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July 11, 2017

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Natural Gas Rises To Open The Week As 2-Week Temperature Outlook Trends Warmer While Crude Oil Rebounds After News Of Possible Libya & Nigeria Production Caps; Gas Demand To Rise As East & Plains Warm With +4 BCF/Daily Storage Injection, Half The 5-Year Average


6:00 AM EDT, Tuesday, July 11, 2017
Natural gas started the week on a strong note Monday as prices rallied 7 cents or 2.3% to settle at $2.93/MMBTU, reversing some of last week's 5.6% loss. The gains were driven by a two-week temperature forecast which trended warmer over the weekend as it appears less likely that a prolonged mid-July cool spell will suppress natural gas demand. Even after the rally, natural gas remains undervalued versus its Fair Price across all timeframes out to 8 months, including by 5.5% based on current inventories alone (down from 7.5% at Friday's close) and averaging 7.1% over the full 8-month period (down from 9.0% on Friday), as shown in the Figure to the right. This suggests that, should the current forecast hold, natural gas could continue to trade higher.


Crude oil likewise worked to shake off the bitter taste of last week as prices rebounded, climbing 17 cents or 0.4% to $44.40/barrel following last week's 4% loss. While a 0.4% gain doesn't sound like much, it was all the more impressive given that the commodity was down over 2% in early morning trading, well under $44/barrel. The rally was driven in part by news that OPEC was considering capping Nigerian and Libyan oil output, both of which had previously been immune to production curbs.


Of note, both oil and natural gas 3x leveraged ETFs began their monthly rollover from August 2017 to September 2017 contracts on Monday according to data released by VelocityShares. The natural gas rollover, which has historically been detrimental to long positions due to persistent contango in the sector, will not be an issue this month as the August and September contracts are trading at nearly identical prices, $2.93/MMBTU for August contracts and $2.92/MMBTU for September contracts, a slight backwardation. For crude oil, on the other hand, long positions will see a slight price-independent loss this month as the August and September contracts are at a 0.5% contango, meaning that the 3x leveraged ETF UWT will lose around 1.5% should the current spread persist through the rollover. As of Monday evening, both oil and natural gas funds had rotated 20% of their holdings into September contracts and this rollover will likely conclude by the end of the week. The 1x ETF USO began its rollover late last week and, as of Monday, had rolled over 50% of its funds. The 1x ETF UNG has not yet begun its monthly rollover. Click HERE for more on natural gas ETF holdings and HERE for more on crude oil ETF holdings.


Natural gas demand will continue higher today as temperatures warm further across the Great Plains, Southeast and Mid-Atlantic. Triple digit heat could stretch as far north as Nebraska today with mid-90s into North Dakota where Bismarck's forecast high of 94F would be 10F warmer than normal. Across the Southeast and Mid-Atlantic, highs will be in the mid-90s from Texas to Pennsylvania with an epicenter of heat from the Tidewater of Virginia north to Baltimore where highs will reach the upper 90s, including a forecast high of 98F in Washington, DC, 11F warmer than average. It is not out of the question that some areas will reach 100F. Cooler air today will be found from the upper Midwest in Iowa, Wisconsin, and Illinois to interior New England, where highs will only reach the mid-to-upper 70s, 5F-10F cooler than normal. Overall, the forecast mean population-weighted nationwide temperature will rise by nearly 1F from Monday to 79.6F today, a strong 2.2F warmer than normal. Total Degree Days will rise to 15.0 TDDs today, 0.9 TDDs larger than normal and the fourth most for July 11 in the last 37 years dating back to 1981. See more on today's temperature and degree day outlook HERE. Based on this outlook and early-cycle pipeline data, I am projecting a bullish daily +4 BCF/day storage injection today, half the 5-year average +8 BCF injection. See more on today's daily storage projection and intraday natural gas inventories HERE.


While a few brief shots of cool air cannot be ruled out, it is becoming increasingly likely that population-weighted nationwide temperatures will be at or above average over the next 1-3 weeks. As the Figure to the right shows, the National Weather Service is calling for temperatures at or above average across much of the nation in its 10-14 day outlook with a core of warmth centered across the northern Great Plains. The only exceptions to this warmth might be across the Desert Southwest and Southeast. It is worth mentioning that while the European ECMWF has trended warmer as well, it does continue to suggest a period of cooling across the Southeast that could cap demand even as the northern Plains is blistering throughout the period. Regardless, I am projecting sub-50 BCF weekly injections for at least three consecutive weeks from July 14 through July 28. By the end of the month, the natural gas storage surplus versus the 5-year average may have dropped to a 5-month low of +130 to +140 BCF. For this reason, I remain long-term bullish on natural gas and will continue to hold my long positions at this time.


For those interested, have published 2 commentaries on Seeking Alpha discussing crude oil and natural gas fundamentals. Click either link below to read each article: 1. Crude Oil Falls For The Sixth Week In Seven As Domestic Production Rebounds, But Oil Continues To Represent An Intriguing Long-Term Buy


2. Natural Gas Falls On Fears Of Mid-July Cooldown And Is Now Over-Extended To The Downside As Temperatures Warm With Smallest Storage Injection Of The Summer Expected This Week


Natural gas demand dipped slightly over the weekend as seasonably cool temperatures dominated the Great Lakes and Northeast with a daily storage injection on Sunday of around +7 BCF/day. Demand will rise to start the week as temperatures warm across the Southeast and Central Plains. Highs today will rise into the mid-to-upper 90s across the Deep South with areas from Jackson, Ms and Montgomery, Al exceeding 95F, 5F-10F warmer-than-average. Hot weather will persist and expand across the Plains with triple digit heat rising as far north as central Kansas with 90s all the way to the Canadian border, 10F warmer than normal. The rise in demand will be blunted somewhat as the prolonged heatwave across the West will relax somewhat today with Phoenix only reaching the mid-100s and Sacramento, Ca dropping below 100F, still around 5F warmer than average. Overall, the forecast mean population-weighted nationwide temperature today will rise over 1F day-over-day to 78.9F, 1.5F warmer than normal. Total Degree Days (TDDs) will rise to 14.1 TDDs today, 0.3 TDDs more than normal. It will be the 10th most TDDs for July 10 in the last 37 years. Natural gas powerburn will likely bounce back above 30 BCF/day today after falling under than threshold over the weekend. See more on today's temperature and degree day outlook HERE. Based on this forecast and early-cycle pipeline data, I am projecting a +6 BCF/day daily storage injection, more than 1 BCF smaller than yesterday and a bullish 2 BCF smaller than the 5-year average +8 BCF/day. See more on today's daily projection and intraday natural gas inventories HERE. Natural gas demand will continue to rise through mid-week as heat builds further across the Southeast and Mid-Atlantic with daily injections falling to around +4 BCF/day, half the 5-year average. For the week of July 8-14, I am projecting a preliminary +34 BCF storage injection, a bullish 25 BCF smaller than the 5-year average +59 BCF. It would be the smallest injection of the 2017 injection season so far. Click HERE for more on this week's projection.