June 12, 2017

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Powerburn To Boost Natural Gas Demand This Week As Heatwave Impacts Midwest & East; Gas Demand Rises Today With +7 BCF/Day Daily Storage Injection Expected As Storage Surplus Likely To Fall Below +220 BCF By Tonight For First Time Since February; CFTC Reports Restoration Of Natural Gas Long/Short Investor Balance

6:00 AM EDT, Monday, June 12, 2017
Natural gas continued a low-volatility trading pattern on Friday, netting a 1 cent or 0.4% gain to close the week up just 1.3% at $3.04/MMBTU. While a heatwave this week is expected to boost gas demand to well above-average levels, investors are fighting a bit of a headwind after the EIA has reported weekly storage injections that have come in a good 5-10 BCF larger than most analyst expectations each of the past two weeks, including last Thursday's reported +106 BCF injection, the first triple digit build in 2 years. Meanwhile, crude oil recovered slightly from Wednesday's disastrous 5% correction with small gains on Thursday and Friday, but still finished the week down 3.8% at $45.83/barrel.

After reaching a new yearly high on Tuesday, my oil & natural gas portfolio faded during the second half of the week thanks to a sharp correction in oil to finish the week with a 1.5% loss, although it is still up 10.7% since May 1. For more on last week's trades and the trading outlook and plan for the upcoming week, please see today's Trading Commentary HERE or learn more and register HERE. Thank you to the 31 of you who have signed up to support the site over the past two weeks and gained portfolio access. I am hard at work adding new features and improvements to the site. If you have found the site to be beneficial over the past year, please consider lending your support (and gaining premium access).

On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly report detailing money manager oil and natural gas positions on the NYMEX as of June 6. For the second straight week, there was a major shake-up in natural gas investor positioning. The CFTC announced that long positions fell by a modest 12,434 contracts to 285,0222, but that short positions increased by nearly 50% week-over-week, surging by a whopping 63,263 to 188,417. This decline in long and rise in short positioning is shown in the table to the right. As a result of this divergence, the Bullish Sentiment--the percentage of natural gas money manager contracts held long--plunged by 10 percentage points to 60%. The Bullish Sentiment is now down 20 percentage points since reaching 80% three weeks ago. The Bullish Sentiment is now within 1 percentage point of the 52-week average. While the souring sentiment may come across as bearish, it has now fallen to the point where longs and shorts are appropriately balanced. When the bullish sentiment was 80%--20 percentage points above the 52-week average--there were likely too many weak hands piled into the trade and not enough new buyers. When a few investors started taking profits or became concerned about a loosening market due to larger-than-expected inventory injections, these weak hands had to sell out quickly to avoid large losses, greasing the wheels for natural gas to drop below $3.00/MMBTU despite a reasonably favorable temperature outlook and continued small undervaluation according to my Fair Price Model. However, with the Bullish Sentiment now back to near its 52-week high, buyers and sellers are more balanced I expect that the commodity will see more balanced, fundamental-driven trading in coming weeks. This is not to say that sentiment--and, by extension, price--cannot go lower as the 52-week low Bullish Sentiment is all the way at 43%, but rather just that the imbalance that may have supported this 2-week correction has now resolved. See more on natural gas investor positioning HERE. Crude oil, despite its sharp decline, saw a rather tranquil week, according to the CFTC. Both long and short positions rose with long positions rising 18,573 contracts and outpacing the gain in short contracts. As result, Bullish Sentiment climbed by 1% to 74%. However, it is worth mentioning that this is only through Wednesday, and I would not be surprised to see significant changes in next week's report that should include more of the response to the EIA's bombshell report. Bullish Sentiment is now right at the 52-week average, which would typically favor below-average volatility as there are likely a balanced number of available buyers and sellers. See more on oil investor positioning HERE.

The EIA will release its weekly natural gas storage report for the week of June 3-9 this Thursday at 10:30 AM EDT. I am projecting a preliminary +82 BCF for the week, which would be a slight 5 BCF bullish versus the 5-year average +87 BCF. However, it would be 14 BCF larger than last year's +68 BCF build. As the Figure to the right shows, it would be the third smallest injection in the past 5 years, behind 2012's +66 BCF injection and last year's build. The slightly bullish injection was driven by a continued relatively tight market in the setting of seasonal temperatures, which averaged 70.8F, 0.6F warmer than the previous week and around 1F cooler-than-average. The rise in demand was driven by powerburn which I estimate averaged 25.9 BCF/day, which was a new 2017 high. See more on Powerburn HERE. Demand was also supported by LNG feedgas to Sabine Pass which, after two softer weeks, returned to near its 3-month baseline last week at 15.5 BCF total deliveries, up nearly 2 BCF week-over-week. See more on LNG feedgas deliveries and tanker movements on my LNG Exports Page HERE.

Should a +82 BCF storage injection verify, natural gas inventories will increase to 2713 BCF. The storage surplus versus the 5-year average will inch lower to +231 BCF or +9%, largely flat over the past month, while the year-over-year storage deficit will continue to contract down to -318 BCF, after exceeding -400 BCF as recently as April 7. With the exception of the upcoming week, I expect that this slow contraction of the year-over-year surplus will be something of a trend thanks to last summer's bullish combination of cheap natural gas prices boosting marginal demand and persistently hotter-than-average temperatures. For more on this week's projected injection, please see my weekly storage page HERE. This remains a preliminary projection and will be revised further over the next 48 hours as finalized pipeline and temperature data is integrated into my model.

Natural gas demand rose over the weekend as July-like temperatures overspread much of the Heartland. Minneapolis was under a heat advisory on Saturday with temperatures rising into the low-to-mid 90s (the city paid the price Sunday morning when a strong line of thunderstorms brought 70 mph wind gusts to the city) while Chicago reached 90F on Sunday. Even with the typical weekend lull in electricity generation, natural gas powerburn still exceeded 25 BCF/day on both Saturday and Sunday, which bodes well for Powerburn exceeding 30 BCF/day on multiple days this week, including today. Daily storage injections on Saturday and Sunday were in the +8-9 BCF/day range, comfortably bullish versus the 5-year average +12 BCF/day range. Natural gas demand will drift higher still today as temperatures warm further still with heat enveloping the densely-populated Eastern Seaboard. 90 degree temperatures will be found up and down the I-95 corridor today with Washington, DC and Philadelphia seeing mid-to-upper 90s while New York City and Boston will see low-90s, all 10F-15F warmer than average. The Midwest will remain very hot for a second straight day with highs in Chicago, Milwaukee, and Detroit all reaching the low-to-mid 90s, 15F warmer-than-average. The cool spot today will be California highs will be largely in the 60s and 70s statewide, with much cooler temperatures at elevation where a few inches of late-season snow is possible across the High Sierras. Overall, the forecast mean population-weighted temperature today will rise to 77.0F, up 1F day-over-day and a whopping 4.2F warmer-than-average. Total Degree Days (TDDs) today will surge to 13.0 TDDs, 3.0 larger than normal and the single most TDDs for June 12 in the last 37 years. See more on today's temperature and degree day outlook HERE. Based on this outlook and early-cycle degree data, I am projecting a +7 BCF/day daily natural gas storage injection today, which would be a bullish 5 BCF smaller than the 5-year average +12 BCF/day. By the end of the day today, I project that the storage surplus versus the 5-year average will have dropped below +220 BCF for the first time since February 17. See more on today's storage projection and intraday storage surplus HERE.

For the remainder of the week, mean population-weighted temperatures will likely peak near 77.5F on Tuesday before slowly cooling to around 75F by the end of the week, although this remains over 3F warmer than average. The cooldown will largely focused along the East Coast where highs in New York City could drop 25F from Monday to Thursday, while the Midwest and Plains will remain comfortably above-average. Overall, the late-week forecast has cooled slightly compared to last Friday. As a result of this cooldown, natural gas demand will fall slightly with daily injections in the +9-10 BCF/day range by the end of the week. Regardless, I am projecting a preliminary exceptionally bullish +54 BCF weekly storage injection for the week of June 10-16, which would be a strong 28 BCF bullish versus the 5-year average and would be the smallest weekly injection for this period in the last 5 years. Looking longer term, the Plains will likely remain at or above-average for the next 1-2 weeks, while there are indications that there could be a pattern shift with ridging replacing the current Pacific trough and a trough replacing early-week ridging across the East. As a result, California, the Pacific Northwest, and the Desert Southwest are likely to see much hotter temperatures while the Northeast could see seasonally cool temperatures during the second half of June. This is reflected in the National Weather Service's 10-14 day temperature outlook, shown in the Figure to the right. Due to population and fuel type consumption patterns, this pattern shift would result in decreased natural gas demand, although it would remain comfortably above-average for the season. For the weeks of June 17-23, I am projecting an early +50-55 BCF injection, comparable to this week's forecast, and a slightly larger +60-65 BCF injection for June 24-30 as the major demand centers of the Northeast (potentially) cool. By the end of June, I project that the natural gas storage surplus versus the 5-year average to have declined to +187 BCF, down around 40 BCF from the end of this past week. See more on the longer term temperature outlook on my Extended Temperature Forecast Page HERE