November 10, 2017

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Natural Gas Extends Rally after EIA Reports Bullish Weekly Storage Injection; Gas Demand To Surge Today As Arctic Airmass Anchors Into Northeast, Driving Huge Daily Draw & First Weekly Storage Withdrawal Of The Season Before Rapid Warm-Up Early Next Week; Week 1 Rankings For Natural Gas Storage Contest Released

6:00 AM EDT, Friday, November 10, 2017
In its weekly Natural Gas Storage Report for the week of October 28-November 3, the EIA announced Thursday morning that inventories increased by +15 BCF to 3790 BCF. The injection was 1 BCF larger than my +14 BCF projection but a huge 30 BCF bullish versus the 5-year average +45 BCF build. All 5 storage regions saw bullish injections or withdrawals, led by the Midwest region whose +5 BCF build was 8 BCF bullish versus the 5-year average +13 BCF injection. At 3790 BCF, natural gas inventories now stand 71 BCF or 2% below the 5-year average and a whopping -219 BCF or -5% below year-ago-levels.

With natural gas demand surging this week as an early-season arctic airmass settles southward, last week's injection is likely to be the final storage build of 2017. (However, it is worth noting that, while not officially recorded, inventories likely peaked just over 3800 BCF on Sunday, November 5 due to mild conditions the first two days of the week). Through the 32 weeks that made up the 2017 injection season, a total of +1741 BCF of natural gas was injected into storage. This was 350 BCF smaller than the 5-year average +2090 seasonal injection and the third smallest seasonal build in the last 5 years, behind only 2012's +1474 BCF and 2016's +1549 BCF. And as the Figure to the right shows, it was the 7th smallest seasonal injection in the full 23 year history for which EIA storage data is available, ranging from a minimum +1383 BCF in 2000 and a maximum +2524 BCF in 2015.

Click HERE for more on current natural gas inventories and seasonal storage data.

In Thursday's discussion, I had commented that should the reported injection come in near expectations--as it did--that there was a good chance investors would use the opportunity to "sell-the-news", taking profits and setting the stage for a pullback. It was therefore a pleasant surprise that, after a brief post-report dip, natural gas finished the day strong and finished up 3 cents or 0.8% for its 5th straight day of gains to settle at $3.20/MMBTU. However, I expect much of the rally was due less to the reported injection than the prospect of a second shot of arctic air the week of Thanksgiving in some of the computer models. Thanks to rebalancing from a post-2:30 move the day before, natural gas ETFs outperformed with UNG rising 1.9% and UGAZ rising 5.2%. Speaking of these ETFs, UGAZ continues its rollover process into January 2018 contracts, which closed at $3.30/MMBTU, a modest 10 cent contango. Through Thursday, UGAZ holds 60% of its funds in January 2018 contracts and 40% in December 2017 contracts. The fund will likely conclude the rollover on Monday. UNG holds only December 2017 contracts and will not begin its rollover for another week or so. Since bottoming at $2.85/MMBTU on October 18, the front month contract has rallied an impressive 12.2%. Even with the rally, however, natural gas is still undervalued according to my Fair Price Model, trading at a 7.4% undervaluation to a $3.47/MMBTU Fair Price based on current inventories alone (or a 4.9% undervaluation using January 2018 pricing). And thanks to a large late-winter backwardation in futures contracts and expectations that the storage deficit will continue to build, the commodity is undervalued by an average of 16% based on the next 8 months of projections. However, with natural gas approaching overbought technical territory and temperatures expected to at least temporarily moderate next week, it would not be surprising to see the commodity pull back near-term, though the underlying bullish fundamentals will remain intact.

Crude oil, meanwhile, recovered most of Wednesday's small dip, rising 36 cents or 0.6% to settle at $57.17/barrel on Thursday, just shy of Tuesday's $57.35/barrel 2-year high. Brent crude kept pace, rising 44 cents or 0.7% to $63.93/barrel, maintaining a strong Brent-WTI spread of $6.58/barrel. This should continue to support a recovery in US crude oil exports after last week's surprising dip.

Thanks to sector-wide strength, my Oil & Natural Gas Portfolio rose 0.6% on the day to reach a new 2017 high, up +30.0% since May 1, an annualized return of +57%. I made a single trade on the day, in line with Wednesday's Investing Commentary. Subscribers can view my Investing Commentaries, recent trades, and current holdings on my Portfolio Page HERE. To learn more about signing up to support the site and gaining access to these features, please click HERE.

Following Thursday's Storage Report, I have tabulated the initial set of rankings through week 1 of my Natural Gas Storage Contest. RM516 holds a slim lead over KATI, earning a strong 54.6 points out of a possible 72. RM516 earned the maximum 12 points by correctly projecting a +15 BCF injection and a strong 10 points by projecting a $3.18/MMBTU close versus the $3.20/MMBTU observed close, reaching his/her final score of 54.6 courtesy of a 2.48x time bonus for submitting early. KATI is in a close second with 53.3 points and phil97 is in third with 45.3 points. These three are the early front-runners to take home the 1st, 2nd, and 3rd place prizes of $250, $100, and $50, respectively. Submissions for Week 2 are now open, which includes the storage projection for November 4-10 and the closing price for natural gas on November 16. Of note, after analyzing the results for week 1, it is clear that forecasting the closing price of natural gas is a bigger challenge than the storage injection/withdrawal and is currently underweighted by my scoring algorithm with the average entrant earning 7.9 points via storage and just 2.3 points via price last week, which is skewed even with recent volatility. Thus, beginning with week 2, I have adjusted the algorithm such that the closing price component of the equation is worth 1.5x the storage component to balance things a bit more. This is discussed on the contest homepage. This adjustment did not impact week 1 scores. Click HERE to view the complete rankings of all 82 entrants and to submit your entries for week 2, which will close next Tuesday at 5pm. For those who did not enter last week but are interested in getting involved, remember that each entrant's bottom 2 weekly scores in the 10 weeks of the tournament are discarded which, in your case, would be a "0". Thus, you can enter this week (or the following week even) and still compete for 1st place, although you won't be able to afford any poor showings. The same applies to those who underperformed last week. . Nobody is out of the contest, not by a longshot, at this early stage. If you have questions about the contest or your score or are concerned that you do not appear on the rankings, please email CelsiusEnergyFM@gmail.com. I am working on individual profile pages for each contestant which will have a much more detailed breakdown of scoring that should be available sometime next week or early the following week.

Natural gas demand will soar today as an arctic airmass dominates the Midwest and Northeast. Highs today will be in the upper 20s to lower 30s from Minneapolis to Chicago to Detroit, while the major population centers of the Northeast will see readings in the upper 30s to lower 40s from Washington, DC to Boston, all 15F-20F colder than average. The coldest anomalies will probably be across central New York State where highs only in the low-to-mid 20s will approach 30F colder than normal. Such temperatures are more typical of early-to-mid December than the second week of November. Elsewhere, temperatures across the Southeast will be seasonal within 5F of normal, generally in the low-to-mid 60s, while readings will be 5F-10F warmer than average across the Intermountain West. However, given the magnitude of the cold and the major population centers that will be impacted, the chill across the Northeast and Midwest will dictate demand today. Overall, the forecast mean population-weighted temperature today will be 46.2F, 4.6F colder than Thursday and a whopping 6.6F colder than normal. Total Degree Days will rise to 19.6 TDDs today, 5.6 TDDs more than normal and the third most for November 9 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 stunningly bullish -15 BCF/day storage withdrawal, 17 BCF bullish versus the 5-year average +2 BCF/day injection. Click HERE for more on today's projected draw and intraday natural gas inventories.

For the natural gas storage week of November 4-10 that ends today, I am projecting -15 BCF storage withdrawal, the first of the season. Such a withdrawal would be a strong 27 BCF bullish versus the 5-year average +12 BCF injection, and an exceptional 49 BCF bullish versus last year's +34 BCF build. Should it verify, natural gas inventories would drop to 3775 BCF while the storage deficit versus the 5-year average would rise to -98 BCF and the year-over-year deficit would rise to -268 BCF. As the Figure to the right shows, a -15 BCF withdrawal would be the second largest in the last 5 years behind only 2012's -21 BCF draw as well as the 6th largest draw in the full 23 year history of EIA storage data. Unsurprisingly, with domestic production steady at 75.5 BCF/day near record highs, the bullish draw will be driven primarily by gains in residential/commercial heating demand which will climb nearly 5 BCF week-over-week to just over 25 BCF/day, up a whopping 9 BCF year-over-year. Surprisingly, powerburn electricity demand will remain strong as it has all Fall, averaging near 24 BCF/day, up 2 BCF/day week-over-week and around 1 BCF/day year-over-year. It is the strength in res/com and powerburn demand that is compensating for the surge in domestic production over the past year that is preventing a supply/demand mismatch from forming and is even further widening the storage deficit. However, both of these variables are tied closely to the weather and if and when we see a prolonged period of warmth, I expect to see large whipsaws in demand that can quickly lead to bearish conditions, boosting volatility. The EIA will release its official storage numbers for this week next Thursday, November 16, at 10:30 AM EDT. This remains a preliminary projection and will be revised further over the next 96 hours. Click HERE for more on this week's projected draw.

Looking ahead to next week, as impressive as today's arctic blast is, it won't stick around for long. While much colder-than-average readings will persist into Saturday, by the start of the work-week, most areas east of the Rockies will be seasonal with highs within 5F of normal. By midweek, parts of southern Minnesota that late this week struggled to reach 20F will reach 50F, 10F warmer than normal. By the end of the week, forecast mean population-weighted temperatures will approach 55F, 9F warmer than today and around 3.5F warmer than normal. This could result in withdrawals temporarily flipping back to small daily injections as the Figure to the right, plotting projected daily changes in natural gas inventories, shows. In the end, the frigid start and mild end to the week look to cancel themselves out and I am presently projecting a near-average -30 BCF storage withdrawal for the week of November 11-17, a slight 4 BCF bullish versus the 5-year average, but a huge 33 BCF bullish year-over-year, enough to push the year-over-year storage deficit to -300 BCF for the first time since July 2017. The EIA will release its official storage report for next week on Wednesday, November 22 at 12 pm EDT, one day early due to the Thanksgiving Day holiday. Click HERE for more on next week's projected draw. It is still early, but there are some indications that the cold air could reload itself for a second visit to the lower 48 the week of Thanksgiving, driving demand right back up again. Stay tuned.