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November 13, 2017

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Natural Gas Rises 8% On The Week Boosting 2-Week Gains to 17% On Colder Outlook; Gas Demand Retreats From Exceptionally Bullish Weekend Draws But Remains Above Average For 1 More Day Before Warming Trend Kicks Into Gear; Bullish Storage Draws Expected For The Next Two Weeks As Year-Over-Year Deficit To Soar'


6:00 AM EDT, Monday, November 13, 2017
Natural gas extended its winning streak on Friday, rising 1 cent or 0.4% to settle at $3.21/MMBTU, its second strain weekly gain. The commodity rose 7.7% on the week and is up 17% in the past two weeks since the November 2017 contract expired at $2.75/MMBTU on October 27. The natural gas rally was initially driven by an oversold bounce, but has really found its legs in the past week as what many had expected to be a mild November has transitioned to a much cooler-than-average first week with an arctic intrusion driving record cold across the major demand centers of the Northeast. On news that the Baker Hughes rig count rebounded last week, crude oil pulled back on Friday, shedding 43 cents or 0.8% to settle at $56.74/barrel, but still gained 2.3% on the week for its fifth straight weekly gain. Beyond the "usual" news of contracting US petroleum inventories, oil was also buoyed on news of a large-scale corruption crackdown versus power consolidation in oil-rich Saudi Arabia, boosting socioeconomic risk. On the week, my Oil & Natural Gas Portfolio gained 4.2%, rising to a new 2017 high on Friday, up 30% since May 1, before falling 0.1% on Friday. I made 3 trades on the week, opening a new position and moving to protect profits. For subscribers, I have published a new Investing Commentary for Monday, discussing these trades, my current holdings, and strategy for the upcoming week. To learn more about subscribing and gaining this premium access while helping to support the site, please click HERE. Finally, Week 2 of my Natural Gas Storage Contest closes to submissions on Tuesday at 5 pm EDT. Submit your picks now by clicking HERE and compete to win $250.


On Thursday following the EIA's weekly Natural gas Storage report, the Administration also released its weekly supply and demand data for October 28-November. Most notably, the EIA announced that domestic natural gas production surged by 0.7 BCF/day week-over-week to a new record high of 75.5 BCF/day. Production is now up a mammoth 4.9 BCF/day year-over-year. This has resulted in a widening year-over-year loosening of the temperature-independent components of natural gas supply/demand balance, which include production, LNG imports and exports, exports to Mexico and imports from Canada. Assuming that over a long enough timeframe temperature will be near its long-term averages, it is these components that dictate natural gas inventories and, by extension, price. It is for this reason that the rapid rise in production over the past 6 months is particularly concerning. Other components of temperature-independent balance have partially offset this rise, with Canadian imports down 0.2 BCF/d year-over-year, exports to Mexico up 0.1 BCF/d year-over-year, and LNG feedgas demand up 1.4 BCF/day year-over-year, but year-over-year supply/demand balance is still 3.2 BC/day loose. As the Figure to the right shows, this is the loosest that year-over-year temperature-independent supply/demand balance has been in over a year. As production growth has accelerated and year-over-year gains in LNG feedgas demand have narrowed, the temperature-independent market has transitioned from over 6 BCF/day tight last spring to the -3.2 BCF/day loose for the week ending November 3. What does this mean for natural gas? It places an increased emphasis on temperature-dependent demand, primarily residential and commercial demand. This in turn requires consistently colder-than-average temperatures to generate the same storage withdrawal. Fortunately, in the present, intermittent waves of unseasonably cool readings have bolstered these components of demand, supporting the recent rally in the commodity and masking the growth in production. Additionally, partially temperature-independent powerburn demand has remained consistently above year-ago levels, although these gains may disappear should natural gas hold consistently above $3.20/MMBTU and becomes less competitive versus other fuels. Further, Cove Point's LNG export plant is expected to come online before the end of the month, which could boost temperature-independent export demand. Nonetheless, should temperatures moderate, total supply/demand balance could rapidly loosen leading to bearish wintertime withdrawals. This could result in large price swings throughout the winter as investors are increasingly tied to weather forecasts. Click HERE for more on natural gas supply and demand.


The EIA will release its weekly Natural Gas Storage Report for the week of November 4-10 this Thursday at 10:30 AM EDT. I am projecting -14 BCF storage withdrawal, the first of the season. Such a withdrawal would be a strong 26 BCF bullish versus the 5-year average +12 BCF injection, and an exceptional 48 BCF bullish versus last year's +34 BCF build. Should it verify, natural gas inventories would drop to 3776 BCF while the storage deficit versus the 5-year average would rise to -98 BCF and the year-over-year deficit would rise to -267 BCF. As the Figure to the right shows, a -14 BCF withdrawal would be the second largest in the last 5 years behind only 2012's -21 BCF draw as well as the 6th largest draw in the full 23 year history of EIA storage data. Unsurprisingly, with domestic production steady at 75.5 BCF/day near record highs, the bullish draw will be driven primarily by gains in residential/commercial heating demand which will climb nearly 5 BCF week-over-week to just over 25 BCF/day, up a whopping 9 BCF/day year-over-year. Surprisingly, powerburn electricity demand will remain strong as it has all Fall, averaging near 24 BCF/day, up 2 BCF/day week-over-week and around 1 BCF/day year-over-year. As previously discussed, it is the strength in res/com and powerburn demand that is compensating for the surge in domestic production over the past year that is preventing a supply/demand mismatch from forming. This remains a preliminary projection and will be revised further over the next 48 hours. Click HERE for more on this week's projected draw.


Over the weekend, natural gas rocketed to exceptionally high levels for early-November as a record-setting arctic airmass enveloped the Midwest, Great Lakes, and Northeast. On Saturday morning, New York City dropped to 24F in Central Park, blowing out the previous daily record of 28F while Washington, DC tied a record low by dropping to 26F. Most of the Great Lakes and Northeast was 20F-30F colder than normal. As a result of such cold, I projected that daily storage withdrawals on Saturday and Sunday both reached double digits, exceptionally bullish versus the 5-year average -4 BCF/day. By mid-day Sunday, my storage model projected that the year-over-year storage deficit had reached 300 BCF while the storage deficit versus the 5-year average broke 100 BCF for the first time since last winter. However, natural gas demand will rapidly decline to start the week as much warmer air scours out the arctic chill. Highs today will be seasonally cool across the Great Lakes and Northeast with readings generally within 10F of normal with Chicago and Detroit rising into the mid-40s, Philadelphia and New York City to around 50F, and Raleigh and Richmond into the mid-50s, all 5F-10F cooler-than-average but 10F-20F warmer than Saturday. Much milder conditions will be found across the Intermountain West with highs in the low-to-mid 60s from Denver to Boise to Salt Lake City, all 10F-15F warmer than normal. Overall, the forecast mean population-weighted nationwide temperature today will climb to 51.4, up 2.4 BCF from Sunday but still 0.2 BCF cooler than normal thanks to the residual chill across the Northeast. Total Degree Days will rise to 14.7 TDDs, the 18th most for November 13 in the last 37 years. 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 still-bullish -6 BCF/day daily natural gas storage withdrawal for Monday, nearly 5 BCF smaller than Sunday but still 2 BCF bullish versus the 5-year average -4 BCF/day draw. Click HERE for more on today's projected daily draw and intraday natural gas inventories. The warm-up will really kick into gear on Tuesday with demand falling below average with further warming by the end of the week with inventories flattening with daily withdrawals of under -2 BCF/day. Nonetheless, the damage will have been done during the first 3 days of the week and I am projecting a bullish -42 BCF weekly storage withdrawal for November 11-17, 16 BCF bullish versus the 5-year average and a mammoth 45 BCF larger than last year's anemic +3 BCF injection. It would be the second largest weekly draw for the November 11-17 period in the last 5 years, but still well-behind 2014's massive -79 BCF withdrawal. Should it verify, the storage deficit versus the 5-year average would grow to -110 BCF while the year-over-year deficit would rise to -309 BCF. Click HERE for full details returning this week's projected draw.


Looking longer term, the extended outlook has steadily trended increasingly bullish--but not spectacularly so--over the past two weeks. For the remainder of November, the current outlook is calling for intermittent intrusions of arctic air across the northern Plains then shifting into the Northeast and Mid-Atlantic with persistently milder-than-average readings across the West and Rockies. Given the population density across the eastern 2/3rds of the nation, such a pattern is generally favorable for natural as demand. The first of these bursts of below-average temperatures looks to arrive sometime around November 19 or 20 with a with a second shot around Thanksgiving on November 24 or 25. The Figure to the right shows the 8-14 day outlook issued by the NWS showing an increased probability of colder-than-average temperatures across the East. This should be sufficient to maintain a >100 BCF storage deficit versus the 5-year average, but probably not boost it much beyond -120 BCF or -130 BCF by the end of November with expected weekly draws the weeks of November 24 and December 1 each 5-10 BCF bullish versus the 5-year average, based on current forecasts. As mentioned earlier, such a temperature pattern should continue to mask the rise in domestic production and maintain a rather optimistic trading environment. However, should natural gas continue to rally, the year-over-year edge in powerburn may dry up and, should temperatures warm for an extended period of time, investors could be faced with a considerably loosened market.