March 1, 2018

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In Like A Lion: Record-Setting Arctic Blast To Drive Largest Ever March Natural Gas Inventory Withdrawal Next Week & Send End-Of-Season Inventories Heading For Sub-1000 BCF--But Investors Shrug It Off As Low-Volatility Trading Continues; EIA Reports 2nd Straight Bullish Weekly Storage Draw But New Production Record; Gas Demand To Dip Today As East Temporarily Warms

6:00 AM EDT, Friday, March 1, 2019
In its weekly Natural Gas Storage Report for February 16-22, the EIA announced Thursday morning that inventories fell by -166 BCF. This was a bullish 62 BCF larger than the 5-year average but 5 BCF smaller than my projected -171 BCF draw. It was also the second of what will likely be at least 5 straight bullish draws. With the withdrawal, natural gas inventories fell to 1539 BCF while the storage deficit versus the 5-year average rose to -424 BCF or -22%. All five natural gas storage regions--East, Midwest, Mountain, Pacific, and South-Central--saw bullish withdrawals last week. The South Central led the way with a -51 BCF draw, 32 BCF bullish versus its respective 5-year average, accounting for more than half of the bullishness of the week's nationwide draw all on its own. Interestingly, the South Central Region has the largest absolute storage deficit versus its 5-year average at -157 BCF but at the same time the smallest year-over-year deficit at just -13 BCF. The Pacific Region saw its inventories tumble -16 BCF versus the 5-year average -5 BCF and, at 122 BCF, its inventories stand at a -91 BCF deficit versus the 5-year average or a massive -43%, the largest percent deficit of any region. And finally, storage across the Mountain Region fell -8 BCF last week, which doesn't sound like much, but with inventories at just 79 BCF, this was a 10% weekly decline. Mountain Region storage is now the lowest on record since 2010, when the EIA data for the current regional breakdown begins. And with several weekly of unseasonably cold temperatures centered on this region--which includes the Dakotas, Nebraska, the 4-corners states, Nevada, Wyoming, Idaho, and Montana--I expect inventories to easily fall under 50 BCF by early April, less than half the 5-year average and dangerously low. Click HERE for more on current natural gas inventories.

Following the morning release of storage data, the EIA also issued its weekly supply/demand update just after the market close, covering the week of February 21-27. Of note, this differs from the storage week (February 16-22). Headlining the data was natural gas production which rose another 0.2 BCF/day from the previous week to 88.8 BCF/day, up 1.4 BCF/day in the past 3 weeks alone and setting a new all-time record high. As the Figure to the right shows, production surged by nearly 5 BCF/day in the 3rd quarter of 2018 to 88.6 BCF/day on December 5th and then plateaued for nearly 90 days, hovering between 87.5 BCF/day and 88.5 BCF/day before growth has accelerated over the past month. It remains to be seen whether this is the first stage of a move to 90 BCF/day, or just part of a larger oscillation with another downturn in the works, though I feel the former is more likely. Domestic production is now up a massive 10.6 BCF/day year-over-year. Of note, total supply--which stands at 93.7 BCF/day--did not set a new all-time record since Canadian imports at 4.7 BCF/day are down more than 1 BCF/day from early January when total supply reached 94.7 BCF/day on January 16. On the demand side, weather-driven demand held strong with residential/commercial heating demand down less than 2 BCF/day week-over-week at 42.6 BCF/day, up a strong 10.8 BCF/day from 2018. Powerburn and industrial demand, on the other hand, both dropped week-over-week and are up less than 1 BCF/day year-over-year. LNG feedgas demand rose to a second straight weekly record at 5.2 BCF/day, up 1.8 BCF/day, a consistent, temperature-independent source to counter production growth. Additionally, based on my analysis of degree day data and the EIA's supply/demand data, I calculate that the temperature-independent natural gas supply/demand balance tightened by 0.2 BCF/day last week relative to 2018 supply/demand balance, though the market remains 3.7 BCF/day loose. This means that, for any given temperature, I would expect the daily natural gas storage withdrawal to be 3.7 BCF/day smaller--or bearish--compared to the same temperature with last year's fundamentals. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make long-term storage and price projections. The year-over-year supply/demand imbalance, while still loose, has tightened by over 2 BCF/day over the past 3 months, due to a combination of rising LNG feedgas demand, plateauing production, and cheap natural gas facilitating fuel-switching. It will be interesting to see whether this tightening trend can continue over the next few weeks now that production is back at record highs and natural gas prices have bounced more than 10% off their early-February lows.

Click HERE for more on the latest EIA Inventories and HERE for the latest supply/demand statistics.

Following the small downside storage miss, natural gas immediately gave up its early-session gains that saw prices top $2.84/MMBT and traded down under $2.80/MMBTU. However, as it has throughout the week, the commodity proved resilient and finished the day up 0.5% at $2.81/MMBTU. For the month of February, natural gas was nearly flat, up less than 1%. However, over the past 3 months, the sector is down a massive 39%, its largest 3-month loss since the 2008 Financial Crisis. After the close, the bulls got another dose of good news as the Gold Standard long-term model, the twice-weekly 44-day ECMWF-EPS model came out with its Thursday run and continued to trend colder for longer, building and expanding a strong trough across the Central US throughout March. Once this data is integrated into my Hybrid Model--which combines data from short-term GFS and ECMWF ENS and long-term CFSv2 and ECMWF-EPS models--I am now forecasting gas-weighted degree days (GWDDs) that are at or below-average through the entirety of the remainder of the natural gas storage withdrawal season, not rising to above-average until April, as shown in the Figure to the right. Click HERE for more on the latest short- and long-term temperature data on my Advanced Models Page.

As a result of this cooling outlook, I am now projecting that natural gas inventories will fall below 1000 BCF for the first time since 2014, bottoming out near 985 BCF as of Thursday evening's model runs. As shown in the Table to the right, this would be the second lowest in the last 5 years behind only the 824 BCF from 2014--a number which is likely safe. It would be less than half the 2049 BCF bottom from just 2 years ago in 2017. It would also be the sixth lowest season-ending inventory level all-time in the full 25 year period for which EIA data is available. As forecasts have trended colder and the market has tightened up, this projection has fallen more than 200 BCF in the past two weeks alone as I was projecting season-ending inventories near 1200 BCF as recently as February 17. Click HERE for more on my season-ending projection. On the one hand, the current temperature and storage outlook is exceptionally bullish and would historically correlate with prices north of $4.00/MMBTU. However, for whatever reason--seasonality, record production, etc--natural gas has barely budged, climbing 10% from 2-year lows over the past two weeks and holding more than 30% below my calculated Fair Value. The reasons behind this large undervaluation can be debated endlessly. However, my concern right now is that natural gas prices are struggling to rise despite a forecast that, honestly, cannot get much more bullish. In fact, the probability that the near- and long-term forecast moderates is far greater than the odds that it cools further. For this reason, I don't see another catalyst that can take natural gas higher, no matter how long-term undervalued it is. As it is, I fear that even a small warm-up in the forecast could prompt selling pressure and take the commodity back under $2.75/MMBTU. For this reason, I am maintaining my soft price target of $2.90/MMBTU and am resisting the urge to add to my small long position on every little dip.

Natural gas demand will dip slightly to finish the week today as more seasonal temperatures expand into New England and the Ohio Valley. Highs today in Boston will reach the mid-to-upper 30s, 5F colder-than-normal while, Buffalo, NY reaches the mid-30s and Columbus, OH the low 40s, each within 5F of normal. Once again spring-like temperatures will dominate the Southeast with Charlotte, NC reaching the mid-60s and Atlanta, GA approaching 70F, 5F-10F warmer-than-normal. Nonetheless, this warmth will again be overwhelmed by arctic air across the Great Plains. Dallas will only reach the low 50s, Kansas City near 40F, and Des Moines near 30F, and Minneapolis near 20F, all 10F-15F warmer than normal--and by recent standards these readings are actually comparability mild and will likely be the warmest for the next week or so. Overall, thanks to the warm-up across the East, today's forecast mean population-weighted nationwide temperature will increase 0.8F from Thursday to 44.4F, still 1.0F colder-than-normal. Total Degree Days will fall to 21.2 TDDs, 1.1 TDDs greater than normal and the 18th most for March 1st 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 -20 BCF/day daily natural gas storage withdrawal, 2 BCF smaller than Thursday's draw but still 4 BCF bullish versus the 5-year average -16 BCF/day draw. Click HERE for more on today's temperature and degree day outlook. For the natural gas storage week of February 23-March 1 that ends today, I am projecting a -140 BCF withdrawal, 31 BCF bullish versus the 5-year average and 80 BBCF smaller than last year's draw. It will be the third straight bullish withdrawal. As the Figure to the right shows, such a withdrawal would be the third largest in the last 5 years behind only 2015's -220 BCF draw and 2014's -158 BCF draw. The bullishness of the expected withdrawal was driven by unseasonably cold temperatures throughout the week with a mean population-weighted nationwide temperature of 42.4F, nearly 3F colder-than-normal compared to the 45.2F long-term normal. Demand was also given a boost by LNG feedgas demand which totaled 37.0 BCF this week, up 4.0 BCF from last week and is a new all-time weekly high. Should a -140 BCF withdrawal verify, natural gas inventories will fall to 1399 BCF while the storage deficit versus the 5-year average climbs to -455 BCF. The year-over-year deficit, meanwhile, will rise to -234 BCF. The EIA will release its official storage numbers for the week next Thursday, March 7, at 10:30 AM EDT. Click HERE for more on this week's projected withdrawal.

Looking ahead to next week, March really will earn its nickname, storming in like a lion. On Saturday a massive plume of arctic air will move southward into Montana and the Dakotas with sub-zero highs and anomalies more than 30F below average. This airmass will race southeastward, reaching the Eastern Seaboard on Monday and finally breaking down the ridge of high pressure that, for the most part, kept the region consistently warmer-than-normal throughout February. On Monday, Tuesday, and Wednesday, highs will be -15F-25F below-average across nearly all areas east of the Rockies. Many areas will see record low maximum temperatures as well as overnight lows. Additionally, a series of fast-moving looking to bring snow to the southern Plains, Ohio Valley, and East throughout the week. As a result of this chill, projected daily storage withdrawals will be very close to -40 BCF on Monday, Tuesday, and Wednesday, as shown in the Figure to the right. Given that the 5-year average weekly withdrawal for the week is just 99 BCF, these three days alone would drive a bullish withdrawal. As it is, I am currently projecting a -215 BCF weekly withdrawal, 116 BCF bullish versus the 5-year average and 127 BCF larger than last year's draw. It will be the largest draw all-time for the week of March 2-8, topping 2014's -173 BCF draw, and will be the largest ever during the month of March. Should it verify, natural gas inventories will fall to 1184 BCF while the storage deficit versus the 5-year average rises to -571 BCF, the largest since December 27, 2018--when natural gas prices were trading at $3.64/MMBTU. Blame seasonality or record production for that apparent undervaluation. I will have much more on this upcoming week's withdrawal in Monday's commentary, but in the meantime, click HERE for more.