April 12, 2019

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Natural Gas Falls As Investors Value Loosening Market & Lackluster Temperature Outlook Over Smaller-Than-Expected EIA-Reported Storage Injection; Sixth Straight Bearish Inventory Build Expected Next Week As Inventories Flip To A Year-Over-Year Surplus; Despite 2-Week Low Prices, Path Of Least Resistance Remains Lower

6:00 AM EDT, Friday, April 12, 2019
In its weekly Natural Gas Storage Report for March 30-April 5, the EIA announced Thursday morning that inventories rose by +29 BCF in the second weekly build of 2019. This injection was 24 BCF bearish versus the 5-year average +5 BCF build and was 4 BCF smaller than my +33 BCF projection. The build included the re-classification of Pacific and South Central Region stocks that resulted in the lowering of initial inventories in those regions by 1 BCF and 2 BCF, respectively. With the build, total storage levels rose to 1155 BCF while the storage deficit versus the 5-year average contracted to -485 BCF and the year-over-year deficit tumbled to -183 BCF. All 5 storage regions reported builds--or small draws in the case of the East and Midwest regions--that were at or above their respective 5 year averages, but it was once again the South Central region leading the way with a +23 BCF injection, 6 BCF larger than the 5-year average +17 BCF build. This was likely due to the combination of seasonally mild temperatures across the region as well as ongoing maintenance at the Sabine Pass LNG export plant that cut flows to the facility by over half throughout the week. All five storage regions remain at deficits versus both the 5-year average and 2018. Despite the bearish build in this week's report, the South Central Region continues to lead both categories by considerable margins with a -199 BCF deficit versus the 5-year average and a -95 BCF year-over-year deficit. However, year-over-year deficits have slid into the single digits in both the East and Midwest regions and, over the next month, both of these regions, as well as the Mountain Region, are likely to flip to surpluses versus last year. The Pacific and South Central Region year-over-year deficits are likely safe for the foreseeable futures. Click HERE for more on current EIA-reported natural gas inventories.

Following the morning release of storage data, the EIA also issued its weekly supply/demand update just after the market close, covering the week of April 4-10. Of note, this differs from the storage week (March 30-April 5). After climbing to new all-time highs the previous two weeks, domestic natural gas production pulled back last week, sliding 0.8 BCF/day to 88.9 BCF. However, as shown in the Figure to the right, production is still up a steep 8.1 BCF/day year-over-year. And with takeaway capacity being rapidly developed from the gas-rich Permian Basin, I expect production to resume its consistent growth in short order. Otherwise, Canadian imports held flat at 5.0 BCF/day week-over-week and are down 1.3 BCF/day year-over-year, reducing the total supply glut versus 2018 down to 6.8 BCF/day. On the demand side, LNG feedgas demand fell to 3.2 BCF/day, 0.3 BCF below last year, due to ongoing maintenance at Sabine Pass. Otherwise, temperature-dependent demand remained at a hefty deficit to last year with residential/commercial heating demand averaging just 19.5 BCF/day, down 11.9 BCF/day from last year, thanks to last April's unseasonable chill. Additionally, industrial demand was down 1.5 BC/day at 20.4 BCF/day while Powerburn was down a slight 0.7 BCF/day at 22.8 BCF/day.

Despite the drop in production, for a second straight week, temperature-adjusted supply/demand balance loosened. The year-over-year supply/demand imbalance loosened by another 0.2 BCF/day to -2.0 BCF/day loose versus 2018. This means that, for any given temperature, I would expect the daily natural gas storage injection to be 2.0 BCF/day larger--or bearish--compared to the same temperature with last year's underlying fundamentals. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make accurate long-term storage and price projections. As the Figure to the right shows, after the imbalance tightened steadily throughout the winter as prices fell, LNG exports rose, and supply plateaued, this trend has reversed the past two weeks as LNG feedgas demand has been cut and production has resumed its climb. The path forwards will depend on whether growth in LNG exports outpaces production growth or vice-versa. For the next several months, unless we see an exceptionally hot or cool summer, this imbalance will be the primary driver as to whether the storage deficit continues to contract or stabilizes.

Click HERE for the latest EIA-reported supply/demand numbers and temperature-adjusted imbalance data.

Despite the fact that the EIA's number came in lower than most analyst guidance--including my own--and production fell, natural gas prices fell 4 cents or 1.3% to $2.66/MMBTU. It was the lowest close since March 29. Clearly, investors care less about slight week-to-week variations in injections and more about a loosening market and the prospect for milder temperatures during the back half of April and into May. According to my Hybrid Model--which integrates the latest GFS ENS, ECMWF ENS, ECMWF-EPS, and CFSv2 data--I am projecting consistently above-average daily natural gas storage injections each day for the next 6 weeks. As a result, I project that the year-over-year storage deficit will flip to a surplus by the middle of next week and that the deficit versus the 5-year average will contract to just over -200 BCF by the end of May, down more than 200 BCF from current levels. With inventories larger than 2018 and the temperature-adjusted supply/demand imbalance loose versus 2018, I expect 2018 prices, which traded throughout the spring and summer rangebound between $2.70-$2.90/MMBTU to act as a hard price ceiling. As a result, I am maintaining my current near-term bearish sentiment on natural gas with an initial downside price target of $2.60/MMBTU, though I may ultimately revise this lower.

Meanwhile, crude oil finally pulled back yesterday, with WTI falling 1.6% to $63.58/barrel and Brent falling 1.3% to $70.78/barrel. The pullback was likely due to a combination of profit-taking and a reaction to news that OECD oil demand fell 300,000 barrels/day in the fourth quarter of 2018. Moving forward, I expect investors will be closely eying refinery demand which has lagged 2018 in recent weeks but is due for a seasonal pick-up which could support larger inventory draws. My near-term price target remains $65/barrel.

My Oil & Natural Gas Portfolio retreated from 2019 highs on Thursday, falling a slight -0.2% to reduce year-to-date gains to +12.1% or +43.4% annualized. I made no trades on the day. The Portfolio remains long WTI oil and short natural gas, which I feel is reasonable positioning. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will fall to end the week as unseasonably mild temperatures surge northwards on the eastern side of the powerful Heartland storm as it slowly winds down. Highs will reach the upper 60s as far north as Buffalo, NY today and mid-70s into Pittsburgh, PA, both around 15F warmer-than-normal. Across the I-95 corridor, it will be another mild day in Washington, DC and Philadelphia, both of which will be 5F-10F warmer-than-normal near 70F, but New York City and Boston will be on the wrong side of the front and will be stuck in the mid-to-upper 50s, up to 5F below-average. Across the Central US, the sprawling storm system that brought nearly a foot of snow to Minneapolis and up to 20 inches to outlying regions will continue to dominate the wather pattern, even as it slowly weakens. Highs in Minneapolis and Omaha, NE will only reach the low 40s while Kansas City, MO will only see 50F, all around 15F colder-than-normal. Overall, today's forecast mean population-weighted mean nationwide temperature will warm by 1.2F from yesterday and will be a balmy 2.6F warmer-than-normal. Total Degree Days will fall to 9.7 TDDs, 0.7 TDDs fewer than normal and the 15th fewest for April 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 +11 BCF/day daily natural gas storage injection, 3 BCF larger than Thursday's build and 8 BCF bearish versus the 5-year average. Mitigating the loss of temperature-dependent demand somewhat will be LNG feedgas demand which will rise sharply for a second straight day as flows to Sabine Pass have risen by over 1 BCF during this period to 2.5 BCF/day today. Total LNG feedgas demand will top 4 BCF/day for the first time since March 23. Click HERE for more on today's projected daily injection and Realtime natural gas inventories. For the natural gas storage week of April 6-12 that ends today, I am projecting an exceptionally bearish +92 BCF storage injection. Such a build would be 71 BCF bearish versus the 5-year average and 126 BCF larger than last year's -34 BCF draw. As the Figure to the right shows, a +92 BCF build would be the largest in the last 5 years by a 22 BCF margin, handily topping 2015's +70 BCF injection. The bearishness of the build was driven by temperatures which have been unseasonably mild throughout the week, particularly across the East, with a mean nationwide temperature averaging 61.4F, nearly 5F warmer-than-normal. Additionally, despite the spike in the past 2 days, total LNG feedgas demand fell for a third straight week to 23.0 BCF, down 2.5 BCF from the previous week and the lowest since the week ending February 8. Should a +92 BCF injection verify, natural gas inventories would rise to 1247 BCF while the storage deficit versus the 5-year average would contract to -414 BCF. The storage deficit versus the 5-year average would contract to -57 BCF, or just 4%. The EIA will release its official storage numbers for the week next Thursday, April 18, at 10:30 AM EDT. Click HERE for more on the week's projected build.

Looking ahead to next week, I am expecting a slightly smaller natural gas storage injection, but not small enough to avoid a sixth straight bearish build. Overall, temperatures will be slightly cooler than this week due to a highly amplified pattern, driven first by the current storm system across the Heartland that will be followed quickly by another system further south and east late in the weekend into the beginning of next week. I expect that injections will be once again above-average throughout the week, starting near +10 BCF/day this weekend--around 3 BCF/day bearish versus the 5-year average +7 BCF/day--before rising to near +14 BCF/day by late in the week as temperatures again warm -up across the East, as shown in the Figure to the right. By Tuesday or Wednesday, I project that the long-standing year-over-year storage deficit will flip to a surplus for the first time since January. Overall, for the full week of April 13-19, I am projecting a preliminary +84 BCF, 37 BCF bearish versus the 5-year average and a massive 105 BCF bearish compared to last year's withdrawal. It would be the second largest weekly injection in the last 5 years, just behind 2015's +87 BCF injection. Should it verify, natural gas inventories would rise to 1332 BCF while the storage deficit versus the 5-year average would contract to -376 BCF, the lowest since February 8. The new year-over-year surplus will finish the week at +48 BCF. I will have much more on next week's projected injection in Monday's Commentary. Click HERE for more on next week's injection.