September 10, 2018

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Lots To Talk About: Natural Gas Falls Nearly 5% Last Week As Demand Drops To 4-Month Low During Soggy Weekend; Downside Risk Remains As Investors Wait On The Sidelines; Hurricane Florence A Dangerous Threat To The US East Coast & Could Contribute To The Most Bearish Weekly Injection Since May This Week

6:00 AM EDT, Monday, September 10, 2018
Natural gas finished an ugly week nearly flat Friday, rising less than a penny or 0.1% to settle at $2.78/MMBTU. However, thanks to a forecast of below-average near-term temperatures poised to drive a series of bearish storage injection and record production approaching 83 BCF/day, up 10 BCF/day year-over-year, the commodity pulled back sharply on the week, falling 4.8%, erasing August's gains and falling to its lowest level since August 1. Despite the substantial pullback, with Hurricane Florence threatening the East Coast near-term with cool temperatures and power outages and production expected to begin overwhelming demand in the weeks to come, I would not be surprised to see further downside, perhaps taking prices as low as $2.70/MMBTU. Unfortunately for the bulls, there just aren't any catalysts for higher prices right now making attempts at a sustained rally likely to be transient and just another selling opportunity for the bears.

Crude oil, meanwhile, rallied from steep early-session losses on Friday to book a small 2 cent loss and settle at $67.75/barrel. Despite a bullish US inventory drawdown, concerns about dwindling demand growth and a strong US dollar weighed on prices and the commodity fell 2.9% on the week to snap a 2-week winning streak. With the international focus seemingly deadlocked on a demand slowdown versus as supply shortfall due to Iranian sanctions, I expect a near-term period of rangebound trading with a price-floor near $65/barrel. My WTI price target remains $75/barrel, although it may take longer to reach this price than I was anticipating. With a series of larger-than-expected US inventory drawdowns and the Brent-WTI spread now over $8/barrel, I expect WTI prices to outperform Brent near-term.

My Oil & Natural Gas Portfolio was nearly flat on Friday but finished the week with a 0.3% loss, reducing 2018 to-date gains to +17.7%, or +25.8% annualized. I made a total of 3 trades on the week. The first was a pair trade on Wednesday to set up a Brent-WTI spread arbitrage trade, via shorting offsetting positions in DWT and BNO worth a total of 24% of my holdings. Should Brent fall fasting than WTI or WTI rise faster than Brent, this trade will be profitable. To date, however, the trade has yet to pay dividends as the Brent-WTI spread has widened from around $7.60/barrel to $8.10/barrel since setting up the arbitrage trade. However, with the spread at the upper limits of the 4-year range, I will continue to hold this position and remain confident in its prospects. Additionally, on Friday, I initiated a long position in LNG exporter Cheniere Energy (LNG). This is a stock that I have traded before and has remained largely rangebound between $60/share and $65/share over the past 6 months. With Corpus Christi Train 1 and Sabine Pass Train 5 ahead of schedule and US natural gas prices falling improving the worldwide profit margin on exports, I feel that this position could be poised to break out over the next month or two. The position is worth 7.7% of my holdings and is up +0.7% from my basis. My natural gas short trade continues to move towards parity with my UGAZ short worth 17.1% of my holdings now offset by a robust 14.2% DGAZ position as natural gas has continued to fall, meaning that my net short position is a mere 2.9%. The UGAZ short is up +22.5% from my basis while even DGAZ is up +6.0%, illustrating the impact of leverage-induced decay upon which this trading strategy is based. One way or another, I plan to increase my directional natural gas exposure in the next week or two. Should natural gas fall to $2.70-$2.75/MMBTU, I will take profits on shorts and likely flip to a modest net long trade. However, should natural gas bounce, I will be aggressive in shorting additional UGAZ. Click HERE for more on my current portfolio holdings and recent trades. If you have not done so already, please follow @CelsiusEnergyFM for real-time trade updates.

On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly update through September 4 detailing NYMEX money manager natural gas investor positions. Unsurprisingly given the recent pullback, the Commission reported that natural gas open long positions fell by 13,831 contracts last week to 226,850 while short positions rose by 12,133 contracts to 99,424. However, as the Figure to the right shows, natural gas short positions are still right at 52-week lows, down nearly 70% from the 52-week high of 323,465 contracts. It is worth noting that long positions are also very weak, at their third lowest since 2016 driving total open money manager positions to a 7-year low. Clearly, there is a lot of money on the sidelines, perhaps frightened away by opposing elements of record production but a large storage deficit. Regardless, there is obviously lot of potential for aggressive shorting should investors decide to put this money to work, opening the door for further downside. This is also reflected in the Bullish Sentiment--or fraction of open positions held long--which stands at 70%, down 4% week-over-week, but still up 8% versus the 52-week average of 62%. This suggests a relative surplus of long positions. Click HERE for more on natural gas investor positioning.

The tropics remain hyper-active this morning with a whopping 7 active, named cyclones. Helene and Isaac are in the far eastern Atlanta, Hurricane Frances menaces southeast of Bermuda, Paul is well away from the south coast of Mexico on its way to a watery grave, Olivia continues to move towards Hawaii, Typhoon Mangkhut has a late-day date with the Mariana Islands, and a new tropical depression has spun up near Taiwan. Whew. By far the biggest threat, however, is Hurricane Florence. After moving off the west African coast last week and moving northwest into a region that would traditionally favor harmless recurvature, a potent ridge of high pressure has built in forcing the storm west-southwestward to a location several hundred miles southeast of Bermuda. Defying computer model forecasts, the storm rapidly intensified to Category 4 strength late in the week before succumbing to higher shear and weakening all the way down to mid-range tropical storm strength. Over the weekend, however, the sheer weakened and the storm steadily, and more recently, rapidly, intensified, to a high-range Category 1 storm with winds of 90 mph as of 11 PM Sunday night. Florence's environment remains exceptionally favorable with warm sea surface temperatures and low shear and the official forecast favors rapid intensification with winds peaking at high-end Category 4 strength of 150 mph on Wednesday. Thanks to an unusually strong ridge, the storm will be forced west-northwestward to northwestard and is unlikely to recurve. The current NHC forecast places the storm onshore somewhere between Myrtle Beach and Cape Hatteras on Thursday as a very large, high-end Category 3 or low-end Category 4, as shown in the Figure to the right. This is a very grim forecast and, should it verify, damage will likely be well into the billions with significant threat to life and livelihood. Exacerbating the situation, around the time of landfall there are indications that steering currents could collapse and the storm could drift over North Carolina or Virginia for days. This is a region that is already waterlogged after months of heavy rain and the set-up is in place for a catastrophic flooding situation, comparable to or exceeding that of Hurricane Floyd in 1999. For natural gas, this is once again likely to be a net bearish influence with a prolonged period of below-average temperatures and likely a very large number of power outages, exceeding what was seen across the region this weekend. The further the storm tracks to the north towards the more densely-populated Mid-Atlantic the greater this bearish influence will be. It remains to be seen what, if any, impact the storm will have on the producing regions of the Marcellus and Utica Shales further northwest across West Virginia, Pennsylvania, and Ohio. Fortunately, the forecast does remain uncertain and there are several days left for the track to shift back offshore, although the chances of this happening are dwindling. Click HERE for the latest tracks and advisories from the National Hurricane Center.

For the remainder of the week, natural gas demand will pick up as temperatures across the Eastern Seaboard--particularly inland--quickly rebound into the 80s, 5F-10F above-average. Highs across Texas and the Midwest will remain cool which will keep daily injections at or larger than the 5-year average. As the Figure to the right shows, injections could fall by 5 BCF from today's peak to +11 BCF/day by Thursday--right at the 5-year average--before increasing back to +12 BCF/day by Friday as Florence's influence arrives. However, this does not yet take into account for the potential for power outages and this projection very well may rise. Additionally, should the storm stall out, the storm's bearish influence could extend for several days into the following week. At this time, I am projecting a +93 BCF natural gas storage injection for September 8-14, a bearish 17 BCF bearish versus the 5-year average, but, surprisingly, 3 BCF smaller than last year's injection. It would be the largest bearish injection relative to the 5-year average since the week ending May 11. It would be the second largest weekly injection for the period in the last 5 years, ahead only of last year's +96 BCF build and a whopping 41 BCF larger than the 5-year minimum, 2013's +52 BCF build. Should a +93 BCF injection verify, natural gas inventories would rise to 2735 BCF while the storage deficit versus the 5-year average would contract to -573 BCF. The EIA will release its official injection numbers for the week on Thursday, September 20. Click HERE for more on this week's projected injection.