July 1, 2019

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Natural Gas Looks To Consolidate Its Gains After A Strong Week While WTI Oil Is Poised To Top $60/Barrel On OPEC Production Cut Deal & US-China Trade Progress; Despite Squeeze, Natural Gas Trade Remains Excessively Overcrowded; Realtime Natural Gas Inventories To Top 2400 BCF Today, 6 Weeks Ahead Of Last Year's Pace, But Rare Bullish Build Possible This Week

6:00 AM EDT, Monday, July 1, 2019
Natural gas dipped 2 cents or 0.7% on Friday to settle at $2.31/MMBTU in a volatile week of trading. Thanks to a 5% short squeeze on Monday that lifted the commodity off of 3-year lows, gas was up +5.7% on the week, its best week since the week ending January 18. The rally was driven by a combination of bottom-fishing, profit-taking, a modest warming trend in the near-term temperature outlook, and a EIA-reported storage injection that, while still bearish for a 15th straight week, came in-line with expectations for the first time in 3 weeks and, at +98 BCF, snapped a 6-week run of triple digit builds. Nonetheless, natural gas finished the month with a 6% loss and, as the Figure to the right shows, prices are still down a steep 21.1% from a year-ago when the front-month contract traded near $2.92/MMBTU. This has helped to drive fuel switching and boosted powerburn demand to average +3.1 BCF/day over 2018 over the past 30 days, despite only so-so temperatures. At this time, the near-term temperature outlook is providing a similar level of support. While temperature-driven cooling demand will be strong for the next week as unseasonable warmth dominates the major population centers of the Eastern Seaboard, the majority of short-term models are indicating a significant cooldown across the Central US by the second week of the month. At this time, my sentiment is unchanged and I feel that the commodity is undervalued long-term at current prices. This is supported by my Fair Price Model which calculates a 15% undervaluation from a Fair Price of $2.74/MMBTU based on current inventories alone. While the Fair Price falls late in the summer due to the current supply/demand imbalance, this could ultimately be too bearish should the supply/demand imbalance continue to tighten as it has for the past 6 weeks. At this time, I am maintaining an injection season price target of $2.60/MMBTU, representing around 12% of upside from current levels. Of note, given the persistent (though improving) supply/demand imbalance and the threat of a July cooldown, I do not believe a rally to this level will be a V-shaped recovery similar to what has been seen in the oil sector over the past 6 month, but rather a choppy, volatile uptrend.

Meanwhile, oil prices dipped on Friday, but still held onto bullish weekly gains. WTI fell 96 cents or 1.6% to $58.47/barrel while Brent slid 93 cents to $64.74/barrel. Nonetheless, it was a sector week for the sector with WTI rallying 1.8% to boost June monthly gains to 9.3%. On Wednesday, WTI prices reached an intra-session high of $59.93/barrel in the EIA's exceptionally bullish -12.8 MMbbls that signaled a dramatic tightening in the sector after weeks of dispiriting builds. However, it is possible that the sharp rally in prices is already beginning to impact supply/demand fundamentals. Baker Hughes reported on Friday that its oil rig count rose for a second straight week, gaining 4 to 793 rigs. Nonetheless, as the Figure to the right shows, the rig count has been steadily falling since the beginning of 2019 and is still down 92 rigs since the start of the year. Oil looks to continue to rollover its strong performance from June into July as the sector got dual jolts over the weekend. First, per Russian President Vladimir Putin, OPEC and Russia have agreed in principle to extend the current production cuts by another 6-9 months ahead of today and Tuesday's official meeting. Further, American President Donald Trump announced progress in restarting US-China trade talks, which could provide support for global demand. As a result, oil prices jumped 2% in Sunday evening electronic trade with WTI topping $59.50/barrel. At this time, I am maintaining a $65/barrel price target--raised from $60/barrel after last week's huge EIA-reported draw--though will likely begin to decrease my position size should WTI reach $60/barrel.

My Oil & Natural Gas Portfolio continues to take advantage of the rally in both commodities, as well as the uptick in energy sector volatility. The Portfolio finished the week up a stellar +3.3% to push 2019 year-to-date gains to +13.4%--within 1% of 2019 highs--and +27.3% annualized. I made 2 trades on the week. First, on Monday, I sold short SVXY worth 10.2% of my holdings when the VIX dropped under 15.50 to build a long volatility position as a hedge against my large long oil holdings as I see a sell-off in equities as a possible headwind to oil. My upside price target for the VIX in this trade is 22 and I would consider adding to the position should the index fall under 13. Then, on Thursday, I added to my Chesapeake Energy (CHK), doubling its size from 3% to 6%. I continue to feel that the stock is undervalued under $2.00/share and has not reasonably responded to the rally in oil over the past month. At this time, I am satisfied with my position size and have no immediate plans to add further. Otherwise, I remain long oil (via short DWT at 8.5%) and net long natural gas (net 9.5% via short UGAZ and DGAZ) with upside commodity price targets of $65/barrel and $2.60/barrel. With my cash position down to 44.5%, I have no immediate plans to add to either of these positions and will begin taking profits on my DWT trade should WTI top $60/barrel. Click HERE for more on my current oil and natural gas holdings.

On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly report detailing natural gas and oil trader positions through Tuesday, June 25. Starting with natural gas, despite Monday's 5% short squeeze, the CFTC announced that the bears remained in control of the sector. On the week, open long positions fell by 5,579 contracts to 149,235 while open shorts rose by 13,077 contracts to 316,530, as shown in the Figure to the right. These are 52-week lows and highs, respectively. As a result, the Bullish Sentiment--the percentage of open positions held long--fell another 2% to 32%. This is an extreme distortion from recent levels. It is down 40% from a year ago, down 37% from the 52-week average of 69%, and is down a massive 55% from the 52-week high of 87% set just 6 months ago. It is the lowest that the Bullish Sentiment has been since November 10, 2015, 3.5 years. Obviously, these significant surplus of shorts indicates that the realtime sentiment is exceptionally bearish. However, it also shows just how overcrowded the natural gas short trade is. As I've discussed previously, this lends the commodity to abrupt short squeezes when these bearish investors exit the trade en masse on only meager news, similar to what was seen last Monday. Longer term, this overcrowdedness will likely exaggerate any sustained rally and limit significant downside at current levels. Click HERE for more on the last natural gas investor holdings.

Turning to crude oil, the recover in prices over the past month continues to be reflected in money manager holdings. The CFTC reported that open long positions dipped by 8,618 contracts but shorts fell a steeper 17,150 contracts. Long positions stand at 215,133 contracts, not too far off the 52-week low of 195,923 contracts, but shorts at 53,922 contracts are at the bottom of their 1-year range of 13,132-142,709, as shown in the Figure to the right. As a result, crude oil Bullish Sentiment fell another 4% week-over-week to 80%. After falling under 70% in early June, the Sentiment has recovered to 80%, just 2% lower than the 52-week average. Thus, unlike natural gas, the oil trade is not heavily overcrowded by long or short traders. This should limit volatile moves going forward, as the commodity will not be susceptible to short squeezes or sell-offs as a cohort of traders abruptly exit an over-crowded trade. Click HERE for more on current oil money manager holdings.

Over the weekend, natural gas demand held close to the 5-year average as above-average temperatures across the Southeast, Mid-Atlantic, and northern Plains were countered by cooler-than-normal readings across Texas and the West. I project daily builds +9 BCF/day and +10 BCF/day on Saturday and Sunday, respectively, near the 5-year average +10 BCF/day. Gas demand will inch slightly lower today to start out the week. It will again be a hot day across the Southeast with highs region-wide in the low-to-mid 90s including Atlanta, Columbia, Charlotte, and Raleigh, all around 5F above-average. Similarly, highs will be in the upper 80s to lower 90s across the northern Plains. Chicago could see the upper 80s while Des Moines reaches the lower 90s, up to 10F hotter than normal. Finally, highs will be seasonally cool across Texas--the nation's largest natural gas consuming state--today with Houston and Dallas only reaching the upper 80s while San Antonio struggles into the lower 90s, 5F cooler-than-normal. Once again, however, it will be hotter across the western part of the state with El Paso reaching the lower 100s. Overall, thanks to cooling temperatures across Texas, today's forecast mean population-weighted nationwide temperature will drop by 0.5F from Sunday to 76.9F, still 0.4F hotter-than-normal. Total Degree Days (TDDs) will fall to 12.6 TDDs, the 10th most for July 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 +10 BCF/day daily natural gas storage injection for today, less than 1 BCF larger than Sunday's build and very close to the 5-year average. Early this morning, projected Realtime natural gas inventories will top 2400 BCF before finishing the day near 2406 BCF. This is nearly 6 weeks ahead of last year's pace when the 2400 BCF level was reached until August 12. The storage deficit versus the 5-year average will hold steady at -166 BCF while the year-over-year surplus will grow by 3 BCF to +241 BCF. Click HERE for more on today's projected daily injection and Realtime natural gas inventories. For the remainder of the week, look for gas demand to slowly rise during the middle portion of the week with daily builds falling to +8 BCF/day as warmth builds along the East Coast. As a result, I am now projecting the first bullish weekly injection in 16 weeks for June 29-July 5th at +65 BCF, 6 BCF smaller than the 5-year average. Stay tuned as this projection evolves.