January 11, 2018

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Natural Gas Pulls Back After Tuesday's Short Squeeze As Temperature Forecast Continues To Flip-Flop; EIA Expected To Announce Historic Withdrawal In Today's Storage Report; Natural Gas Demand To Fall To 2018-Low Today Before Arctic Air Surges South This Weekend; Season-Ending Inventory Projections Fall Under 1300 BCF

6:00 AM EDT, Thursday, January 11, 2018
It was another volatile day for natural gas on Wednesday. The commodity gapped up more than 2% overnight to approach $3.00/MMBTU as the near term temperature outlook trended colder, but quickly sold off at the open, ultimately finishing the day down 2 cents or 0.6% to settle at $2.91/MMBTU. The pullback was likely due to a combination of profit-taking from Wednesday's rally and a temperature forecast that reverted back to a milder late-January. With the EIA expected to announce a record-setting weekly storage withdrawal today and very inconsistent computer models, expect volatility to continue.

Meanwhile, crude oil, rose to yet another 3-year high after the EIA reported an 8th straight weekly storage drawdown. The commodity gained 61 cents or 1.0% to settle at $63.57/barrel, its highest close since December 9, 2014. The Brent-WTI spread continued to slowly contract as Brent only rose 38 cents to $69.20/barrel, with the spread falling to a multi-week low of $5.63/barrel, though still more than 50% higher year-over-year. In its weekly Petroleum Status Report for December 30-January 5, the EIA reported Wednesday morning that crude oil inventories dropped by -4.9 MMbbls. While such a draw was bullish versus the 5-year average -0.3 MMbbl draw, it was less than half of Tuesday's API forecast of what would have been a record -11.2 MMbl draw for the period. Nonetheless, inventories fell to 419.5 MMbbls, the lowest since March 6, 2015 while the storage surplus versus the 5-year average narrowed to just +31 MMbbls, down nearly 120 MMbbls in 9 months from last Spring's all-time high. Inventories are down 64 MMbbls year-over-year. Perhaps the biggest headline-grabber was the surprising 0.29 MMbbl/day decline in domestic production, as shown in the Figure to the right. At 9.49 MMbbls/day, production fell to its lowest level since the hurricane-induced shut-ins from October 13, 2017 and the lowest production not associated with hurricane disruptions since the week ending August 4. It is not immediately apparent as to why oil production saw such a substantial drop. It is possible that freeze-offs associated with record cold last week prompted the decline, although oil isn't usually as susceptible to freezing temperatures as is natural gas. It will be very interesting to see if production recovers next week because, if it doesn't, there could be substantial upside remaining in this melt-up as record production has been the primary bearish argument.

Returning to natural gas, the EIA will release its weekly Storage Report for December 30-January 5 today at 10:30 AM EDT. Thanks to record cold last week, I am projecting an all-time record storage withdrawal of -332 BCF. Such a withdrawal would crush the previous record of -288 BCF January 2014 by a massive 44 BCF as shown in the Figure to the right. The withdrawal was driven by a surge in heating demand with total demand rising to a record 150 BCF/day last Monday and remaining strong throughout the week. Even partially temperature-independent demand elements soared with Powerburn averaging just under 30 BCF/day on the week, 10 BCF/day higher than last year, and industrial demand averaging 25.9 BCF/day, up 3.5 BCF/day year-over-year. Domestic production was also impacted by freeze-offs, falling nearly 3 BCF/day week-over-week to average 74.0 BCF/day, which is an impressive decline due to freeze-offs, topping the production losses from the polar vortex in January 2014, although these losses will likely be very short-lived. Should a -332 BCF withdrawal verify, natural gas inventories would fall to 2794 BCF while the storage deficit versus the 5-year average would climb by 179 BCF to a 4-year high of -371 BCF. The year-over-year storage deficit would jump nearly 200 BCF to -387 BCF, just weeks after briefly flipping to a surplus. And with a record warm February last year, it is very likely that the year-over-year deficit exceeds -500 BCF this winter, and probably quite a bit higher.

Despite the expected record-smashing nature of this week's report, it is likely to have already been priced into natural gas over the past two weeks. In fact, I expect that there is more downside risk should the report fall short of lofty expectations than should it come in above projections with definite "sell-the-news" potential. I feel that it would take a reported withdrawal of over -350 BCF to be considered unequivocally bullish with prices likely to again challenge $3.00/MMBTU. I feel that a withdrawal of smaller than -330 BCF, while still historic, would be considered a relative disappointment with prices likely to pull back under $3.90/MMBTU. A reported withdrawal between -330 BCF and -350 BCF would be neutral with prices equally likely to rally or pull back. However, with the near-term temperature forecast trending colder and the storage deficit likely to climb back above -400 BCF near-term, I expect any downside would be relatively limited.

Check back at 10:30 AM EDT for the official EIA storage withdrawal on my Current Natural Gas Inventories Page HERE. Also, I now have weekly natural gas supply and demand statistics on my Natural Gas Supply & Demand Page HERE that should be updated between 3 pm and 4 pm EDT.

Natural gas demand will fall to a new 2018-low today as record warmth spreads into the Great Lakes ahead of an arctic cold front. However, said cold front will bring much higher heating demand beginning tomorrow and today will likely be a demand-minimum for at least the next week. Record daily high temperatures into the 50s and even lower 60s will spread across southern Illinois, Indiana, and into Southern Michigan today, more than 30F warmer than normal in some areas. Indianapolis could reach 63F today while Louisville, Ky could reach 70F, each 25F warmer-than-normal. Interestingly, both of these cities are under Winter Storm Watches for Friday with 3-5 inches of snow possible. Further to the northwest, temperatures will plunge more than 20F day-over-day with Minneapolis only climbing to 15F today while Des Moines will be lucky to reach 20F, both around 10F colder than normal. Highs across much of North Dakota will not reach 0F. However, thanks to the extensive warmth across the much more populous Great Lakes, Ohio Valley, and Eastern Seaboard, the forecast mean population-weighted nationwide temperature today will rise 3.6F day-over-day to 50.7F, a blistering 11.8F warmer than normal. Total Degree Days will slump to just 14.9 TDDs today, 11.7 TDDs fewer than normal and the single fewest for January 11 in the last 38 years. 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 bearish -10 BCF/day daily natural gas storage withdrawal, 21 BCF less than the 5-year average -31 BCF/day draw. It would be 42 BCF weaker than Saturday's -52 BCF/day draw just 5 days ago. Strong work, Mother Nature. Click HERE for more on today's projected daily withdrawal and intraday inventories. Projected withdrawals will nearly double to -19 BCF/day on Friday as arctic air moves rapidly eastward. However, the damage will have been done mid-week and I am projecting a modestly bearish -189 BCF natural gas storage withdrawal for January 6-12, 27 BCF smaller than the 5-year average draw, which would drive the storage deficit versus the 5-year average back down to -344 BCF after briefly topping -400 BCF Sunday evening. Much more on this week's projected withdrawal in Friday's commentary, but see my Weekly Storage Page HERE for more details.

Arctic air will return with authority over the weekend with daily withdrawals once again exceeding -40 BCF/day. As a result, I am projecting a third -200 BCF or larger withdrawal in the last 4 weeks for January 13-19, likely near -240 BCF which would be around 90 BCF bullish versus the 5-year average and would drive the storage deficit versus the 5-year average to -430 BCF, a 4-year low. While temperatures will likely moderate for the final full week of January, long-term computer models are still suggesting that February and March will be seasonally cool, particularly across the northern half of the nation. As a result, my end-of-season storage projections have continued to decline and dropped below 1300 BCF on Wednesday, settling at around 1285 BCF. This would be 411 BCF bullish versus the 5-year average and a huge 761 BCF smaller than last year's season-ending inventories. It would be the second smallest level in the last 5 years after 2014's 824 BCF and, as the Figure to the right shows, it would be the 13th smallest level in the last 24 years. This is actually quite the achievement as season-ending inventories have been steadily climbing over the past decade. And should February or March turn out to be even slightly colder than average, it is not out of the realm of possibility that inventories end below 1000 BCF. Click HERE for more on my long-term storage projections. Should a 1280 BCF (or thereabout) verify, it would correspond to a Fair Price based on historical price/storage data of $4.10/MMBTU. With the April 2018 contract trading at $2.70/MMBTU, this would be a substantial 34% undervaluation according to my Fair Price Model. While I doubt the commodity will approach these levels due to ongoing concerns over record production, significant upside potential does remain if demand growth is able to keep pace with gains in supply. However, as is typical during the winter though more so this year, the temperature forecast will continue to dictate day-to-day movements of natural gas.