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February 13, 2018

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Natural Gas Continues Pullback To Start The Week, Falling To 18-Month Low; Unseasonably Mild Temperatures Likely Through The End Of February, But March Cooldown Still Possible That Could Drive Season-Ending Inventories Under 1300 BCF


6:00 AM EDT, Tuesday, February 13, 2018
After 10% and 9% losses in each of the last two weeks, natural gas picked up right where it left off yesterday, falling 3 cents or 1.2% to settle at $2.55/MMBTU, the lowest close for the commodity since August 11, 2016. Monday's decline pushes losses since January 29 to a huge 30% as forecasts for the next 15 days continue to look quite bearish with the storage deficit versus the 5-year average potentially falling by 25% by the end of the month. However, some of the long-range computer models continue to suggest a large-scale pattern shift during early March that would allow arctic air, which will be bottled up in Canada and the extreme northern Plains near-term to finally move southward and eastward across the Lower 48 more freely. Leveraged natural gas ETFs continued their monthly rollover yesterday with UGAZ now holding 80% of its funds in the April 2018 contract with just 20% remaining in the front-month March 2018, as shown in the Figure to the right. Unlike last month in which this rollover occurred during steep backwardation creating a substantial tailwind for the bulls, this month's roll will be nearly neutral. Although April natural gas closed yesterday at a slight 3 cent contango to March ($2.58/MMBTU vs $2.55/MMBTU), this rollover began last week under a small backwardation and the two will nearly cancel out. As a result, price-independent losses associated with the rollover will be near zero. Looking ahead, as natural gas has continued to drop, a consistent 2-4 cent per month contango has developed with the August 2018 contract now priced at $2.71/MMBTU, a 6.2% 5-month contango, or 1.2% per month. This will create small monthly losses for holders of long ETFs (and gains for inverse ETFs), which, historically speaking, is not too bad. However, the further that natural gas falls, the larger that the contango will become. On the other hand, a rally will likely trim any contango and possibly revert to backwardation, as we saw earlier this winter. The 1x ETF UNG continues to hold only March 2018 contracts and won't begin its rollover until next week. Click HERE for more on current natural gas ETF holdings.


Crude oil, meanwhile, saw strong early-session gains fade by the end of the day as the commodity squeaked out a 9 cent or 0.2% gain to $59.29/barrel, after reaching nearly $60/barrel Monday morning. Brent oil, on the other hand, settled lower by 20 cents at $62.59/barrel. The commodity continues to face downward pressure on news of record US production that topped 10.25 MMbbl/day last week, but could find some support at these levels as worldwide demand has remained strong and the US natural gas storage deficit has been nearly erased.


My Oil & Natural Gas Portfolio reversed early-session losses to rise for a 6th straight day, the longest winning streak since the portfolio's inception last spring, rising +0.2% on the day. Gains since May 1, 2017 now stand at a new high of +38.3% while 2018 year-to-date returns are +5.6%, or +48.9% annualized. I made no trades on Monday after an active week last week with 5 trades. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.


Natural gas demand will hold nearly steady today as temperatures warm across the Plains, but cool across the East with generally seasonal conditions expected across much of the nation. After days in the Deep Freeze, temperatures across the Plains, Midwest, and Great Lakes will finally moderate with Minneapolis perhaps hitting 30F, Chicago and Des Moines the mid-30s, and St Louis and Kansas City the mid 40s, 10F-15F warmer day-over-day and within 5F of normal. On the other hand, temperatures across the Eastern Seaboard will cool 5F-10F day over day, with Washington and Philadelphia cooling to the mid-40s and NewYork City and Baltimore falling into the 30s, also within 5F of normal. Overall, the forecast mean population-weighted nationwide temperature today will fall by 1.4F from Monday to 41.6F, 0.3F cooler than normal. Total Degree Days will be 23.5 TDDs, 0.3 TDDs fewer than normal and the 16th fewest for February 13 in the last 38 years. Click HERE for more on today's temperature and degree day outlook. Based on this forecast, I am projecting a -26 BCF/day daily natural gas storage withdrawal, 1 BCF less than Monday, but still 5 BCF bullish versus the 5-year average -21 BCF/day. By the end of the day today, natural gas inventories will have declined to near 1810 BCF, which will push the year-over-year storage deficit over -600 BCF for the first time since early 2014 while the storage deficit versus the 5-year average will top -420 BCF, still well shy of the peak -486 BCF deficit reached earlier this winter. Click HERE for more on today's projected daily withdrawal and realtime natural gas inventories.


The outlook for the remainder February looks unseasonably mild across the eastern third of the nation with arctic air remaining entrenched across Canada and the Rockies, but unable to push southward. After this Thursday's projected -179 BCF storage withdrawal, I am projected modestly bearish withdrawals for each of the next 3 storage weeks through March 2. This could contract the storage deficit versus the 5-year average down to near -340 BCF by March 2 (although the year-over-year deficit will balloon to -721 BCF). Click HERE for more on the near-term natural gas storage outlook. It is this forecast that has contributed to the acute drop in natural gas prices over the past two weeks. Beyond that, however, there are some indications that colder weather could return in early March to give inventories a late-season jolt downward. The National Weather Service's CVSv2 model continues to suggest that the cold air locked up across the north could finally spill southwards. See my Extended Temperature Outlook Page HERE for more. The ECMWF's 46-day outlook, on the other hand, shows this air remaining largely locked in across the north. As it stands right now, the cooling trend in the CVSv2 models has resulted in a downward revision of my projected season-ending natural gas inventories to 1250 BCF, which would the 12th lowest in the last 24 years, quite the achievement in this era of consistently elevated storage levels as shown in the Figure to the right. It would be -450 BCF bullish versus the 5-year average and down -800 BCF year-over-year. Click HERE for more. Near-term, I would not be surprised to see further weakness in natural gas as temperatures likely trend milder and the storage deficit begins to erode with the specter of a very loose Shoulder Season looming. However, should March end up being colder-than-average as the CFSv2 suggests, natural gas could be setting itself up for a quick bounce, the sustainability of which will depend on how loose the market ends up being later in the spring. I find it difficult to support entering in on the short trade at these levels given the risk of such a bounce. Those looking to get long, however, should be equally cautious of trying to catch a falling knife. Should a March cooldown not verify, the commodity could easily tumble to $2.00/MMBTU in very short order. Undoubtedly, the natural gas trade over the next month will be a volatile and dangerous one with momentum. After what promises to a bearish next 10-15 days from a temperature perspective, the forecast could become somewhat more favorable by the first week of March. Near term, a persistent pattern looks to set up with troughing across the Heartland allowing arctic air to spill southward, but only encompassing the generally sparsely-populated states of Montana, the Dakotas, Nebraska and Minnesota, while a strong ridge and southerly flow allows much-above average warmth to surge northward across the major demand centers of the Megalopolis. However, by early March, it appears that this pattern could break down, permitting colder air to make it all the way to the East Coast, as suggested by the CFS model for the March 5-11 period, as shown in the Figure to the right. It is possible that such a pattern could persist into the second half of March. In the end, the verification or moderation of this set-up will likely make the difference between season-ending inventories finishing at 1350 BCF, favorable, but widely anticipate and likely already priced in, or 1200 BCF, a bullish surprise that could prompt a quick rally. Stay tuned and click HERE for more on the extended temperature forecast or HERE for more on projected long-term natural gas inventories.