November 12, 2018

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Natural Gas Prices Come Under Pressure As The Most Sustained Stretch Of Bearish Temperatures In 9 Months Take Aim On The Lower 48; EIA Forecast To Announce Exceptionally Bullish -10.2 MMbbl Crude Oil Inventory Draw In Today's Petroleum Report (But Don't Count Your Chickens Just Yet); Gas Demand To Fall For Third Straight Day Today

6:00 AM EDT, Wednesday, December 12, 2018
Volatile trading continued in the natural gas sector on Tuesday as the commodity gave up its Monday gains and then some. With computer models showing extensive near-term warmth and the bears shrugging off the prospect of at least a transient return to colder temperatures to start 2019, the commodity slid 13 cents or 3.0% yesterday to close at $4.41/MMBTU. With the pullback, natural gas prices fell below my projected Fair Price of $4.49/MMBTU and now trade at around a 1.9% discount. The commodity has been tip-toeing this line for the past two weeks. However, with the storage deficit likely to contract with warmer temperatures, this Fair Price is poised to fall sharply in the weeks to come, perhaps dropping under $4.00/MMBTU by early January. This should allow selling pressure to persist even as natural gas falls below its Fair Price based on Realtime inventories only. Tuesday's pullback was driven by the persistent forecast of much above-average temperatures across nearly the entire nation over the next 2+ weeks. Computer models continued to overall trend milder over the past 24 hours. As the Figure to the right shows, both the GFS and ECMWF 14-day gas-weighted degree forecasts remain much below-average for each of their runs over the last 24 hours and, if anything, pushed back the onset of a return to colder temperatures by a couple of days. Most of the variation in these 14-day forecasts has to do with each model's and each run's handling of a potential pattern shift during the final week of December and just how much arctic air is able to settle south from Canada, and how long it lasts. The near-term forecast through the next 10-12 days is very high-confidence. With this type of pattern in place, I am expecting heating demand to slump back to November levels, resulting in a contraction of the storage deficit versus the 5-year average that could approach -200 BCF over the next 4 weeks depending on the evolution of the late December/early January outlook, dropping the deficit to as low as -650 BCF, the lowest since the second week of November, a time when natural gas was trading near $3.50/MMBTU. At this time, I continue to maintain a downside price target of $4.00/MMBTU though, should the above-average temperature pattern persist in January, I expect natural gas to trade towards $3.50/MMBTU as the large Winter-Spring backwardation that currently stands just under $1.50/MMBTU contracts back down. Click HERE for more on the latest near- and long-term computer model outlooks on my Advanced Model Page, available exclusively for subscribers.

Ahead of today's EIA Petroleum Status Report, WTI oil bounced off Monday's 2-week lows, with WTI rising 65 cents or 1.3% on Tuesday to settle at $51.65/barrel. However, the commodity finished well off its highs of $52.43/barrel. Brent oil rise by a slighter 23 cents or 0.4% to close at $60.20/barrel. The bounce appears to have been driven by news of Libyan supply disruptions totaling 0.4 MMbbls/day, but was curtailed by the EIA slashing its 2019 WTI price forecast by 16% to $54.19/barrel and Brent forecast by 15% to just $61/barrel. With OPEC and other major producing nations showing at least some willingness to stem the rapid drop in oil prices and US rig counts beginning to fall, this sharp reduction in forecast price seems overly bearish to me. My 6-month WTI price target remains at $60/barrel.

The EIA will release its weekly Petroleum Status Report for December 1-7 this morning at 10:30 AM EDT. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting a -10.2 MMbbl crude oil inventory drawdown, a massive 6.0 MMbbls bullish versus the 5-year average. As the Figure to the right shows, it would be the second largest draw for the December 1-7 period in the last 34 years, topped only by 2013's -10.6 MMbbl decline. Should it verify, crude oil inventories would tumble to 433.0 MMbbls--the lowest since November 2--while the storage surplus versus the 5-year average would contract to just +18.3 MMbbls. Such a draw would bring the two-week drawdown to -17.5 MMbbls. Additionally, the API is forecasting bullish data from refined products as well, with an expected -2.5 MMbbl gasoline draw (5-year average +4.6 MMbbls) and a +0.7 MMbbl distillate build (5-year average: +2.1 MMbbls). All told, the agency is forecasting Total Petroleum Inventories (crude oil + gasoline + distillates) to fall by -11.9 MMbbls, nearly 14.5 MMbbls bullish versus the 5-year average +2.5 MMbbl build. It is important to take this forecast with a large grain of salt given the API's enormous miss last week, calling or a +5 MMbbl build compared to the EIA-reported -7.3 MMbbl draw. It likely dramatically overestimated imports or underestimated exports leading to the miss. The API may be attempting to overcorrect for this week's numbers and as a result I would not be surprised if these exceptionally bullish draws end up being to high. However, with the impact of OPEC's, Russia's, and Canada's production cuts yet to materialize, I feel that even a slightly bullish report at this time is a win. Check back after 10:30 AM EDT on my Crude Oil Inventories Page HERE for the official EIA numbers.

My Oil & Natural Gas Portfolio took advantage of weaker natural gas prices and a rebound in oil to notch a strong +1.4% daily gain, pushing year-to-date gains to +3.0%. I have yet to make any trades this week. My largest directional holding remains Cheniere Energy (LNG) at 10.5% of my holdings. This remains one of my favorite positions--even more so should natural gas continue to fall--and I am maintaining a $75/share price target on the company, though I may ultimately raise this to triple digits. My net long WTI oil position via short DWT stands at a modest 7.8% of my holdings (with the remainder of the 14.9% position going towards offsetting a 21.4% short BNO position as part of a Brent-WTI arbitrage trade). With last week's production cuts, record US exports, and the API's very bullish projections for today, I am increasingly bullish on a more sustained bounce in oil prices from current levels and am maintaining a $60/barrel price target on WTI. Should today's official EIA numbers be comparable to the API's forecast and oil for some reason hold near or under $52/barrel, I will look to build my long oil position, likely shorting another 3% of DWT to push my net position above 10% of my holdings. My natural gas short position stands 7.5% of my holdings via a 2.1% short UGAZ position and a long 5.0% DGAZ position. With natural gas production at record levels and the longest period of sustained bearish temperatures likely to dominate the nation for at least the next 10 days, I am maintaining a $4.00/MMBTU price target on natural gas. Should the temperature outlook remain as it is and prices top $4.50/MMBTU for some reason, I will consider adding to my short position by adding to my UGAZ short. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will fall for a third straight day today as warmer-than-normal temperatures continue to expand across the Heartland and shift east. The largest anomalies will once again be found across the Northern Plains extending southward into the Midwest. Highs could reach the low 40s as far north as the North Dakota-Canada border--20F warmer-than-normal. Further south, St Louis will approach 60F while Dallas nears 70F, each 10F-15F above-average. Across the Eastern Seaboard, temperatures will steadily warm and will be within 5F of normal regionwide. Washington, DC and Philadelphia will climb into the mid-40s while Boston and New York City will stay in the lower 40s. Significantly below-average readings will be restricted to extreme northern New England with parts of Maine and northern Vermont and New Hampshire up to 10F-15F colder than normal. Overall, the forecast mean population-weighted nationwide temperature today will rise 2.4F from Tuesday to 43.4F, 1.3F warmer-than-normal. Total Degree Days (TDDs) will slide to 21.2 TDDs, 2.6 TDDs fewer than normal and the 18th fewest TDDs for December 12 in the last 38 years since 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 -14 BCF/day daily natural gas storage withdrawal for today. This would be 6 BCF larger than Tuesday's draw and 7 BCF bearish versus the 5-year average. As a result, by this evening, projected Realtime natural gas inventories will be near 2803 BCF while the storage deficit contracts down to -730 BCF. The year-over-year deficit will tumble by 13 BCF to -716 BCF. Click HERE for more on today's projected storage withdrawal and Realtime natural gas inventories. For the remainder of the week, look for projected daily withdrawals to continue to fall, likely reaching single digits by Friday at near -8 BCF/day. I am projecting a -122 BCF weekly withdrawal, a bearish 22 BCF smaller than the 5-year average and 44 BCF larger than last year's draw.