January 10, 2018

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Late-Day Short Squeeze Drives 3% Natural Gas Rally As Near-Term Temperature Outlook Cools; Gas Demand To Continue Falling Today As Temperatures Warm Ahead Of Next Arctic Blast; EIA Forecast To Announce Large Crude Oil Inventory Withdrawal As Prices Top 3-Year Highs; Nuclear Outages Rebound While LNG Feedgas Falls

6:00 AM EDT, Wednesday, January 10, 2018
It was a good day for energy traders on Tuesday as both natural gas and oil saw healthy gains, with the latter rising to a new multi-year high. After trading modestly higher throughout the day, natural gas caught fire in the hour prior to the close, surging 10 cents or 3.1% to close at $2.92/MMBTU. Thanks to continued strength after 2:30 PM that took prices to near $2.95/MMBTU, the popular 1x ETF UNG rose 4.4% on the day. The quick short squeeze was likely due to a forecast for the January 13-19 period that trended colder over the preceding 24 hours. It is likely that there will be at least one more >200 BCF storage withdrawal this January (in addition to the -300 BCF+ draw projected for Thursday's EIA report) and that the storage deficit could once again rise above -400 BCF. However, with the January 19-26 period still looking mild and natural gas production likely near record levels, plenty of speed bumps remain to block natural gas from trading consistently above $3.00/MMBTU.

The late-day short squeeze was likely boosted by a persistently overcrowded short trade in which (likely) over 50% of NYMEX open natural gas positions held by money managers were held short, prompting a scramble for the exits by flat-footed bears. Of note, the rally came despite the EIA cutting its 2018 natural gas forecast by 7% due to concerns for rising US production. With the rally, the ongoing backwardation between the front-month February 2018 contract and T+2 April 2018 contract widened again to an impressive 22 cents as that contract only climbed 5 cents on the day. This is relevant for natural gas ETF traders as it creates a significant tailwind for the monthly rollover process as the fund is selling contracts and rebuying the next month at a cheaper price.

Such gains are already being realized as the 3x ETF UGAZ began its rollover from February to March contracts on Monday, which continued into Tuesday. As of Tuesday evening, the fund had 60% February contracts and 40% March 2018 contracts, as shown in the Figure to the right. With the March contract closing Tuesday at $2.85/MMBTU, the backwardation for the two is 7 cents or 2.4%. Should this degree of backwardation persist, it would result in price-independent gains for UGAZ-holders of 7.2%. UNG continues to hold only February 2018 contracts and will not begin its rollover until next week. Click HERE for more on the current holdings of natural gas ETFs.

Crude oil, meanwhile, soared to a new 3+ year high on Tuesday ahead of what promises to be a blockbuster EIA Petroleum Status Report today. The commodity rose $1.23 or 2.0% to $62.96/barrel, the highest close since December 9, 2014. The rally may have been prompted by expectations for a large EIA-reported storage withdrawal today or by news that the EIA had also raised its 2018 average price forecast by nearly to $55.33/barrel, despite also raising its production outlook.

My Oil & Natural Gas Portfolio also rose to a new 52-week high, grinding out a 0.5% daily gain to push returns since May 1, 2017 to +32.4%. For subscribers, I have published a new Mid-Week Investing Commentary HERE detailing my trades over the past week, market outlook, and trading plan for the remainder of the week. Subscribers also gain access to my real-time portfolio holdings. To learn more about subscribing, please click HERE.

The EIA will release its weekly Petroleum Status Report for December 30-January 5 today at 10:30 AM EDT. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting an exceptionally bullish -11.2 MMbbl crude oil inventory withdrawal. Such a draw would be a massive 10.9 MMbbls bullish versus the 5-year average -0.3 MMbbl draw and would be the largest storage drawdown for the December 30-January 5 period in the full 34 years for which EIA data is available, easily topping the -9.6 MMbbl draw from 1988, as shown in the Figure to the right. It would also be the 11th largest withdrawal for any week all-time. Should such a drawdown verify, crude oil inventories would tumble to 413.3 MMbbls, the lowest since February 27, 2015, nearly 3 years ago. At that time, oil was trading at $49.76/barrel, more than $13/barrel lower than Tuesday's close, although inventories were moving bearishly higher at the time. The storage surplus versus the 5-year average would tumble to just +24.7 MMbbls, also a multi-year low and down more than 120 MMbbls in just 9 months since the surplus rose to an all-time record last spring at +148 MMbbls. The API also announced that it was forecasting gasoline inventory builds of +4.3 MMbbls and +4.7 MMbbls, respectively. While these builds sound ugly, they are actually quite bullish versus 5-year average builds of +7.0 MMbbls for gasoline and +7.7 MMbbls for oil. As a result, Total Petroleum Inventories--crude oil + gasoline + distillates--would fall by -2.2 MMbbls, exceptionally bullish versus the 5-year average +14.4 MMbbl build.

Should these numbers verify in today's EIA report, and production not rise too much, it is very possible that WTI oil could challenge $65/barrel and Brent $70/barrel near-term. However, the more expensive oil becomes, the more likely that US producers will move to ramp up production further and OPEC members may seek the repeal of current production curbs, pressuring prices in the future. Remember, the current supply/demand tightness is an artificial one created by OPEC. Should OPEC look to boost supply, the Brent-WTI spread would collapse, US exports would tumble, and US supply/demand balance would again loosen. Check back on my Crude Oil Inventories Page HERE at 10:30 AM EDT for the official EIA inventory numbers.

Natural gas demand will continue to slump today as record cold is replaced by record warmth ahead of the next major storm system. A large bubble of mild air--fueled by a strong southerly flow--will drive highs in the 40s as far north as the Minnesota-Canada border today, 60F higher than week-ago temperatures and more than 20F warmer than normal. While not as anomalous, highs across the I-95 corridor from Washington, DC to New York City will rise into the low-to-mid 40s today, around 5F warmer than normal. While low population density will preclude much of an impact on natural gas demand, highs across Montana and western North Dakota will tumble today as the storm system and its associated arctic front prepares to move southward, with Billings, Mt seeing early-morning highs in the upper 20s--already 10F colder than normal--and falling into the teens throughout the day. Overall, however, the forecast mean population-weighted nationwide temperature will warm 1.8F day-over-day to 47.1F, an impressive 8.2F warmer than normal. Total Degree Days will drop to 17.7 TDDs, 9 TDDs fewer than normal and the 6th fewest for January 9 in the last 38 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 -16 BCF/day daily natural gas storage withdrawal, down 4 BCF from Tuesday and 16 BCF bearish versus the 5-year average. It will be the weakest of 2018 to date. Click HERE for more on today's projected daily withdrawal and intraday natural gas inventories.

After rising to an all-time high 4 BCF/day last Friday, LNG feedgas demand has tumbled by nearly 50% over the past 4 days. After climbing to 0.7 BCF/day last Friday--very near the 0.8 BCF/day daily capacity--feedgas demand to Cove Point plunged to 0 BCF/day on Tuesday and will remain at 0 BCF today. The reason for the drop is not clear, but as an LNG tanker has not yet docked at Cove Point, it is possible that the facility's storage tanks are now full or that the initial feedgas introduction could have been a temporary commissioning measure. In addition to the drop at Cove Point, feedgas demand to Sabine Pass has been soft as well, dropping as low as 1.8 BCF/day on Monday before recovering to 2.2 BCF/day today. The reason for decreased flows to Sabine pass is also unclear as LNG tankers have been arriving and departing on schedule at the facility. Regardless, total LNG feedgas demand will be 2.2 BCF/day, down around 50% from last Friday's record. At this pace, total feedgas demand for the natural gas storage week of January 6-12 will be just 15.5 BCF, down 7.1 BCF from last week, which will likely loosen supply/demand balance modestly this week, in will likely be a bearish weekly withdrawal anyways. Click HERE for more on LNG feedgas demand and exports.