June 10, 2019

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Natural Gas Holds Near 3-Year Low While Late-Week Bounce Rescues Oil Even As Sector Slips Into A Bear Market; Natural Gas Investor Sentiment Falls To 52-Week Low Amidst Massive Short Surplus But Investors More Cautiously Trim Oil Long Holdings; Gas Demand Slumps To Start The Week As Central US Cools; Realtime Powerburn Data Now Available On The Site

6:00 AM EDT, Monday, June 10, 2019
Natural gas bounced slightly on Friday, but this only blunted what was another dismal week for the sector. Front-month July 2019 prices rose just over 1 cent or 0.6% to settle at $2.34, just above a 3-year low and down 4.8% on the week. The commodity is down 19% year-over-year, as shown in the Figure to the right. Prices had fallen to their lowest level since May 31, 2016 on Thursday following the EIA's much larger-than-expected +119 BCF storage injection, the second straight week in which the agency reported a bearish miss, raising concerns of a looser-than-anticipated. Nonetheless, flat production growth and surging powerburn demand gave the bulls some long-term hope that cheaper prices would lead to a tightening supply/demand imbalance. Near-term, however, the sector continues to be driven by the June temperature outlook which, needless to say, remains unfavorable with a prolonged period of below-average temperatures expected across key demand centers of the Lower 48 for at least the next 2-3 weeks. In this environment, it will be challenging for the commodity to mount any sort of sustained rally. My upside price target is $2.60/MMBTU, though I would be very surprised to see this level reached during the month of June. However, with prices so heavily discounted, I feel that further downside will be limited with $2.25/MMBTU acting as support. Thus, a period of rangebound trading seems likely as the commodity attempts to establish a bottom from where it can rebound once the temperature outlook improves.

Meanwhile, oil prices rose for a second straight session on Friday as optimism built that the US-Mexico trade spat would resolve without tariffs--speculation that verified shortly after the close of trading. July 2019 WTI rose $1.40 or 2.7% to $53.99/MMBTU. Despite dropping into bear market territory on Wednesday--down 22% from recent highs--after yet another larger-than-expected inventory build, prices actually finished up 0.9% on the week after a strong Thursday and Friday. Brent oil rose $1.62 on Friday to finish the week at $63.29/barrel, up 2.1% for the week. While concerns persist over global demand with multiple trade conflicts threatening and US inventories rising to 2-year highs despite aggressive moves by OPEC to reduce domestic imports, investors at least temporarily resorted to dip buying on speculation that the sell-off was to too far, too fast. Adding to the bullish late-week sentiment, Baker Hughes reported Friday afternoon that the crude oil rig count had fallen to the lowest since February 2018. Oil-directed rigs dropped by 11 last week to 789 rigs. As the Figure to the right shows, oil rigs have fallen steadily since the start of the year and are down 96 rigs year-to-date and 73 year-over-year. Over time, bullish investors hope that this will stem domestic production growth, which rose for a third straight week last week to an estimated new record high of 12.4 BCF/day. At this time, I remain bullish long-term on the sector and am maintaining an aggressive $60/barrel 2019 price target, though I acknowledge that the commodity could see some further near-term weakness should US inventories continue to rise. For the moment, that weakness may be delayed as US futures rose again in electronic trading Sunday evening in the wake of news that US tariffs on Mexico had been indefinitely delayed, rising as high as $54.80/barrel before retreating some to around $54.30/MMBTU.

My Oil & Natural Gas Portfolio rose +0.6% on Friday thanks to the continued rebound in the oil sector. Rallies on Thursday and Friday significantly cut into what had been steep weekly looses and the Portfolio "only" ended down 1.7% on the week. Nonetheless, the recent sell-offs in both oil and natural gas have hit the Portfolio hard, driving the largest pullback since January, as shown in the Figure to the right, taking year-to-date returns from nearly +15% to briefly under +8%. Presently, the Portfolio is up +9.9% through the first 109 trading days of 2019, or +22.8% annualized. I made no trades on the week, as I was (unfortunately) already rather aggressively positioned and chose to mitigate losses by holding fast and not putting myself in a position where I would have to abandon my positions should prices continue to drop. At this time, I am long WTI via a relatively aggressive 11.3% short DWT position. As discussed above, I am maintaining a $65/barrel price target on this position. At this time, I have no further plans to add to it. Should prices fall further, my first step of risk reduction would likely be to shift a portion of the holdings from short DWT to long UWT, abandoning the prospect of leverage-induced decay profits, but shifting the holdings into a safer long 3X ETF position. I am likewise strong long natural gas with a net 8.2% long position with a 13.6% DGAZ short position partially offset by a 5.4% UGAZ short position so as to boost total 3X ETF exposure to capitalize on leverage-induced decay without boosting directional exposure. I flipped from net short to net long two weeks ago on the break under $2.48/MMBTU, a level, in hindsight, which may have been premature. At this time, I am maintaining a $2.60/MMBTU upside price target and have no plans to add on further downside at this time. Click HERE for more on my current oil and natural gas holdings.

On Friday, the Commodities Futures Trading Commission (CFTC) released its weekly data detailing money manager oil and natural gas positions on the NYMEX through Tuesday, June 4. The Commission announced that oil long holdings tumbled 18,133 contracts last week to 239,064, still comfortably above the 52-week low of 195,923 contracts. Short holdings rose a modest 12,798 to 68,688 contracts, but still far short of the 52-week high 142,709. The Figure to the right plots current oil long and short money manager holdings. As a result of the rise in shorts and decline in longs, the crude oil Bullish Sentiment--the percentage of open contracts held long--slumped 4% week-over-week to 78%. Despite the precipitous decline in oil over the past 6 weeks, this Bullish Sentiment is far from the 52-week low of 59% set in early January. It is also just 5% below the 52-week average of 83%, suggesting only a small surplus of shorts in the trade, although it is down 8% year-over-year. On the one hand, this suggests that investors have not fully bailed on the long trade nor fully committed to going short, perhaps hinting that they feel this sell-off is overextended and likely to be temporary. However, should inventories continue to rise, it does mean that there could be a lot more selling before the Bullish Sentiment falls to its 52-week low. Thus, there does seem to be a greater downside risk than upside potential here near-term, if bearish fundamentals persist. Ultimately, where prices--and investor sentiment--goes from here, will likely be dictated by inventories in the weeks to come. Click HERE for more on the latest crude oil investor holdings.

On the other hand, despite falling far less steeply than oil, natural gas investor sentiment has been shredded in recent weeks. The CFTC reported last week that long positions fell another 1,340 contracts to 164,009, a new 52-week low, while shorts spiked 41,037 contracts to 239,714 open positions, a 52-week high. Current natural gas positioning is shown in the Figure to the right, highlighting the sharp divergence between long and short holdings in recent weeks. As a result, the Bullish Sentiment tumbled 5% to a mere 41%. This is down 32% year-over-year, down 31% from the 52-week average 72%, and is a new 52-week low. There is now a significant surplus of shorts in the natural gas trade. Investors are obviously exceptionally pessimistic on the sector right now given the loose (but tightening) supply/demand imbalance and prospect for a prolonged period of bearish temperatures and it shows in their trading activities. It will take considerable efforts from the bears to stretch his surplus further. On the other hand, the short trade is very overcrowded. Any transition to more bullish fundamentals--hotter temperatures, stalled production growth, rising LNG exports, etc--and bearish traders may be forced to close these positions en masse, resulting in a sharp short squeeze higher. Fortunately for the bulls, few, if any, of those things appear to be imminent so the danger of such a squeeze right now is relatively low. Click HERE for more on current natural gas investor positioning.

The EIA will release its weekly Natural Gas Storage Report for June 1-7 this Thursday at 10:30 AM ED. I am projecting a +103 BCF natural gas storage injection for the week. Such a build would be a slight 11 BCF bearish versus the 5-year average--the 13th straight bearish build--and 8 BCF larger than last year's injection. As the Figure to the right shows, such a build would be the third largest in the last 5 years, behind only a +109 BCF injection in 2014 and a +105 BCF build a year later. Should a +103 BCF injection verify, natural gas inventories would rise to 2089 BCF while the storage deficit versus the 5-year average falls again to -229 BCF. Inventories will finish the week up +190 BCF over 2018. The EIA will release its official storage numbers for the week next Thursday, June 13, at 10:30 AM EDD. Click HERE for more on this week's projected injection. Looking ahead into next week, an unusually strong cold front will sweep southward across the Plains and off the East Coast by Monday, bringing much colder temperatures to all areas east of the Rockies next week. The core of the cold will be focused on Texas and the Southeast where highs 10F-15F cooler than normal likely across a large areas. As a result, daily injections could top +16 BCF/day by late-week, 4 BCF/day bearish versus the 5-year average. For the week, I am projecting a +106 BCF storage injection, 22 BCF bearish versus the 5-year average, driving the year-over-year gain in inventories to +201 BCF. Click HERE for more on next week's projected injection.

Natural gas demand held steady over the weekend as hot temperatures across Texas and parts of the Plains blunted cooler readings across the Northeast. That all changed late Sunday when a potent cold front cut across Texas and the Central US bringing much colder temperatures to the region. I project daily storage builds of +14 BCF/day for both Saturday and Sunday, each 2 BCF bearish versus the 5-year average. Gas demand will fall today as much colder temperatures will now dominate the entire Central US, a pattern which will be annoyingly persistent for the next 1-2 weeks. The core of the chill be focused on Texas, the nation's largest natural gas-consuming state. Highs will only reach the lower 70s across the western portion of the state, including El Paso, Lubbock, and Amarillo, up to 25F colder-than-normal. Even major cities like Dallas, Houston, and San Antonio will struggle into the lower 80s, 10F below-average. This will dramatically cut cooling demand to the region. Elsewhere across the Central US, highs will generally be in the 70s north to the Canadian border, 5F-15F below-average. These cool temperatures will be partially countered by a surge of warmth across the West Coast. Heat Advisories and Excessive Heat Warnings are up for California, Oregon, and Washington with Sacramento potentially topping the 100F mark. Even San Francisco could reach 90F while Portland, OR reaches the upper 80s. Such readings are 15F-25F hotter than normal. However, compared to other parts of the nation, California and the Pacific Northwest have been at the forefront of pursuing renewable energy via solar, wind, and hydroelectric and natural gas makes up a far smaller share of demand. Overall, today's forecast mean population-weighted mean nationwide temperature will cool -0.5F from Sunday to 72.5F, still 0.3F warmer-than-normal thanks to above-average readings across the densely-populated East and West Coasts. However, Total Degree Days (TDDs) will fall to 8.1 TDDs today, 1.5 TDDs fewer than normal and the 11th fewest for June 10 in the last 38 years. 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 +16 BCF/day daily natural gas storage injection for today. Such a build is 2 BCF larger than Sunday and 4 BCF bearish versus the 5-year average. After topping 2100 BCF overnight Saturday, projected Realtime natural gas inventories will finish the day near 2132 BCF. The storage deficit versus the 5-year average will contract down to -221 BCF while the year-over-year surplus continues its slow march to +200 BCF, gaining 2 BCF to +193 BCF. Click HERE for more on today's projected daily injection and Realtime natural gas inventories. Look for gas demand to inch lower on Tuesday and Wednesday with daily builds peaking at just under +17 BCF/day midweek.

In other news, I upgraded the site's Powerburn page on Sunday to now feature a heavily-validated Realtime intraday and daily powerburn levels. As you likely know, powerburn is natural gas burned for the purpose of electricity generation. During the summer months, it is the leading single component of daily natural gas demand. While it rises with increasing cooling demand, powerburn is also influenced by the price of natural gas and it is a metric for the competitiveness of natural gas versus other fuels. This makes powerburn less temperature-dependent than other elements of natural gas demand and it serves as a useful proxy for the looseness/tightness of the gas market. In particular, with production up more than 7 BCF/day year-over-year, it will be up to powerburn to trim the supply/demand imbalance so this daily data will be especially important. The site's powerburn data is derived from actual electrical grid load based on the 7 Independent System Operators (ISO) and the EIA. It is updated on a minute-to-minute basis and is re-calibrated each week after the release of the EIA's official storage and supply/demand numbers. Average daily error is <0.5 BCF/day. Powerburn demand peaked for the season so far last week at a strong 37 BCF/day, on Wednesday, up 7 BCF/day over 2018, and is averaging a 0.8 BCF/day year-over-year gain over the last 30 days. Over the weekend, powerburn slumped with cooling temperatures to near 30 BCF/day, flat versus last year. You can view the data on the site's Powerburn Page HERE. Please let me know if you have an thoughts or recommendations regarding the new page.