July 10, 2018

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Natural Gas Falls To A 7-Week Low To Start The Week On Supply Concerns; Gas Demand Rises Today As Southeast & Northern Plains Heat Up With Inventories Topping 2250 BCF Overnight Tonight; Inventories Likely To Peak With Sizable Storage Deficit This Fall Despite Record Production...But That Doesn't Mean You Should Go Long Right Now

6:00 AM EDT, Tuesday, July 10, 2018
Facing the dual threat of a cooler second half of July and record US production, natural gas extended its decline on Monday, falling 3 cents or 1.1% to settle at $2.83/MMBTU. It was the lowest close for the Front-Month Contract Since May 16. Crude oil prices, meanwhile, were once again split, but diverged opposite that of Friday's movements. After the Brent-WTI spread had plunged to a 4-month spread of $3.31/barrel on Friday, WTI oil inched higher by 5 cents to $73.85/barrel while Brent oil rose a steeper 96 cents or 1.2% to $78.07/barrel, driving the spread back up to $4.22/barrel. The outperformance of the international price point was likely fears over supply disruptions out of major producers Venezuela, Iran, and Libya. My Oil & Natural Gas Portfolio, meanwhile, rose +0.2% on Monday, climbing to a new record high. The portfolio is up +18.7% through the first 130 trading days of 2018 or +36.7% annualized. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

Natural gas demand will continue its upswing today as the Southeast begins to heat back up and the Northern Plains remains hot. Highs today from Atlanta through Washington, DC will be in the lower 90s regionwide, around 5F warmer than normal. Across the northern Plains, readings will top out in the mid-90s from Denver through Billings, Mt to Bismarck, Nd, each 5F-15F hotter than normal. Across the Southwest and Texas, highs will remain seasonally cool, with Phoenix limping to 100F and most of the major cities of Texas, the nation's largest natural gas consuming state, in the low 90s, all around 5F cooler than normal. Nonetheless, thanks to the warming trend across the densely-populated East, today's forecast mean population-weighted nationwide temperature will rise 1.5F from Monday to 79.6F today, a robust 2.3F warmer than normal. Total Degree Days will rise to 15.2 TDDs, 1.1 TDDs greater than normal and the 5th most for July 10 in the last 37 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 +8 BCF/day daily natural gas storage injection, 2 BCF smaller than yesterday's build and 1 BCF bullish versus the 5-year average +9 BCF/day build. I project that Realtime natural gas inventories will be near 2247 BCF by this evening while the storage deficit versus the 5-year average will climb back above -510 BCF. Click HERE for more on today's projected injection and Realtime natural gas storage levels.

Looking ahead towards the second half of July, the current temperature pattern, consisting of above-average warmth across the West and East Coasts and cooler readings across the Heartland looks to persist, as shown in the Figure to the right. Fortunately for natural gas bulls, this is a relatively favorable pattern for gas demand during the summer, particularly across the East, as these are the largest natural gas-consuming regions for cooling demand. Thus, Mother Nature looks to remain unusually cooperative, once again masking the implications of record US production and a supply/demand balance that is more than 7 BCF/day loose on a temperature-independent basis and still around 3.3 BCF/day loose versus the 5-year average accounting for all variables. However, at this time, it does not appear that we will see another widespread, record-setting heat wave such as was seen last week and, even with the favorable temperatures projected injections for the next 2 weeks will likely be within 5 BCF of their respective 5-year averages before perhaps climbing to above-average should cooler readings arrive for the final week of July as suggested by some models. At this time, I am projecting July natural gas inventories to finish near 2395 BCF, a 480 BCF storage deficit versus the 5-year average. Click HERE for more on the extended temperature outlook and HERE for more on projected natural gas inventories through the end of July.

Looking well ahead through the end of the storage injection season, thanks to the extended winter season and hot first half of summer, it is now a virtual guarantee that natural gas inventories will peak at a solid deficit versus the 5-year average. Even if August and September are mild--as some models are suggesting--and supply/demand balance remains as loose as it is presently, there will be insufficient time for the deficit to contract down and flip to a storage surplus. At this time, I am projecting inventories to peak at 3620 BCF the week of November 9, 2018. This would be -228 BCF below the 5-year average 3848 BCF--or less than half the current deficit--and, as the Figure to the right shows, would be the second smallest in the last 5-years, just behind 2014's 3611 BCF. Click HERE for more on long-term natural gas storage projections.

This is a particularly challenging trading environment. On the one hand, if you use 2014 as a storage analog to 2018, natural gas closed at $4.17/MMBTU on July 9, 2014, which is also very close to my calculated Fair Price. This would suggest upwards of 30% of upside from current levels. However, as discussed extensively, natural gas supply/demand is dramatically unbalanced and is being propped up by a favorable temperature forecast. Investors realize this and, expecting temperatures to eventually normalize, have aggressively sold natural gas to a substantial discount expecting the surplus to quickly be whittled down. Despite the undervaluation and the heat, momentum is strongly in the bearish camp right now and it feels inevitable that the commodity will test $2.75/MMBTU when temperatures do cool.

This is all well and good during the summer where even consistently above-average temperatures are merely able to maintain the storage deficit at its current level. However, should inventories enter the withdrawal season near 3620 BCF as currently projected, arctic outbreaks would overwhelm record production and the low baseline inventory level could be a set-up for a price spike should November or December start the season off cold. I am currently short natural gas, but, as detailed to subscribers on Monday, the commodity is approaching my price target and, looking long term, I will probably want to be long in size heading into the Fall. Between now and then, I feel that swing trading with quicker entries and exits with relatively small position sizes will be the way to go. Natural gas demand will dip slightly today but will remain comfortably above-average as above-average temperatures persist across the Southeast and West. Heat Advisories are up for parts of Montana today as Billings could top out near 100F, 15F warmer-than-normal. Excessive Heat Warnings are flying for Phoenix today where afternoon highs could approach a blistering 115F, around 8F warmer-than-normal. Further west, Los Angles will reach the low-to-mid 90s, nearly 20F warmer-than-normal while much of California's Central Valley will reach the 90s (Sacramento) or low 100s (Fresno), generally 5F-10F warmer-than-normal. Above-average readings will hang on along the Southeast and immediate East Coast with New York City again approach 90F, 5F warmer-than-normal. In contrast, seasonally cooler temperatures will overspread much of the Plains and Midwest today with Detroit only reaching the upper 70s, Chicago the low 80s, and Houston near 90s, all around 5F cooler-than-normal. Overall, the forecast mean population-weighted nationwide temperature will drop under 80F for the first time this week, falling 0.9F from Thursday to 79.7F today, still 2.6F hotter than normal. Forecast Total Degree Days today will dip to 15.1 TDDs, 1.3 TDDs greater than normal and the 7th most for July 6th in the last 37 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 +9 BCF/day daily natural gas storage injection, 1 BCF larger than yesterday but still 2 BCF bullish versus the 5-year average +11 BCF/day build. For the natural gas storage week of June 30-July 6 ending today, I am projecting a +56 BCF injection, 21 BCF bullish versus the 5-year average. The bullish build was driven by record heat across much of the nation throughout the week driving powerburn demand to near 40 BCF/day, but was blunted by the 4th of July holiday and its suppression of commercial and residential demand as well as record production topping 81 BCF/day. Should this projection verify, natural gas inventories would rise to 2206 BCF while the storage deficit versus the 5-year average would widen to -516 BCF or -19%. Click HERE for more on this week's projected injection, to be announced officially by the EIA next Thursday, July 13 at 10:30 AM EDT.