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April 12, 2017

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Natural Gas Surges To A 5-Month High After EIA Announces Very Bullish +45 BCF Storage Injection Although Overvaluation Persists; Gas Demand To Finish The Week Above-Average As New Storm System Evolves; Preliminary Bullish +56 BCF Weekly Natural Gas Storage Injection Projected For May 6-12, Smallest In Last 5-Years


6:00 AM EDT, Friday, May 12, 2017
In its weekly Natural Gas Storage Report for April 29-May 5, the EIA announced yesterday that inventories rose by +45 BCF. This was a bullish 7 BCF smaller than my +52 BCF projection and 28 BCF smaller than the 5-year average +73 BCF build. It was the second smallest injection for the April 29-May 5 period in the last 5 years, behind only 2012's +34 BCF build.



As the Figure to the right shows, the bullishness of the report was spread nationwide with four out of the five storage regions seeing at or below average storage growth. This was driven by the South Central region which saw a mere +8 BCF build, one-third of the 5-year average +24 BCF and the Midwest with a +5 BCF injection versus the 5-year average +19 BCF. Only the Northeast saw a bearish build at +25 BCF versus the 5-year average +22 BCF. Despite the bearish injection in this region, the Northeast inventories remain the most bullish at 350 BCF, still 46 BCF or 12% smaller than the 5-year average for the date. And despite the small bullish build, the South Central region remains the most bearish with storage levels of 1034 BCF, a whopping +204 BCF or +25% larger than the 5-year average. Overall, nationwide inventories rose to 2301 BCF while the storage surplus dipped to +275 BCF or +14%--meaning that the South Central region is responsible for just under 75% of the nationwide surplus on its own.


While the bullishness of the report can largely be attributed to a favorable temperature pattern, even with temperature removed as a variable, supply/demand fundamentals remained bullish. I calculate that with temperature removed, the natural gas market was 3.5 BCF/day tight versus the 5-year average last week, up from the 1-month average of just 2.3 BCF/day tight. This suggests that, even with near-average temperatures, the natural gas storage surplus can be expected to continue to contract, at least for now.



Thanks to a string of smaller-than-normal storage builds this spring, the spring injection season has gotten of to a bullish start. Since bottoming at 2049 BCF the week of March 24, +252 BCF has been injected into storage over the past 6 weeks. This is tied with 2016 for the second smallest volume injected through the first 6 weeks of the season, behind only 2012's +177 BCF. And, as the Figure to the right shows, it would be the 6th smallest 6-week injection in the full 23 year period of record dating back to 1994. 6-week injections have ranged from just +168 BCF in 1999 to +436 in 2015.


See more on current natural gas inventories HERE.


Unsurprisingly, given that the week's injection was a bullish surprise on top of an already bullish build, natural gas rose sharply following the EIA data. On the day, the commodity settled up 8 cents or 2.6% at $3.38/MMBTU. It was a break above the recent trading range and the highest close since January 17. While investor optimism was certainly justified given the bullishness of the report, the commodity continues to be overvalued according to my Fair Price model, even after adjusting for the increased tightness of the natural gas market. With storage levels at an estimated +247 BCF surplus versus the 5-year average as of early this morning, I calculate that natural gas is overvalued by over 13% versus its Fair Price based on current inventory levels alone. With the surplus expected to contract over the next 8 months given the tight market (assuming normal temperatures beyond the near-term forecast), this overvaluation decreases but remains substantially elevated with the current 8-month average Futures price of $3.51/MMBTU trading at an 8.6% overvaluation versus its 8-month average Fair Price of $3.23/MMBTU. See more on my Fair Price model HERE. I continue to hold a short position in natural gas via short UGAZ--although I am not thrilled with it--and will even plan to add to this position further should the 8-month average overvaluation exceed 10%, albeit with a considerable amount of caution. Indeed, while natural gas is overvalued based on the historical context of its observed and projected storage surplus, with a favorable temperature pattern and tight market bolstering investor optimism, it is not unreasonable that natural gas might trade above its Fair Value for an extended period of time.



In other news, UGAZ--the 3x leveraged ETF issued by VelocityShares--completed its monthly rollover yesterday from June 2017 to July 2017 contracts. With the July 2017 contract settling at $3.46/MMBTU yesterday--a 2.3% premium to the June contract. Thanks to this contango, the monthly rollover will cost UGAZ longs nearly 7%, benefitting my short position by the same amount. The 1x ETF UNG continues to hold only June contracts and will not begin its own rollover until next week. See more on current natural gas ETF holdings HERE.


Natural gas demand will hold steady at above-average levels to finish out the week as yet another broad storm evolves across the Southeast and Mid-Atlantic reenforcing below-average temperatures across much of this region. Highs will only reach the upper 50s and lower 60s from Virginia through New England, 10F-15F colder than average after a chilly morning in the low 40s across much of this region, prompting some late-season cooling demand. Further west, there will be little north-south variation in temperature today with highs from Texas to North Dakota in the upper 70s to lower 80s, 10F colder than average across the former and 10F-15F warmer than average across the latter. Thanks to the cooling trend across the East, the forecast mean population-weighted nationwide temperature will ease 1.6F day-over-day to 63.3F today, 1.5F colder than average. Total Degree Days (TDDs) will hold nearly steady at 8.1 TDDs, 1.2 TDDs greater than normal and the 18th most in the last 38 years. See more on today's temperature and degree day forecast HERE. Based on this outlook and early-cycle pipeline data, I am projecting a +10 BCF daily storage injection, nearly unchanged from yesterday and 2 BCF smaller than the 5-year average +12 BCF/day. See more on today's projected injection and intraday inventories HERE.


For the natural gas storage week of May 6-12, I am projecting a preliminary +56 BCF weekly storage injection. Such a build would be a strongly bullish 31 BCF smaller than the 5-year average +87 BCF injection. As the Figure to the right shows, it would be the smallest injection for the week in the last 5 years, 7 BCF better than 2012's +63 BCF injection. It would also be the third smallest injection in the full 23 year period for which EIA data is available, dating back to 1994. Injections during this period have ranged from +11 BCF in 1995 to +106 BCF in 2014. The bullish injection was driven by nationwide temperatures that were at-or-below average throughout the week, along with an assist from some early-season cooling demand across the deep south with parts of Florida approaching triple digits. Daily builds on the week were consistently smaller than average ranging from +6 BCF/day to +10 BCF/day, versus the 5-year average +12 BCF/day. Should a +56 BCF build verify, natural gas inventories would climb to 2357 BCF while the storage surplus versus the 5-year average would drop to +244 BCF or +12%, a decisive break below +260-300 BCF range of the surplus for the past 6 weeks. This would be the smallest storage surplus since February 17, 2017, at which time natural gas was trading at $2.91/MMBTU, 13% lower than yesterday's settlement. See more this week's projected storage injection on my Weekly Natural gas Storage Page HERE. Looking ahead to next week, expect temperatures to slowly moderate through mid-week, although demand looks to once again hold above-average throughout the week. For May 13-19, I am preliminarily projecting a third consecutive below-average storage injection at +69 BCF, 20 BCF less than the 5-year average. Should it verify, the natural gas storage surplus will continue to decrease, sliding to +223 BCF or +10% while the year-over-year deficit will once again approach -400 BCF, climbing to -388 BCF..