June 14, 2019

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Natural Gas Falls To New 3-Year Low After EIA Reports A Fifth Straight Triple Digit Storage Injection, But Evidence Of Tightening Supply/Demand Balance Could Catalyze A Move Higher Once Warmer Temperatures Return; Crude Oil Spikes On Gulf Threat

6:00 AM EDT, Friday, June 14, 2019
In its weekly Natural Gas Storage Report covering June 1-7, the EIA announced Thursday morning that inventories rose by +102 BCF. On the one hand, this was 10 BCF bearish versus the 5-year average +92 BCF, was the 13th straight bearish build and fifth straight triple digit injection. However, it came in below my +103 BCF projection and was even further below the analyst consensus which was in the +104 BCF to +108 BCF range, the first time in three weeks the actual build came in below the consensus. With the injection, storage levels rose to 2088 BCF while the storage deficit versus the 5-year average dipped to -230 BCF. Inventories are +189 BCF higher than a year ago.

Interestingly, the bearishness of the build was driven by the tiny Pacific and Mountain regions whose +14 BCF and +10 BCF builds were 7 BCF and 5 BCF bearish versus their respective 5-year averages. This area was baked with record heat this week, so expect a much smaller build--or even draw--in next week's report. Otherwise, a slightly bearish +33 BCF build in the Midwest Region (5-year average: +29 BCF) was partially cancelled out by slightly bullish injections in the East (+26 BCF versus +29 BCF) and South Central (+21 BCF versus +22 BCF). All 5 storage regions held at deficits versus the 5-year average, led by the South Central Region at -100 BCF, while only 2 are at year-over-year deficits, ironically this week's laggards, the Pacific (-12 BCF) and Mountain (-14 BCF) regions. On the bearish side, the Midwest Region is leading at a +97 BCF or a +26% year-over-year surplus, a consequence of consistently cooler-than-normal temperatures this spring. Click HERE for more on last week's official storage numbers.

Following the morning release of storage data, the EIA also issued its weekly supply/demand update just after the market close, covering the week of June 6-12. Of note, this differs from the storage week (June 1-7). For a second straight week, powerburn demand was exceptionally strong, averaging 34.4 BCF/day, up nearly 6 BCF/day year-over-year, as shown in the Figure to the right. Click HERE for a more detailed look at Realtime powerburn demand. Additionally, exports to Mexico rose to a new all-time high of 5.0 BCF/day, up 0.5 BCF from 2018 while LNG feedgas demand held steady at 5.3 BCF/day, up 2.4 BCF year-over-year. As a result, total demand averaged a robust 82.0 BCF/day this week, up a massive 10 BCF/day year-over-year, with the majority of the gain coming from temperature-independent (or at least partially so in the case of powerburn) sources of demand, suggesting that this trend will continue. On the supply side, domestic production has seen its production growth flatline, with output averaging 88.6 BCF/day this week, down 0.2 BCF/day from last week. While up 5.9 BCF/day from last year, this week's production number is equal to that of the week ending December 5, 2018, highlighting how growth has not budged in 6 months. Canadian imports held nearly flat at 5.1 BCF/day, just 0.4 BCF/day lower than last year. Total supply averaged 93.8 BCF/day, up "only" 7.6 BCF/day from last year.

With demand rising and supply flat, the temperature-adjusted natural gas supply/demand imbalance--a significant thorn in the bulls' side this spring--has begun to tighten. According to my model, the year-over-year temperature-independent imbalance tightened by 0.5 BCF/day for a second straight positive week to 3.2 BCF/day loose versus 2018. This means that, for any given temperature, I would expect the daily natural gas storage injection to be 3.2 BCF/day larger--or bearish--compared to the same temperature with fundamentals consistent with the 5-year average. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make accurate long-term storage and price projections. While still bearish, it is a considerable improvement from late May when the year-over-year looseness was around 4 BCF/day. The most likely cause of the tightening is flat production growth and cheap natural gas fueling strong powerburn, even with relatively mediocre temperatures. With this week's data further reinforcing both of these points, I expect to see further tightening in the weeks to come and, should prices remain suppressed below $2.50/MMBTU, I would not even be surprised to see the imbalance even disappear by the end of the summer.

Overall, while this report was technically bearish, I felt that there were multiple elements--as discussed above--that were supportive of prices, especially way down at current levels. Investors, however, rather vehemently disagreed with my assessment. July 2019 front-month prices slumped 2.6% to $2.33/MMBTU, a fresh 3-year low. As the Figure to the right shows, natural gas prices are trading at a massive 23% year-over-year discount despite inventories less than 200 BCF higher and the supply/demand imbalance starting to contract. Additionally, the same geopolitical concerns in the Middle East that drove oil up to 4% higher on Thursday could certainly lend support to natural gas prices given robust LNG exports from the region, particularly Qatar. And finally, Thursday's run of the long-term 6-week ECMWF-EPS model trended sharply warmer yesterday, showing nationwide temperatures returning to above-average by the first week of July. It is for these reasons that I took advantage of Thursday's dip to add to my long holdings via shorting more DGAZ. Presently my net long holdings stand at an aggressive 10.3% of my portfolio with a 15.7% DGAZ short partially offset by a 5.4% UGAZ short, so as to capitalize on leverage-induced decay. I am holding my upside price target at $2.60/MMBTU at this time.