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March 12, 2019

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Natural Gas Falls More Than 3% To Open The Week As Powerful Storm System To Drive First Daily Injection Of The Year On Thursday & Late March Outlook Trends Warmer; Crude Oil Bounces On Saudi Move To Cut Exports Further; Nuclear Reactor Outages Soar As Maintenance Season Kicks Into Gear, Driving Substitution Demand Higher


6:00 AM EDT, Tuesday, March 12, 2019
After weeks of grinding, low-volatility trading, action in the natural gas sector picked up a notch on Monday--just in the wrong direction. After near- and longer-term models both trended milder over the weekend, the commodity fell 9 cents or 3.3% to settle at $2.77/MMBTU. It was the largest single-session decline since February 13 and was the lowest close for the front-month contract since February 22. Meanwhile, oil opened the week on a positive note with WTI gaining 72 cents or 1.3% to $56.79/barrel while Brent tacked on 84 cents to $66.58/barrel. Both settlements were March highs. Crude oil took advantage of reports that Saudi Arabia was looking to aggressively cut its exports to under 7 MMbbls/day in the weeks to come in order to rebalance global supply/demand balance. Additionally, most analysts expect OPEC+ to maintain output reductions at their current levels when the cartel meets in Azerbaijan one week from yesterday.


Despite the pullback in natural gas, my Oil & Natural Gas Portfolio took advantage of the rally in crude oil and strength in domestic equities to finish in the black on Monday. The Portfolio rose +0.4% to push year-to-date gains to +8.3%, right at 2019 highs, or +44.4% annualized. I made no trades on Monday and am overall satisfied with my positioning. With Monday's losses, my net long natural gas position stands at a tiny 4.1% of my holdings with an 8.8% short DGAZ stake providing long exposure partially offset by a 4.7% UGAZ short. Should natural gas trade under $2.75/MMBTU, I will consider beginning to re-accumulate this position with a target net long of 15% should the commodity dip all the way to $2.50/MMBTU. My upside target in what is evolving into a longer-term hold is $3.00/MMBTU. My net long oil exposure stands at 7.0% via short DWT, a position that is currently up +12.4% from my basis. I plan to let this position ride with an upside target of $65/barrel. Should WTI fall under $55/barrel, I will consider accumulating further, up to around 12% of my holdings. My largest position remains my long LNG stake, worth 11.1% of my holdings and up +12.5% from my basis. My price target for the stock is $75/share and I have no current plans to add further. Click HERE for more on my current oil and natural gas holdings.


On Monday afternoon, the latest run of the 44-day ECMWF-EPS continued the warming trend seen in the near-term models as well as the CFSv2 6-week model over the weekend. The biggest change is that it is now becoming increasingly likely that a strong southerly flow will pump warm air northwards across the Eastern US, Great Lakes, and Ohio Valley during the March 23-30 period resulting in a rapid warm-up from next week's last gasp of arctic air. Thereafter, there is some disagreement in the long-term models as the CFSv2 remains consistently warm-than-normal through the end of April while the ECMWF-EPS attempts to reinforce a trough across the Great Plains for the first week of April, bringing another shot of colder temperatures before things moderate again by the middle of the month. According to my Hybrid Model, which integrates data from the short-term ECMWF ENS and the GFS ENS and long-term CFSv2 and ECMWF-EPS models, after next week's shot of cold air drives gas-weighted degree days (GWDDs) much higher than normal, GWDDs look to be at or below-average throughout the month of April, resulting in the storage injection season getting off to a fast start. Even before that, the warming trend during the final week of March--and the final week of the withdrawal season--has resulted in my end-of-season natural gas storage projection rising by around 70 BCF over the past week from a low of 969 BCF to 1040 BCF as of this morning. Despite increase in the projection, the warmer temperatures will in the end come too late and this projection is still a massive -595 BCF smaller than the 5-year average and 320 BCF smaller than last year's season-ending level. Click HERE for more on the latest near- and long-term temperature outlook on my Advanced Model Page.


In other news, nuclear reactor outages soared late last week and over the weekend as the spring maintenance season kicks into gear. As of Monday, total outages stood at 374 GWh or 15.7% of capacity. This is 145 GWh or 64% higher than 2018 and 82 GWh or 28% higher than the 5-year average. 14 reactors are currently 100% offline while a further 12 are operating at less than 100% capacity. This leaves 73 fully operational. As a result of the increase in outages, natural gas substitution demand to make up for the nuclear shortfall. Substitution demand stands at 3.11 BCF/day through Monday, up 1.21 BCF/day compared to last year and 0.68 BCF/day compared to the 5-year average. During the otherwise loose and lackluster Shoulder Season, this is an important source of temperature-independent demand and, should 2019 year-over-year gains persist, could tighten the market further and counter any further growth in production. Click HERE for the latest nuclear outage data, updated each morning around 7:30 AM EDT.


Natural gas demand will resume its decline today as warmer-than-normal temperatures build across the Eastern Seaboard and the Ohio Valley while arctic air finally begins to retreat across the Plains ahead of a powerful mid-week storm. Highs along the I-95 corridor will be 10F-15F warmer-than-normal today with Richmond, VA approaching 70F, Washington, DC the low 60s, Philadelphia the upper 50s, and New York City and Boston the low-to-mid 50s. The hot spot across the nation today will be Florida where highs will be in the 80s statewide and even some daily record highs above 90F are possible. Unseasonably cold temperatures will transition to seasonally chilly readings across the Plains and Midwest today with Dallas and Oklahoma City reaching the upper 50s, Chicago the lower 40s, and Minneapolis near 30F, all 5F-10F colder-than-normal. Overall, today's forecast mean population-weighted nationwide temperature will hold nearly flat from Monday, falling less than 0.1F to 50.1F, 1.9F warmer-than-normal. However, total degree days will fall to 16.0 TDDs, 1.0 TDDs fewer than normal and the 18th fewest for March 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 -9 BCF/day daily natural gas storage withdrawal today, 2 BCF smaller than Monday's draw but still 1 BCF bullish versus the 5-year average -8 BCF/day. By tonight, projected Realtime natural gas inventories will fall to near 1138 BCF while the storage deficit versus the 5-year average will climb to -578 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories.


Looking ahead to the rest of the week, the weather pattern--and by extension natural gas demand--will be dominated by an unusually powerful storm system across the heartland. On the system's colder backside, parts of Colorado, Nebraska, and South Dakota will see blizzard conditions with wind gusts to 60 mph and up to 2 feet of snow. However, on the storm's more populous eastern side, a warm, southerly flow will pump spring-like warmth northwards. On Thursday, highs could reach the 60s as far north as central Michigan while 70F weather reaches parts of Indiana and Iowa. As the Figure to the right shows, projected daily withdrawals will fall to under -5 BCF/day on Wednesday and could even flip to a small daily storage injection by Friday. Based on my numbers, this will be the first daily storage injection of 2019, just over a week after daily draws topped -40 BCF/day. As a result of this late-week collapse in demand, I am now projecting a slightly bearish -52 BCF weekly storage withdrawal for March 9-15, 4 BCF smaller than the 5-year average and 35 BCF smaller than last year's draw. Click HERE for more. While demand will move higher next week, it is becoming increasingly unlikely that the natural gas storage deficit versus the 5-year average will make it to -600 BCF.