $2.25/MMBTU, I feel that it becomes too risky to maintain a short position with limited downside risk and massive upside potential should Mother Nature cooperate later this Fall. At this level, I would advise any short sellers to take what are likely to be considerable profits and either step to the sidelines or consider adding a small long position.


Meanwhile, crude oil has now erased all of its gains following the drone attack in Saudi Arabia. WTI fell $1.84 or 3.3% to settle at $54.07/barrel, the lowest close since September 3. Brent fell $1.13 to $60.78/barrel, a 2-week low. The sell-off was driven by news that Saudi production had returned to 9.8 MMbbls/day, the nation's pre-attack level, fasting than was anticipated. On the one hand, the commodity has been selling off on anticipation of this happening and it might be that the commodity will put in a bottom as investors buy-the-news. However, geopolitical tension has calmed considerably in the region over the past two weeks, capping any premium attached to the price. Regardless, I continue to feel that the commodity is undervalued at current levels. According to my Fair Price Model, this discount stands at 15% versus a Fair Price of $63.54/barrel and climbs to 18% by the end of the year based on projected storage levels. I feel that prices under $55/barrel represent a good long entry point. My only reluctance to aggressively add at these levels is caution ahead of Wednesday's EIA Petroleum Status Report given small, but bearish, inventory builds each of the past two weeks. But should prices hold below $55/barrel on Tuesday, I will have a low threshold to accumulate. Currently, my long position is a modest 8.3% via short DWT and I am maintaining a $65/barrel upside price target.


Natural gas demand will rise to a weekly high today as excessively hot temperatures expand across the eastern third of the nation. Record-setting warmth will be possible for parts of the Ohio Valley into the Northeast. St Louis will reach the mid-90s while Indianapolis, IN and Louisville, KY could both top 90F today. Pittsburgh, PA and Buffalo, NY could reach the mid-to-upper 80s. Such readings are a massive 15F-25F above-average. Across the Southeast, Richmond, VA will reach 90F while Birmingham, Al, Little Rock, AR, and Jackson, MS will all reach the mid-90s, all around 15F above-average. On the other hand, unseasonably cool temperatures will expand across the northern half of the nation. Billings, MT will struggle to 40F, Sioux Falls, SD to 50F, and, one day after reaching the mid-80s and seeing its Dew Point top 70F, Minneapolis, MN will cool by nearly 25F day-over-day to the low 60s. Nonetheless, the heat across the more densely-populated East will win out and today's forecast mean population-weighted nationwide temperature will rise 1.0F from Monday to 71.7F, a blistering 6.4F warmer-than-normal. Total Degree Days (TDDs) will rise to 11.0 TDDs, 4.1 TDDs greater than normal and the single most for October 1 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.


Based on this forecast and early-cycle pipeline data, I am projecting a +13 BCF/day daily natural gas storage injection, very close to the 5-year average and 1 BCF/day smaller than Monday. It shows the impact of the latest surge in production and resultant loosening of the supply/demand imbalance that such a bullish temperature pattern is only above to drive a neutral storage injection. By tonight, projected Realtime natural gas inventories will top 3360 BCF, the highest that stocks have been since December 19, 2017. The storage deficit versus the 5-year average will hold steady at -25 BCF while the year-over-year surplus will do the same at +456 BCF. Click HERE for more on today's projected storage injection and Realtime natural gas inventories.