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September 13, 2019

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Natural Gas Rallies After EIA Reports Smaller-Than-Expected Storage Injection Even As Near-Term Temperature Outlook Trends Less Favorable; Oil Falters Again As Global Supply & Demand Worries Outweigh Tightening Domestic Inventories; Natural Gas Demand To Dip Today As Much Cooler Temperatures Overspread The Northeast


6:00 AM EDT, Friday, September 13, 2019
In its weekly Natural Gas Storage Report for August 31-September 6, the EIA announced Thursday morning that natural gas inventories rose by +78 BCF. This was 4 BCF smaller than my +82 BCF projection, but was still 5 BCF bearish versus the 5-year average +73 BCF injection. Three out of the five storage regions saw bearish injections on the week. The Midwest Region led the way with both the largest and most bearish build at +37 BCF versus the 5-year average +32 BCF. This pushed the storage surplus versus the 5-year average up to +16 BCF--the only region to be at a surplus--and the year-over-year surplus to +130 BCF, the second largest among storage regions. The East and Mountain Regions also saw bearish builds at +25 BCF and +6 BCF versus 5-year averages of +21 BCF and +3 BCF, respectively. The Pacific Region, meanwhile, saw a very bullish -1 BCF storage withdrawal, 4 BCF bullish versus the 5-year average, boosting its storage deficit versus this average to -28 BCF, the second largest in the nation on an absolute basis and by far the largest on a percentage basis at -9%. Finally, the South Central Region saw a +11 BCF injection, very close to its 5-year average +12 BCF. Interestingly, the Region has both the largest storage deficit versus the 5-year average (-39 BCF) but also the largest year-over-year storage surplus (+152 BCF). Click HERE for more on the latest EIA-reported natural gas inventories.


In the afternoon following the morning storage numbers, the EIA released its weekly natural gas supply/demand data, covering the period of September 5-11 (which differs from the August 31-September 6 storage week). On the supply side, the EIA announced that domestic production fell from record highs, dropping -0.3 BCF to 92.0 BCF/day, still up a robust 7.0 BCF/day year-over-year. On the other hand, this decline was countered by imports from Canada which rose by 0.3 BCF/day from the previous week to 4.5 BCF/day, equal to year-ago levels. As a result, Total Supply held nearly steady at 96.6 BCF/day, also up 7.0 BCF/day from 2018. On the demand side, thanks to hot nationwide temperatures, powerburn rose 1.2 BCF/day from the week prior to 37.5 BCF/day, up a solid 2.3 BCF/day from 2018. LNG feedgas demand fell 0.5 BCF/day to 5.8 BCF/day, but was still up a 2.5 BCF/day from last year. All-told, total demand averaged 85.1 BCF/day on the week, up 5.8 BCF/day from the previous year, meaning that the supply/demand imbalance was 1.2 BCF/day loose year-over-year on a temperature-unadjusted basis. On a temperature-adjusted basis--which eliminates the impact of temperature as a variable--the imbalance was slightly tighter at -0.3 BCF/day loose versus 2018. This means that for any given temperature, I would expect the daily injection to be 0.3 BCF/day larger were that same temperature/degree day set-up to have occurred last year. Click HERE for more on the latest EIA supply/demand data.


After gapping down to start the session, natural gas rallied following the smaller-than-expected inventory build and finished the session up 2 cents or 0.9%. The rally came despite the near-term temperature outlook trending steadily less favorable. While the next 5-7 days will be much hotter-than-normal across the major demand centers of the Southeast, the forecast has steadily trended less favorable beyond that period. As the Figure to the right shows, both the GFS and ECMWF ENS models have trended less so for the full 14-day period with total gas-weighted degree days (GWDDs) sliding by around 20 GWDDs over the past 48 hours. Additionally, both the CFSv2 and the ECMWF-EPS long-term models are both pointing to a mild start to October which, by that point, is a bearish trend given the expectation for rising heating demand. At this time, I am projecting that end-of-season natural gas inventories will reach 3730 BCF, the highest I have projected in the last two weeks and right at the 5-year average. It would also be +483 BCF higher than last year's 3247 BCF peak. Should a warmer-than-average October verify, it is possible that this projection could rise even further, perhaps challenging 3800 BCF. Click HERE for more on the near- and long-term temperature outlook on my Advanced Modeling Page and HERE for more on long-term natural gas storage projections.


At this time, I continue to feel that natural gas is over-extended following the recent rally. According to my Fair Price Model, natural gas is still undervalued by 2.9% versus a Fair Price of $2.65/MMBTU based on current inventories alone, but this flips to a more than 10% overvaluation by December as I expect the natural gas storage deficit to flip to a surplus. Averaged over the full 8-month period, the commodity, at a mean Futures price of $2.64/MMBTU, is trading at an average 2.7% overvaluation versus a Fair Price of $2.57/MMBTU. At this time, I am targeting a pullback to at least $2.40/MMBTU, though this could be lower should October and November trend warmer-than-normal.


Meanwhile, crude oil sold off for a second straight day. After falling to nearly $54/barrel intra-day, WTI ultimately closed down 66 cents or 1.2% to $55.09/barrel, the lowest settlement since September 3. Brent fell 43 cents to $60.38/barrel. The losses come despite the EIA's huge -6.9 MMbbl reported drawdown on Wednesday amidst ongoing concerns about global demand and the threat of a flood of Iranian crude oil should sanctions be eased against the nation. Over the past month, the domestic crude oil supply/demand imbalance has averaged an impressive 6.6 MMbbls/week tight versus the 5-year average. This would take inventories down to under 350 MMbbls by the end of the year, a more than 100 MMbbl deficit versus both the 5-year average and 2018. The commodity is steeply undervalued across all time frames according to my Fair Price Model. Based on current inventories alone, WTI is trading at a 14% discount versus a Fair Price of $64.17/barrel. This undervaluation grows to as high as 30% by next spring and is averaging 28% over the next 8 months versus a mean Fair Price of $75.06/barrel. This likely represents the peak bullish scenario. At this time, I remain aggressively bullish on the sector and am maintaining a $65/barrel upside price target. Despite the high valuations according to my model, I feel that above this level, we will see incrased US drilling and OPEC will begin to aggressively ease its production quotas, resulting in a loosening of the supply/demand imbalance.


Natural gas demand will dip today to wrap up the week as much cooler temperatures overspread the major demand centers of the Northeast. Highs will only reach the upper 60s to lower 70s from Washington, DC to New York City today, each around 10F cooler-than-normal, while Boston will only top out in the lower 60s, 10F-15F below-average. Unseasonably chilly temperatures will continue across the upper Midwest as well with Minneapolis only seeing the lower 60s, 10F cooler-than-normal. On the other hand, very warm weather will continue across the Southeast into the Ohio Valley. Atlanta and Nashville will again reach the lower 90s, Indianapolis the upper 80s, and Detroit the lower 80s, all around 10F hotter-than-normal and sufficient to drive strong late-season Powerburn cooling demand. Overall, today's forecast mean population-weighted nationwide temperature will fall -1.4F from Thursday to 74.0F today thanks to the Northeast cooldown, but will still be 2.5F warmer-than-normal courtesy of the southern heat. Total Degree Days (TDDs) will fall to 10.3 TDDs, 1.6 TDDs greater than average and the 5th most for September 13 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 +12 BCF/day daily natural gas storage injection, 1 BCF larger than Thursday's injection and 1 BCF bearish versus the 5-year average. Click HERE for more on today's projected storage injection and Realtime natural gas inventories. For the full week of September 7-13 that ends today, I am projecting a preliminary +84 BCF storage injection. Such a build would be a neutral 2 BCF larger than the 5-year average and right at last year's mark. As the Figure to the right shows, it would be the tied with 2018 for the third largest injection in the last 5 years (or the third smallest injection), 11 BCF smaller than the 5-year maximum and 28 BCF larger than 2016's 5-year minimum. The neutral injection comes despite natural gas powerburn averaging 37.1 BCF/day, a huge 5.9 BCF/day higher than 2018, thanks to near-record domestic production, rising Canadian imports, and slumping LNG feedgas demand. Should such an injection verify, natural gas inventories would rise to 3103 BCF while the storage deficit versus the 5-year average would hold nearly steady at -75 BCF. The EIA will release its official numbers for the week next Thursday, September 19, at 10:30 AM EDT. Click HERE for more on this week's projected injection.


Looking ahead to next week, I am expecting another modestly bearish weekly injection with daily builds at or above-average throughout the week. Cooling demand across the South will likely be strongly influenced by the ultimate track of what will be Tropical Storm or Hurricane Humberto, which is spinning up over the Bahamas and will track close to the Florida coastline--the same areas impacted by Dorian--this weekend and early next week. At this time, I am projecting a +85 BCF injection which would bring inventories to 3188 BCF, or within 100 BCF and 1 week of last year's peak. Such a build would be a modest 11 BCF larger than the 5-year average, but a substantial 33 BCF bearish versus last year's injection and would bring the year-over-year surplus to +427 BCF. Click HERE,/u> for more on next week's injection.