January 12, 2018

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History! Natural Gas Surges 6% After EIA Reports Record -359 BCF Storage Withdrawal; Another Top-10 Storage Withdrawal Increasingly Likely For Next Week As Arctic Air Plunges South; 30-Cent Futures Backwardation Increases Chances Of Pullback...Or Sustained Long-Term Upside...But Guarantees Continued Volatility

6:00 AM EDT, Friday, January 12, 2018
In its weekly Natural Gas Storage Report covering the arctic-infused week of December 30-January 5, the EIA announced an historic -359 BCF storage withdrawal. While most following the sector had expected a record draw, it was the magnitude by which the previous record was broken that raised eyebrows--and prices. The -359 BCF withdrawal was 190 BCF bullish versus the 5-year average, 27 BCF larger than my projected -332 BCF draw, and crushed the previous record -288 BCF from January 2014 by 71 BCF, an incredible margin. The -153 BCF in the South Central Region alone would have been nearly equivalent to the 5-year average nationwide withdrawal of -169 BCF. For what it's worth, with South Central inventories only at 907 BCF--17% below the 5-year average--it would take less than 6 weeks, or through late February, to empty storage entirely at this pace. More than just cold weather, the record withdrawal can be attributed to a combination of events. First, not only was it cold, but it was cold across some of the major demand centers (South, Midwest, Ohio Valley), rather than just the sparsely-populated West or the Eastern Seaboard, which while densely-populated, uses heating oil to meet a significant portion of its demand. Additionally, overly-aggressive selling in response to record production had suppressed natural gas prices such that the fuel became competitive with other fuel sources prompting fuel-switching prior to the arctic air's arrival. Overall, with the -359 BCF withdrawal, US natural gas inventories tumbled to 2767 BCF, 382 BCF or 12% below the 5-year average, the largest departure from average since January 2014. Additionally, storage levels are just 30 BCF above the 5-year minimum, set in 2014. Click HERE for more on current natural gas inventories.

Natural gas gapped up over 4% prior to the market open and investors, expecting a draw somewhere between -310 BCF and -340 BCF, continued the buying spree after the report, driving the February 2018 contract to an 18 cent or 6.1% to $3.08/MMBTU, a 6-week high. Once gain, an overabundance of shorts, as reported by recent CFTC data in which half of all open NYMEX money manager contracts were held short likely exaggerated the rally. It is interesting to note that the huge move higher was largely restricted to near-term contracts. The T+1 March 2018 contract rose just 9 cents while the April 2018 contract was up a mere 4 cents. This helps to explain why the 1x ETF UNG was up +6.1% while the 3x ETF UGAZ was up "only" +12.8% versus a UNG-predicted +18.3% as UGAZ has already rolled 80% of its holdings into the less-volatile March contracts while UNG holds only February contracts. As a result of the disparate gains across contracts, the February-April backwardation stands at a massive 31 cents with the April contract settling at just $2.77/MMBTU. This suggests that investors, rightly or not, suggest that the current storage crunch is likely to be temporary with inventories quickly normalizing this spring. However, if the bears are wrong--and they've been wrong often over the past month--there could be considerable upside remaining in these later period contracts.

Thanks to the spike in natural gas and energy sector-wide gains, my Oil & Natural Gas Portfolio climbed 0.4% on Wednesday to another 52-week high, pushing gains since May 1 to +32.7%, after briefly climbing above +33% intraday. Subscribers can view my real-time portfolio, trades, and twice-weekly Investing Commentaries on my Portfolio Holdings Page HERE. To learn more about subscribing and helping to support the site, please click HERE.

Following the EIA's storage report, I released the final rankings of my Natural Gas Storage Contest Thursday evening. Despite earning 0 points last week, SteveNashua cruised to a comfortable victory, taking 1st place with 291 points. SteveNashua moved into first place after Week 6 and didn't relinquish his hold on the top spot for the remaining 5 weeks of the contest. Meanwhile, KATI moved up 1 spot into second place after a 24-point week 10 performance, finishing with 243 points. Capping a spectacular 3-week performance in which he or she accumulated over 130 points, Leo77 climbed 2 spots to take third place with 240 points. Finally, Shore12 received the top Week 10 score with 51 points after missing any storage projection points but nailing the $3.08/MMBTU close along with a 2.92x multiple to move from 17th to 5th place. Congratulations to the three winners, who will take home $250, $100, and $50, respectively, and thank you to everybody for participating. I will be starting up another 10 week contest soon. SteveNashua, KATI, and Leo77, please email CelsiusEnergyFM@gmail.com with your 4-digit passcode for confirmation and instructions on receiving your winnings. To view the Final Rankings, please click HERE.

Natural gas demand will rebound today as an arctic cold front pushes eastward, but will remain below-average as the densely-populated Eastern Seaboard remains unseasonably mild for one more day. Highs across the Great Plains into the Great Lakes and Ohio Valley will be broadly 10F-25F colder-than-average with the largest anomalies across the Dakotas and Montana. Bismarck, ND will only reach -5F today, a whopping 28F colder than average. Further east, Minneapolis will only reach 4F while Kansas City will see just 20F, each 20F colder than average. Areas from Chicago to Indianapolis to Nashville will see their highs early in the day with temperatures then holding steady or slowly dropping throughout the day to around 10F colder-than-average. A large area of Winter Storm Warnings and Winter Weather Advisories are in effect from Memphis, Tn to southern Indiana where rain will change to freezing rain with 0.1 to 0.3 inches of ice possible before changing over to snow with 2-6 inches possible. Across the I-95 corridor, exceptional warmth will persist with highs in the mid-60s from Washington, DC to Philadelphia and upper 50s in New York City and Boston, all 20F-30F warmer than average. Thanks to the invading arctic air, the forecast mean nationwide temperature today will drop 4.1F from Thursday to 46.7F, still 7.8F above average thanks to the warmth across the East. Total Degree Days will rise to 19.3 TDDs today, still 7.3 TDDs fewer than normal and the 7th fewest for January 12 in the last 38 years. Click HERE for more on today's temperature and degree day data. Based on this forecast and early cycle pipeline data, I am projecting a -20 BCF/day daily natural gas storage withdrawal, double Thursday's -10 BCF/day draw but still 9 BCF bearish versus the 5-year average -29 BCF/day. Click HERE for more on today's projected daily withdrawal and intraday natural gas inventories.

For the natural gas storage week of January 6-12 that ends today, I am projecting a -194 BCF natural gas storage withdrawal. Such a draw would be 9 BCF bearish versus the 5-year average -203 BCF draw thanks to mid-week warmth. Unsurprisingly, natural gas demand tumbled by around 22 BCF/day week-over-week, led by a nearly 10 BCF/day decline in residential/commercial demand as temperatures warmed. Powerburn demand also slid by around 3 BCF/day and, at 26.8 BCF/day, is actually around 0.5 BC/day lower year-over-year, a rarity this winter. LNG feedgas slid by 0.6 BCF/day to average 2.4 BCF/day as demand to Sabine Pass briefly fell under 2.0 BCF/day and Cove Point dropped to 0 BCF after the plant delayed operations until March. On the supply side, natural gas production began its expected recovery after freeze-offs prompted a 2.5 BCF/day decline in supply a week earlier, rising 1.2 BCF/day week-over-week to 75.4 BCF/day, still 1.5 BCF/day off of all-time highs. Should a -194 BCF weekly withdrawal verify, it would be the third weakest withdrawal in the past 5 years, as shown in the Figure to the right, 42 BCF smaller than the 5-year high -236 BCF from 2014. Interestingly, it would be the 8th largest withdrawal in the full 24-year period dating back to 1994 since 3 of the 7 largest draws have occurred in the last 5 years. Should a -194 BCF withdrawal verify, natural gas inventories would fall to 2573 BCF while the storage deficit versus the 5-year average would slide to -369 BCF after exceeding -400 BCF on Saturday through Monday. Click HERE for more on this week's projected withdrawal. This remains a preliminary projection and will be revised further over the next 3-5 days as finalized temperature and projection data is integrated into my model. The EIA will release its official storage withdrawal numbers for the week next Thursday, January 18, at 10:30 AM EDT.

Looking ahead, the arctic air centered over the Plains today will rapidly expand east by the end of the weekend. Even by Saturday, demand will soar as the cold front clears the major population centers of the East Coast, more than tripling from Thursday with a -34 BCF/day withdrawal expected. Demand will remain markedly elevated weeklong as a reinforcing shot of arctic air sweeps south on Tuesday with withdrawals likely exceeding -40 BCF/day. Projected daily withdrawals are shown in the Figure to the right. I am projecting a -267 BCF weekly storage withdrawal for January 13-19, 103 BCF bullish versus the 5-year average. It would be the largest withdrawal for the January 13-19 period in full 24 year period for which EIA data is available, handily topping 1997's -228 BCF draw. Such a withdrawal would also be tied for the fifth largest all-time, for any week. Along with 2014, 2018 would then have 2 spots in the top 10 all-time largest weekly withdrawals. Should it verify, natural gas inventories would tumble to 2308 BCF while the storage deficit versus the 5-year average climbs to -474 BCF, the largest since early 2014. The year-over-year deficit would climb to -507 BCF, and is poised to climb much higher as we move towards February. Click HERE for more on next week's projected natural gas storage withdrawal. Thanks to yesterday's larger-than-expected withdrawal and computer models which have trended colder for February and March, I am now projecting season-ending natural gas inventories near 1150 BCF. This would be 551 BCF bullish versus the 5-year average and an incredible 901 BCF smaller than last year. It would be the second smallest season-ending tally since 2014's 824 BCF and the 10th smallest all-time. Should February come in colder than expected, sub-1000 BCF is still possible. Should an 1150 BCF season-ending inventory level verify, it would provide an enormous cushion for the spring and summer months that record production will struggle to overcome without a major assist from Mother Nature. Such an inventory level would historically correlate with a Fair Price of nearly $4.20/MMBTU, a 35% premium to Thursday's close. While it is understandable that there is a "fear" discount baked into the price with production levels soaring, I feel that there remains considerable upside to natural gas, even after Thursday's spike. From a fundamental standpoint, I feel that natural gas traders need to re-evaluate their price points for the commodity, which should be trading, at minimum, around $3.25/MMBTU and the spring-time contracts still priced in the $2.70s/MMBTU should undoubtedly be over $3.00/MMBTU. I would not be surprised to see a trading pattern develop in which the bears attempt to seize control each time an arctic airmass fades or the extended temperature forecast moderates, only to see subsequent short squeezes each time the forecast trends colder. In other words, expect volatility to continue...but with a bullish bias.