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October 10, 2017

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Bear Raid! Oil & Natural Gas Both Tumble Over 4% Last Week; Slightly Bearish Natural Gas Storage Injection Expected For September 30-October 6 Before Quick Shot Of Cold Air Drives Return To Bullish Build For October 7-13; Record Low Nuclear Outages Continue To Suppress Natural Gas Substitution Demand


6:00 AM EDT, Monday, October 9, 2017
The bears tightened their stranglehold on the oil & natural gas sector late last week as a combination of tropical concerns, ongoing fear of developing supply gluts, and a neutral-to-bearish temperature outlook weighed. Natural gas dropped 2.1% on Friday to settle at $2.86/MMBTU, losing a rough 4.8% last week despite a 5-year low EIA-reported +42 BCF storage injection for September 23-29. The commodity settled at its lowest level since August 8 and is down 9.8% in under 2 weeks, even despite the front-month contract rolling over in a state of contango. While natural gas inventories have recently flipped to a storage deficit for the first time since January and the commodity is markedly undervalued per my Fair Price model, it continues to struggle in the absence of a near-term catalyst to drive a sustainable rally. Additionally, concerns about record production and forecasts for unseasonably mild temperatures throughout October even into November continue to embolden the bears. As a result, even yours truly--a long-term natural gas bull--is concerned about the near-term outlook for the commodity.


Meanwhile, crude oil fell sharply on Friday, selling off $1.50 or 3% to settle at $49.29/barrel on the somewhat inexplicable concern that fast-moving Category 1 Hurricane Nate would cause similar disruptions to the Gulf Coast refinery infrastructure as did Hurricane Harvey 6 weeks ago. The commodity also saw its first weekly decline in 5 weeks finishing with a 4.6% weekly loss, despite record oil exports and an across-the-board bullish EIA Petroleum Status Report on Wednesday. With bullish catalysts aplenty, unlike natural gas, it is difficult to see crude oil holding under $50/barrel for long.


Thanks to sector-wide losses, my Oil & Natural Gas Portfolio shed -3.8% last week, reducing gains since May 1 to +15.6%. For subscribers, I have published a new Investing Commentary HERE discussing my holdings, recent trades and trading strategy & outlook for the upcoming week. To learn more about subscribing and helping to support the site, please click HERE.


On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly report detailing oil & natural gas money manager positions for those trading on the NYMEX through October 3. Unsurprisingly, this data showed that investors are increasingly near-term bearish on natural gas. The CFTC reported that long positions actually inched higher by 3,651 contracts week-over-week to 268,969, but that short positions surged by over 15%, climbing 37,499 contracts to 212,353. Open long and short contracts over the past year are shown in the Figure to the right. As a result, the Bullish Sentiment--the percentage of open contracts held long--fell by 4 percentage points to 56%, which is a steep 8 percentage points below the 52-week average of 64% and just 4 percentage points above the 52-week low. Undoubtedly, this indicates a definite near-term bearish bias. It does suggest a modestly overcrowded short trade that could ultimately help support a rally as a large quantity of shorts are forced to exit, but unless some bullish catalyst presents itself, this may not matter and the short surplus may very well continue to grow for several more weeks. Click HERE for more on natural gas investor holdings. Despite its weekly price decline, investor holdings in crude oil were considerably less volatile and decidedly more bullish, although it is worth noting that the data is only through last Tuesday and does not include Friday's selloff. Regardless, the CFTC reported that oil long positions were nearly flat falling just 2,854 contracts to a still-robust 360,904 while short positions climbed slightly to 110,731 contracts. Based on these changes, the Bullish Sentiment fell by a single percentage point to 77% and is now a mere 1 percentage point above the 52-week average. This indicates neutral investor positioning with neither an excess of longs or shorts. Therefore, the commodity is unconstrained to trade in either direction without concern of rising overcrowdedness long or short. Click HERE for more on crude oil investor positioning.


The EIA will release its weekly Natural Gas Storage Report for September 30-October 6 this Thursday at 10:30 AM EDT. I am projecting a preliminary +91 BCF storage injection for the week, which would be a neutral-to-slightly beaish 4 BCF larger than the 5-year average and more than double the previous week's +42 BCF build. As the Figure to the right shows, such an injection would be the 3rd largest in the past 5 years, ahead of only +100 BCF and +97 BCF injections in 2014 and 2015, respectively. Longer term it would be even more bearish, as the 5th largest in the last 23 years, during which time injections have been as low as +41 BCF in 1995. The large week-over-week increase in the projected build can be attributed to much cooler temperatures across the nation which, on a population-weighted basis, averaged 67.9F on the week, more than 5F cooler than the previous week. This resulted in a sharp decrease in natural gas powerburn to an estimated 26.1 BCF/day versus a strong 32.4 BCF/day the previous week. Natural gas production and LNG feedgas demand were essentially flat week-over-week, contributing little to the loosening of supply/demand balance. Should a +89 BCF injection verify, natural gas inventories would rise to 3599 BCF while the storage deficit versus the 5-year average would fall to -4 BCF and the year-over-year deficit would contract to -149 BCF. Click HERE for more on this week's projected injection This remains a preliminary projection and will be revised further over the next 48 hours as finalized pipeline and temperature data is integrated into my model.


Contributing to a loosening of natural gas supply/demand balance over the past month has been record-low nuclear power plant outages. October and November are typically the peak months for the Fall maintenance season during which reactors shut down for inspection and refueling with natural gas stepping in to make up for the lost demand. As of Friday, October 6, nuclear outages were a mere 2190 GWh, just 8.2% of capacity and down a whopping 59% versus the 5-year average. Only 7 reactors are completely offline with another 10 showing partial shutdowns but 82 reported as operating at full capacity. As shown in the Figure to the right, 2017 outages have fallen completely off the 5-year average curve over the past month with a negligible rise in outages. This has dramatically suppressed natural gas substitution demand, an important source of temperature-independent demand for the commodity. Based on Friday's outages, natural gas substitution demand, assuming that losses in nuclear output are compensated solely by natural gas and no other fuel source, would be just 1.6 BCF/day, an enormous 2.7 BCF less than the 5-year average. Since September 1, I estimate that lost natural gas demand due to the much below-average nuclear outages has exceeded 40 BCF. Click HERE for more on nuclear power outages, including daily updates on nuclear output and natural gas substitution demand.


For the remainder of the week, natural gas demand will hold above-average on Tuesday as chilly temperatures persist across the central US, but will then rapidly decline by the end of the week as warmth returns. Overall, temperatures will remain unseasonably warm across the eastern third of the nation with highs in the 60s and 70s extended all the way to the Canadian border, suppressing any significant heating demand. By mid-October, even highs 10F-15F warmer than average will be insufficient to prompt meaningful powerburn demand except along the Gulf Coast or the Desert Southwest. As a result, by the end of the week, I expect daily natural gas storage injections to rise back above average, potentially topping +13 BCF/day by Friday. Projected daily storage injections for the upcoming week are shown in the Figure to the right. Nonetheless, thanks to the early week jump in heating demand--in addition to shut-in natural gas production across the Gulf--I am projecting a slightly bullish +72 BCF storage injection for October 7-13, 6 BCF bullish versus the 5-year average. Such an injection would be the second smallest in the last 5 years behind only 2012's very bullish +52 BCF build. Should a +72 BCF injection verify, natural gas inventories would rise to 3670 BCF while the storage deficit versus the 5-year average would rise to -9 BCF, near a 9-month high. The EIA will release its official injection numbers for this week on Thursday, October 19 at 10:30 AM EDT. Click HERE for more on this week's storage projection.