December 13, 2018

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Natural Gas Poised To Pullback As Near-Term Models Favor Less Frigid Late-February Outlook; EIA Forecast To Report Bullish Crude Oil Inventory Draw Today; Near-Average Natural Gas Daily Storage Withdrawal Likely Today As Northern Plains Remain Cold; LNG Export Data Is Back And Shows Rebounding Demand

6:00 AM EDT, Wednesday, February 13, 2019
Natural gas rose for a third straight day on Tuesday as investors responded to near- and long-term temperature forecasts that continued to trend colder. The March 2019 front-month contract finished the session up 1.7% to $2.69/MMBTU, the highest close since February 1, though up only around 15 cents from the commodity's 52-week low. The 3X natural gas ETFS, UGAZ and DGAZ, continue their monthly rollover and, as of yesterday evening, held 60% April 2019 contracts and 40% March 2019 contracts. This process should complete in the next 2 days. The rollover is occurring in a state of mild contango with the April 2019 contract closing at $2.71/MMBTU, or 0.7%, meaning that the process will act as a slight 2.1% drag on these ETFs. Tuesday's rally was driven by a rapid near-term cooling in the GFS model. As shown in the Figure to the right, over the 30 hours preceding yesterday's close, forecast 14-day GWDDs surged from around 425 GWDDs to over 525 GWDDs, well above the 14-day average of 410 GWDDs, as shown in the Figure to the right. The ECMWF ENS was flat to even slightly weaker, which may have blunted the rally somewhat.

However, as is often the case with the model, as quickly as it cooled, the GFS warmed back up even faster. The 18Z and overnight 00Z runs of the GFS did trend significantly milder which contributed to after-hours weakness in the sector as the model trended towards a strong eastern ridge allowing temperatures across the major population centers of the East Coast to quickly moderate by late February. It remains to be seen whether the ECMWF will get on board with this forecast evolution or if the GFS is just up to its usual tricks. Stay tuned. Despite this warm-up, the longer term outlook still looks favorable, for now. On Monday evening, the ECMWF-EPS gold standard long-range model was released which pushed back the onset of a long-expected warm-up from the very beginning of March to the second or even third week of the month. This followed the trend of the CFSv2 long-term model which has also trended colder in recent days. As a result, my Hybrid Model--which integrates the GFS & ECMWF ENS short-term and CFSv2 and ECMWF-EPS long-term outlooks--is now forecasting that gas-weighted degree days (GWDDs) will be at or above-normal through March 26 or so with a very strong signal for colder-than-average temperatures through at least March 10. This could drive the storage deficit versus the 5-year average to around -475 BCF by the third week of March and season ending inventories to under 1175 BCF should current trends hold.

Click HERE for more on the latest short- and long-term computer model outlooks on my Advanced Modeling Page.

Nonetheless, natural gas bears continue to argue--with their pocketbooks--that, even though inventories are at a large and growing storage deficit, there is no chance of a storage shortfall given how close to the end of the withdrawal season we are and that any deficit will be eroded away this spring and summer once heating demand fades by record domestic production and a loose market. However, the longer that prices remain under $3.00/MMBTU, the more likely it is that supply/demand balance tightens, especially with production recently plateauing, reducing the rate of any contraction in the deficit and potentially setting inventories up to start the 2019 withdrawal season anomalously low. It is this outlook that is driving my Fair Price Model to undervalue natural gas by an average of 31% based on projections for the next 8 months. But this is a long-term fundamental analysis and, during the winter, all that matters is the near-term temperature forecast, which is now trending in the wrong direction. At this time, I am cautiously maintaining my near-term price target of $3.00/MMBTU, which would represent more than 10% upside from current levels. However, I do feel that in order to assuredly reach this level, the storage deficit versus the 5-year average needs to top -500 BCF, which would require some additional cooling to drive another 30 BCF off my current projections, which peak near a -460 BCF deficit. Given the latest warming trend, particularly in the GFS model, this is looking somewhat less likely and I would not be surprised to see natural gas pullback near-term, perhaps even approaching last week's lows if even more dramatic warming occurs.

Meanwhile, crude oil moved sharply higher on Tuesday after OPEC reported that January member production fell nearly 800,000 barrels/day to 30.81 MMbbls/day, led by Saudi Arabia. As a result, WTI prices rose by 69 cents or 1.3% to $53.10/barrel--after nearly topping $54/barrel earlier in the session--while Brent gained 91 cents or 1.5% to $62.42/barrel. It was the highest close for WTI since February 6, but the commodity did finish well off the highs of the session, likely due to the EIA revising higher 2019 and 2010 US production number with production likely to average a record 13 MMbbls/day in 2020.

The data will keep on coming today as the EIA will release its weekly Petroleum Status report for February 2-8 this morning at 10:30 AM EDT. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting a -1.0 MMbbl inventory drawdown. This would be a robust 4.6 MMbbls bullish versus the 5-year average +3.6 MMbbl storage build and would reduce inventories to 446.2 MMbbls. The storage deficit versus the 5-year average would contract for a third straight week to +21.2 MMbbls. Additionally, the API is also forecasting bullish refined product draws with gasoline stocks expected to rise just +0.8 MMbbls (5-year average: +1.9 MMbbls) and distillates to fall -2.5 MMbbls (5-year average: -0.7 MMbbls). As a result, forecast Total Petroleum Inventories (crude oil + gasoline + distillates) are forecast to fall a bullish -2.7 MMbbls versus the 5-year average +4.8 MMbbl 5-year average, as shown in the Figure to the right.

As always given its dubious track record, API forecasts should be taken with a grain of salt, but, should it verify, this would be a modestly bullish report across the boards. It would only reinforce my 2019 WTI price target of $60/barrel--representing 15% upside from current levels--and perhaps render it conservative. Check back on my Crude Oil Page HERE after 10:30 AM EDT for the latest EIA numbers.

My Oil & Natural Gas Portfolio took advantage of gains in natural gas, oil, and equities to rise for a third straight day on Tuesday. The Portfolio gained +0.8% to push 2019 year-to-date gains to +4.5%, or +39.4% annualized. With the rally, my net natural gas long exposure has fallen to 10.6% of my holdings--still near the upper limit of my 12% risk management threshold--with a 15.1% DGAZ short providing long exposure partially offset by a 4.5% UGAZ short, so as to maximize 3x ETF exposure and take advantage of leverage-induced decay. At this point, I plan to continue holding onto these positions with a $3.00/MMBTU upside price target. Should the commodity top $2.75/MMBTU, I will consider taking some exposure off the table. My DWT short position providing long WTI exposure stands at a modest 3.3% of my holdings and is up +4.2% from my basis. This will likely be a long-term hold with a price target of $60/barrel. I will definitely add to this position should prices drop under $50/barrel and will consider doing so under $52/barrel with an maximum target exposure of 10% of my holdings. I otherwise remain comfortable with all of my equity holdings, most of which are bullish bets on the LNG export space, led by Cheniere Energy (LNG). My cash position stands at 50% of my holdings which, given my standard safety threshold of 25%, leaves me free to allocate an additional 25% of my holdings. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will transiently rise today as a nose of colder-than-normal temperatures extends eastward from the Plains into the Ohio Valley. Minneapolis and Milwaukee will only reach the low-20s today, Chicago to the lower 30s, and Columbus, OH the mid-30s, all 5F-10F colder than normal. This will counter warmer-than-normal temperatures across the Southern Plains with Dallas and Oklahoma City both reaching the upper 60s and Denver climbing to near 60F, all 10F-15F above-average. Temperatures will be seasonal across the Eastern Seaboard with the I-95 corridor seeing readings generally in the mid-to-upper 40s, 5F-10F warmer-than-normal. On the opposite coast, a colder-than-normal airmass will persist with Seattle and Portland only rising to the upper 30s to near 40F, a warm-up from last week but still 10F colder-than-normal. Overall, today's forecast mean population-weighted nationwide temperature will cool 1.9F from Tuesday to 43.5F, still 1.6F warmer-than-normal. Total Degree Days will rise to 21.7 TDDs, 2.1 TDDs fewer than normal and the 11th fewest for February 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 -21 BCF/day daily natural gas storage withdrawal, 2 BCF larger than Tuesday's draw and very close to the 5-year average. By tonight, I project that Realtime natural gas inventories will fall to near 1755 BCF while the storage deficit versus the 5-year average will inch slightly higher to -355 BCF. The year-over-year deficit, meanwhile, will rise 3 BCF to -59 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories. Today's rise in demand will likely be transient with significant warming across the East and Ohio Valley ahead of the next shot of arctic air likely to drop daily storage withdrawals into the -13 BCF/day to -17 BCF/day range by Thursday and Friday. However, these bearish draws, too, will be short lived as much colder temperatures arrive this weekend with projected demand at or above average each day next week.

In other news, after more than 2 months of disruptions with my pipeline import algorithms, I have finally restored daily LNG feedgas and export data to the site. And it came at a good time too. It has been a wild, and largely disappointing past 2-3 weeks for LNG exports. After reaching all-time highs above 5 BCF/day on multiple days during the first week of January, LNG exports plunged in early February, falling to just 1.5 BCF/day on February 7 as feedgas to Sabine Pass dropped to 1 BCF/day and flows to Corpus Christi dropped to 0 BCF/day. For the storage week of February 2-8, total feedgas was just 18 BCF, the lowest since February 2018 and down nearly 50% from the all-time record 34 BCF from the last week of December. The significant weakening of LNG feedgas demand is likely at least partially responsible for the smaller-than-expected EIA-reported storage withdrawals each of the past two weeks. The driving forces behind the sharp curtailments at the Gulf Coast plants was, in the case of Sabine Pass, persistent, dense fog that prevented tanker ships from traversing the narrow channel to the plant and, at Corpus Christi, maintenance as well as fog. However, over the past week, these limiting factors appear to be resolving. Flows to Sabine pass have recovered to 3.2 BCF/day as of Wednesday while Corpus Christi is quickly approaching its capacity at 0.6 BCF/day. As a result, based on early cycle pipeline data, LNG feedgas demand is up to 4.5 BCF/day, up 0.4 BCF/day from yesterday and 1.4 BCF/day from a year ago. Weekly feedgas projections for the storage week of February 9-15 stand at 28.6 BCF, up a massive 10.1 BCF week-over-week. As a result, I expect to see the temperature-independent supply/demand balance tighten up over the next week or two and would not be surprised to see the EIA flip to larger-than-expected storage withdrawals. Click HERE for more on LNG feedgas demand and exports.