-->

October 14, 2019

Home --> Daily Commentary & Archive --> October 14, 2019 Daily Commentary


Natural Gas Likely To Rally This Week On Potential Cold Snap, But Don't Get Carried Away Here--The Bears Want You To Make That Mistake; Natural Gas Investor Bullish Holdings Fall To Historic Low; Crude Oil Rises On US-China Trade Detente & Middle Eastern Tensions Even As Rig Count Rises


6:00 AM EDT, Monday, October 14, 2019
Natural gas finished up another week to forget on Friday with one more day in the red--although if you were holding a leveraged ETF you might not have realized it. The front-month November 2019 contract finished the session down less than 1 cent or 0.2% to settle at $2.21/MMBTU. The contract was down an ugly 5.9% on the week--its fourth straight weekly loss--and settled at its lowest since August 27. However, investors likely noticed that the popular 3 ETF UGAZ outperformed considerably on the session, rallying 5.9%, which would correlate with a nearly 2% rally in the underlying commodity. The apparent disconnect is due to the fact that UGAZ has already rolled the entirety of its funds into the December 2019 contract, which did in fact rally nearly 2% on Friday, contrary to the front-month November contract. The future Front-Month contract closed at $2.46/MMBTU, a far more modest 2.4% weekly loss. Investors were more aggressive at bidding up the December 2019 contract due to the potential for a late-October and early-November Arctic outbreak, right around the time that the December contract would become the front-month and most actively traded contract.


However, over the weekend, the near-term computer models continued to disagree on the potency of this arctic air. Which model ends up being in the right will have significant implications on the end-of-season peak inventories and, by extension, the price of natural gas. The GFS ENS has remained steadfast in its commitment to a sustained burst of temperatures 10F-20F cooler-than-normal extending from the northern Plains down to the Southeast from October 23 or 24 into the first week of November. On the other hand, the ECMWF ENS has generally projected a flatter, less enhanced pattern that would greatly limit the ability of cold air to move southward and remain there. However, Sunday's 12Z ECMWF ENS model run did trend significantly colder and seemed to be converging on the GFS ENS run, a rarity for this typically superior model.


Should the GFS ENS trend--and the latest run of the ECMWF ENS--verify, natural gas demand could ramp up considerably to wrap up the month. Unlike this weekend's shot of much colder-than-normal temperatures, below-average temperatures coming at the end of October and beginning of November will have significantly more impact on natural gas demand as average temperatures will be another 5F-10F cooler than they were last week. As the Figure to the right shows, I am projecting that that natural gas demand could rise by as much as 15 BCF during the last week of October with daily builds falling from nearly +20 BCF/day down to under +5 BCF/day. As a result, my end-of-season peak natural gas inventories projection has fallen by nearly 40 BCF over the past week to under 3830 BCF, which may still be too high of the GFS ENS solution verifies. Click HERE for more on the near- and long-term temperature outlook on my Advanced Modeling Page and HERE for more on natural gas inventories.


Also factoring into the near-term outlook for natural gas will be the highly skewed positioning of investor holdings. On Friday, the Commodity Futures and Trading Commission (CFTC) released its weekly data detailing NYMEX money manager positions through Tuesday, October 8. Open long positions fell another 6,716 contracts to just 105,689, a new 52-week low and the lowest recorded since at least the beginning of 2015. Additionally, short holdings surged by 42,458 contracts, the largest one-week spike in shorts since February 13, 2018. After the significant short-covering rally from late-August into mid-September that cut open shorts by nearly 50%, positions have again jumped by nearly 25% to 275,194 contracts as shown in the Figure to the right, and are up a stunning 214,887--or 356%--year-over-year when open shorts totaled just 60,307 contracts. As a result of the spike in shorts and decline in longs, the Bullish Sentiment--the percentage of positions held long--slid another 5% to just 28%. This is within 1% of 2019 lows and is down a massive 56% from 2019 when the Sentiment was over 80%. What does this mean? It means the short trade is historically overcrowded yet again. There is a significant excess of shorts and, should the fundamentals change in such a way to support a sustained rally, the bears could get squeezed in an epic fashion as they stampede for the exits. Right now, however, there is no evidence of this and the skew just shows how in-control the shorts are, such that any attempt at a weather-driven rally this early in the season is more likely that not going to be aggressively sold into. Click HERE for more on the latest CFTC-reported natural gas holdings.


I expect to see natural gas rally to open the week. The commodity is oversold technically, prices are down 30% year-over-year, and, even with a building storage surplus, the commodity is more than 12% undervalued based on current inventories according to my Fair Price Model. Additionally, as discussed above, the short trade is exceptionally overcrowded and it will not be difficult to trigger even a small short squeeze. This all being said, I still feel that a sustained move higher is unlikely. The long-term computer models continue to look above-average for November--though today's run of the twice weekly gold-standard ECMWF-EPS will shed more light on the subject--and, even should end-of-season inventories finish under 3825 BCF, there will be zero concerns this winter of a supply crunch barring one of the coldest winters on record. As a result, I continue to project that natural gas will become overvalued by early-November as the year-over-year surplus tops +600 BCF, as shown in the Figure to the right. For these reasons, I would be surprised to see the December 2019 contract top $2.60/MMBTU and will even consider abandoning my net short DGAZ position should this level be breached. And should the consistently above-average November outlook verify, I would not be surprised to see the December 2019 contract fall under $2.30/MMBTU.


Meanwhile, oil rose sharply to finish a strong week on a high note. WTI rose $1.15 or 2.2% to settle at $54.70/barrel, the highest close in 2 weeks. Brent gained $1.41 to $60.51/barrel. WTI was up 3.6% on the week, despite the EIA announcing a fourth straight inventory build. The rally was driven by the combination of geopolitical strain after an Iranian tanker was damaged after being attacked by missiles as well as news of a temporary trade deal between the US and China raised hopes of a rebound in global demand. On the other hand, Baker Hughes announced Friday that the oil rig count rose for the first time in 8 weeks, gaining 2 to 712. Nonetheless, the rig count is still down a massive 173 rigs or 19.5% since the beginning of 2019. Despite the large drop recently in the rig count, domestic production jumped 0.2 MMbbls/day last week to 12.6 MMbbls/day and is up 1.4 MMbbls or 12.5% year-over-year, although the rate of gain has slowed considerably recently. Despite the series of large builds and falling investor sentiment over the past month, I remain bullish on natural gas. Even with these builds, the commodity is still undervalued by 13% versus a Fair Price of $63.06/barrel according to my Fair Price Model. Further, while I would not be surprised to see a fifth straight build in Wednesday's report, I expect to see weakening imports and rising exports thereafter that should drive a series of large draws in late October well into November. At this time, I am maintaining my aggressive $65/barrel upside price target on WTI.


Thanks to the rise in oil and December natural gas, my Oil & Natural Gas Portfolio soared on Friday, gaining +2.4% to push 2019 year-to-date gains to +10.7% or +13.7%. Thanks to a sharp early October pullback, this is well below the year-to-date highs that topped +16%. Subscribers to the site will note that I have not made any trades so far this month and trading activity on the Portfolio has been very quiet dating back to September. I have certainly not lost interest in the Portfolio nor do I have a deer-in-the-headlights panic following the recent pullback. The honest truth is that I actually like all of my positions--but for the long-run. I don't want to try to get fancy here and abandon these trades with the intent to return to them after a quick swing trade, but then get stuck in such a trade that doesn't work out. Presently, I remain aggressively long natural gas with a short DGAZ position worth 19.4% only slightly offset by a 5.0% UGAZ short. This has not been a successful trade recently and, should the December 2019 contract top $2.60/MMBTU as discussed above, I may cut my losses and bail on it. My short DWT position--providing long WTI exposure--stands at a modest 9.6% of my holdings. At this time, I am maintaining a $65/barrel upside price target. I have previously discussed adding to this position but, after the recent series of builds, have decided to defer on this unless WTI falls under $50/barrel. One reason that I am comfortable holding these positions and not making frequent trades is that I know that, long term, leverage-induced decay will work in my favor, even if the price doesn't necessarily do so. Otherwise, I also like my high-risk, high-reward, low-exposure equity plays in CHK, LNG, GLNG, SWN and have no plans to sell--or add to--them at this time. Click HERE for more on my current oil and natural gas holdings.


Over the weekend, natural gas demand reached a new Shoulder Season high on Saturday as unseasonably chilly temperatures expanded southward, bringing snow showers as far south as Minneapolis, MN. I projected a daily storage build of +10 BCF/day on Saturday, just below the 5-year average. Gas demand weakened on Sunday as temperatures moderated some with a +14 BCF/day build as the Realtime storage surplus versus 2018 topped +500 BCF. Gas demand will hold nearly steady today as the work week begins. Unseasonably chilly temperatures will persist across the northern Plains and Great Lakes today with Minneapolis, MN and Chicago, IL both struggling to 50F, 10F-15F cooler-than-normal. On the eastern extent of the chill, Buffalo, NY will only reach the low 50s, more than 5F cooler-than-normal. On the other hand, after last week's record-setting day-over-day drop from 80F to the low 20s, Denver, CO will remarkably one again see highs top 80F today, 16F warmer-than-normal and a remarkable 60F 4-day temperature swing. Highs will be above-average across the Eastern Seaboard as well with highs in the mid-70s reaching as far north as New York City, 10F warmer-than-normal. Richmond, VA could even top 80F, which is sufficient to prompt some late-season cooling demand. Overall, today's forecast mean population-weighted mean nationwide temperature will warm 1.9F from Sunday to 61.3F, 0.3F warmer-than-normal. Total Degree Days (TDDs) will rise to 8.3 TDDs, right at normal levels and the 14th most for October 14 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 +14 BCF/day daily natural gas storage injection, around 0.3 BCF/day larger than Sunday and nearly 4 BCF/day bearish versus the 5-year average +10 BCF/day injection. Late yesterday evening, projected Realtime natural gas inventories topped 2007's end-of-season peak of 3545 BCF to move into 10th place on the list of all-time largest EOS peaks. By tonight, projected Realtime inventories will top 3560 BCF as the storage surplus versus the 5-year average reaches +24 BCF. The year-over-year surplus will jump 6 BCF to +507 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.


For the remainder of the week, look for natural gas demand to slowly rise as another quick-hitting shot of Canadian air to sweep southeastward from the northern Plains. By Thursday, highs will be 10F-15F cooler-than-normal across most of the Eastern Seaboard, driving daily natural gas storage injections down to around +12 BCF/day. However, the cold air will vanish as quickly as it arrived with temperatures returning to at-or-above-average by Friday into next weekend. For the full week of October 12-18, I am projecting a preliminary +89 BCF natural gas storage injection, 16 BCF bearish versus the 5-year average and 28 BCF larger than last year's injection. It would be the second largest injection for the week in the last 5 years behind only 2014's +94 BCF build. Should it verify, inventories will top 3611 BCF while the storage surplus versus the 5-year average tops +33 BCF and the year-over-year surplus grows to +524 BCF. The EIA will release its official storage numbers for the week next Thursday, October 24 at 10:30 AM EDT. Click HERE for more on this week's projected storage injeciton.