December 1, 2017

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Natural Gas Plunges 5% After EIA Reports Smaller-Than-Expected Withdrawal & Mid-Term Temperature Outlook Moderates; Exceptionally Bearish -11 BCF Withdrawal Projected For November 25-December 1, Smallest In 5 Years; Upcoming Arctic Blast Could Support Near-Term Rally, But Loosening Supply/Demand Balance A Long-Term Concern

6:00 AM EDT, Friday, December 1, 2017
Natural gas put an end to its early-week rally with an emphatic 15 cent or 4.8% decline on Thursday to settle at $3.03/MMBTU. The loss was driven by the combination of a relatively disappointing EIA-reported weekly storage draw in this week's Report, expectations for an even more bearish draw for the storage week ending today, and computer model forecasts that trended warmer--or, more appropriately, less bitterly cold--over the last 24 hours for mid-December. Meanwhile, crude oil, on the heels of the much balleyhooed OPEC meeting yesterday, was nearly flat on the day, rising just 10 cents or 0.2% to settle at $57.40/barrel as the decision to extend cuts through the end of 2018 with an opportunity to revise this deal at the June meeting was widely expected. Brent oil outperformed, gaining 46 cents or 0.7% to settle at $63.57/barrel, driving the Brent-WTI spread back up to $6.17/barrel, the first time it has been above $6/barrel this week and creating a tailwind for US oil exports. My Oil & Natural Gas Portfolio rose +1.1% on Thursday to boost gains since May 1 to +31.1%, a new 2017 high. I made two trades on the day in response to the decline in natural gas prices. Subscribers can view these trades and my current holdings, as well as my latest Investing Commentary, on my Portfolio Page HERE. To learn more about subscribing and to support the site, please click HERE.

In its weekly Natural Gas Storage Report for the week of November 18-24, the EIA announced Thursday morning that natural gas inventories fell by -33 BCF. The storage withdrawal was 4 BCF smaller than my -37 BCF projection and was 14 BCF bearish versus the 5-year average -47 BCF draw. Four out of the five storage regions saw bearish withdrawals (or injections) with only the Midwest's -22 BCF withdrawal bullish versus the 5-year average -19 BCF draw. The South Central was the most bearish region of all with a +3 BCF injection versus the 5-year average -7 BCF draw. With the -33 BCF draw, natural gas inventories fell to 3693 BCF while the storage deficit versus the 5-yar average contracted to -107 BCF, down from an intraweek peak of around -130 BCF the previous week. Click HERE for more on current natural gas inventories. Following the Storage Report, the EIA released its detailed natural gas supply and demand data Thursday afternoon. For the week of November 18-24, the Administration announced that domestic natural gas production topped 76 BCF/d for the first time, reaching 76.1 BCF/d. Production is now up a huge 5.1 BCF/day from this time last year. However, because Canadian imports fell by 0.7 BCF week-over-week to 5.2 BCF/day, total supply actually fell by 0.5 BCF/day week-over-week, although total supply is still up 5 BCF/day year-over-year. On the demand side, natural gas powerburn slid 1.1 BCF/day week-over-week, and is down 0.5 BCF/day year-over-year. Natural gas exports, via LNG and to Mexico, both rose and are each up year-over-year by 1.6 BCF/day and 0.4 BCF/day, respectively. However, it is the gain in natural gas production that dominates temperature-independent supply/demand balance. Temperature-independent supply/demand balance--which includes domestic production, LNG imports and exports, imports from Canada, and exports to Mexico--averaged 3.0 BCF/day loose versus 2016 last week. It was the fourth straight week that the year-over-year supply/demand balance was at least 3.0 BC/day loose, as shown in the Figure to the right, with this looseness being almost entirely driven by gains in domestic production with gains in LNG and Mexican exports only dampening the impact of production. While this looseness is ovewhelmed by gains in temperature-dependent demand--residential and commercial, primarily--when temperatures turn colder as in early November, when things moderate, as they did last week and this week, the weakening supply/demand balance becomes unmasked leading to very soft withdrawals, something we are likely to see next week as well. Click HERE for more on the latest natural gas supply and demand data.

Following the release of the EIA's storage data, I updated the rankings for my ongoing Natural Gas Storage Contest through Week 4 of 10. It was the first week that weekly scores began to accumulate as the two lowest scores to-date are discarded. Dclong returned to the top of the rankings with 101 points thanks to 68.7 and 32.5 in the first two weeks of the contest with lesser scores the past two weeks being tossed. Outsider is in second place with 97 points, driven by a 68 point tally in week 3, while SaintSinnerIdiot is in third, rising two spots on the week, with 95 points. 1st, 2nd, and 3rd places are in the money, receiving prizes of $250, $100, and $50, respectively at the end of the 10-week contest. Last week's leader, Frank1008, dropped 3 spots to number 4. All of the top 10 are within 30 points of the leader. As the Figure to the right shows, it was a trying week for the strongest performers thanks to significant market volatility with each of the top 10 recording one of their two lowest scores to date, which were thrown out. While previous weeks have routinely seen entrants top 50 points/week, last week's strongest performer--Denswabe in 25th place--recorded just 31.1 points. While submitting early earns you bonus points allowing huge scores, it can backfire when we see such large price swings and the reported draw diverges from analyst projections. Submissions for week 5 of 10 are now open and will remain so through Tuesday, December 5 at 5pm EDT. Entrants will be submitting their projected storage withdrawals or injections for the week of November 25-December 1 and the closing price of the January 2018 Front Month contract for Thursday, December 7. Visit my Contest Homepage HERE to view the latest rankings, entrant profiles, and to submit your picks for this week. Good luck to all. If you have any questions or concerns about the contest or rankings, please contact me at CelsiusEnergyFM@gmail.com.

Natural gas demand will finish Friday right where it has been for the entire week: well below average. Unseasonably mild temperatures will continue across the entire lower 48 today, with the mildest anomalies located over the northern Plains. Bismarck and Minneapolis will both reach 50F today while Omaha and Des Moines have a shot at 60F, all 20F warmer than normal. The major demand centers of the Northeast will be mild as well, with highs generally in the upper 50s in Washington, DC falling to the lower 50s in Boston, 5F-10F warmer than normal. As the Figure to the right shows, below-average temperatures will, for all intents and purposes, be entirely absent from the Continental United States today. While days such as these are not that unusual in November, the fact that we have strung 7 of them together this week is rather remarkable. The forecast mean population-weighted nationwide temperature today will be nearly unchanged from Thursday at 52.3F, 7.2F warmer than normal. Total Degree Days will tally just 13.1 TDDs today, 7.9 TDDs fewer than normal and the 4th fewest for December 1 in the last 37 years dating back to 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 miserable -3 BCF/day daily natural gas storage withdrawal today, up around 0.5 BCF/day from Thursday but 7 BCF smaller than the 5-year average -10 BCF/day draw. Click HERE for more on today's projected daily withdrawal and intraday natural gas inventories.

Fortunately for natural gas bulls, this week will likely represent the nadir of natural gas demand for the remainder of 2017. As has been well-advertised on this site and elsewhere, the lower 48 will see a major pattern shift beginning midway through next week that will result in the return of much colder--if not bitter arctic--air and a spike in natural gas demand back to above-average levels. Until yesterday, both the American GFS and European ECMWF had been in good agreement forecasting exceptionally cold air across the eastern two-thirds of the nation from mid-December at least through Christmas. That changed somewhat overnight Wednesday into Thursday when the ECMWF moderated considerably, even as the GFS remained bitterly cold. With most tending to favor the ECMWF over the GFS, this prompted Thursday's sell-off. As the 14-day forecast for the GFS shows, this model is still calling for an extended period of much-above average natural gas degree days beginning around December 7. This, coupled with the fact that natural gas is still undervalued by 11% based on current inventories alone--even with Mother Nature's recent hack job on the storage deficit--suggests that Thursday's bloodbath may have been a bit overdone. Natural gas may be in danger of a long-term supply/demand mismatch due to record inventories, but repeated intrusions of arctic air will overwhelm this and could lead to short term spikes. However, I feel that any wintertime, temperature-driven rally will be an opportunity to take profits or initiate a short position, rather than form the basis of a long-term buy-and-hold strategy. Regardless of how the temperature forecast evolves over the next few weeks, the one thing that natural gas traders can count on is a continuation of the elevated volatility that the sector has witnessed over the past two weeks.