February 14, 2019

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Hard Knocks: Natural Gas Tumbles After Arctic Outbreak Gets CANCELLED; Crude Oil Rises Despite Larger-Than-Expected Inventory Build On Weak Imports & Bullish Goldman Comments; EIA Projected To Announce Exceptionally Bearish -78 BCF Natural Gas Storage Withdrawal Today; Gas Demand To Fall Sharply Today On Warming East

6:00 AM EDT, Thursday, February 14, 2019
One day after natural gas rose to a new 2-week high, the commodity promptly gave up more than half of the gains accrued over the past three sessions as near-term computer models trended dramatically warmer. The March 2019 contract tumbled 11 cents or 4.1% to $2.58/MMBTU, just 5 cents off last week's 2-year intrasession low. In one of the more dramatic swings I have seen, a series of potent nationwide arctic outbreaks forecast earlier in the week have been revised to be restricted to the northern Plains and Rockies thanks to a building Southeastern Ridge. This ridge has been--and looks to continue being--a major source of frustration for natural gas bulls throughout February, especially since there is plenty of arctic air across southern Canada, just waiting to spill south, but is restricted from doing so. This warm-up has resulted in a dramatic reduction in gas-weighted degree days (GWDDs) over the past 36 hours, as shown in the Figure to the right. The GFS saw its 14-day forecast tumble by 30% from 535 GWDDs to 380 GWDDs from the 12Z 2/12 run to the 00Z 2/14 run, as shown in the Figure to the right, having warmed for 5 out of the last 6 model runs . The ECMWF ENS has seen a slower, more steady decline, falling from 510 GWDDs on the 00Z 2/11 run to 460 GWDDs in the 12Z 2/13 run. Even with the warm-up, the ECMWF is forecasting consistently above-average GWDDs while the GFS has now fallen to slightly below-average GWDDs for the first time in nearly 2 weeks. Click HERE for more on the latest short- and long-term degree day forecasts on my Advanced Modeling Page.

Despite the warm-up, I am still projecting bullish natural gas storage withdrawals for each of the next 3 storage weeks, including the weeks ending February 15, February 22, and March 1. However, these bullish departures have come down considerably and, as a result, my projected season-ending storage level has risen by approximately 30 BCF over the past 24 hours to around1194 BCF, 441 BCF bullish versus the 5-year average. Fortunately for the bulls, even as the short term models have trended dramatically warmer, the longer-term CFSv2 has remained consistent in its 3-6 week forecast calling for below-average temperatures nationwide through mid-March, countering the near-term losses in withdrawals. Keep an eye on today's run of the 44-day ECMWF-EPS gold-standard model, due out on my Advanced Models Page tonight at 8 PM EDT.

Obviously, this warming trend is a tough break for the bulls, who have seen a winter filled with tough breaks. The near-term warm-up makes it increasingly unlikely that the natural gas storage deficit versus the 5-year average will top -500 BCF, which was my target that I felt was necessary for prices to top $3.00/MMBTU. As a result, I am reducing my near-term price target from $3.00/MMBTU to $2.90/MMBTU. Of note, this is far below my Fair Price based on current inventories alone of $3.89/MMBTU. Reaching this price target would require a tighter market free from the overwhelming bearish sentiment that is currently dominating the sector, but remains a long-term number to shoot for should supply/demand balance tighten up this spring and summer.

Meanwhile, the EIA released its weekly Petroleum Status Report for February 2-8 Wednesday morning at 10:30 AM EDT detailing crude oil and refined product inventories and supply/demand data. The EIA reported that inventories rose by +3.6 MMbbls, considerably higher than Tuesday's -1.0 MMbbl draw forecast by the API, but still right at the 5-year average. Crude oil inventories rose to 450.8 MMbbls while the storage deficit versus the 5-year average held at +25.9 MMbbls. This week's storage build was influenced heavily by the weather. Just as heavy fog along the Gulf Coast limited LNG exports, it also limited oil imports, which tumbled to just 6.21 MMbbls/day, the lowest since January 1997. Imports are down a steep 1.8 MMbbls//day year-over-year, as shown in the Figure to the right. In fact, the sharp drop in imports more than countered the rapid growth in production such that total supply is now down 50,000 barrel/day year-over-year. On the other hand, the drop in imports also meant that refinery demand dropped, falling 0.86 MMbbls/day week-over-week to 15.77 MMbbls/day, very close to a 52-week low. Both of these anomalies are likely temporary, although I expect the trend of softening imports to continue in response to OPEC export cuts and I envision levels stabilizing near 7 MMbbls/day. Click HERE for more on current oil inventories and supply/demand data.

Crude oil traded above $54/barrel ahead of the report and briefly traded as high as $54.60/barrel in late morning trade after Goldman Sachs issued bullish comments on the sector. Ultimately, WTI closed off its highs but still finished up 80 cents or 1.5% at $53.90/barrel. Brent rose $1.19 to close at $63.61/barrel, less than 30 cents from a $10/barrel WTI-Brent spread, which will likely favor strong US exports and continue to suppress imports. Based on current inventories alone, crude oil remains undervalued by 11% versus a Fair Price of $60.56/barrel according to my Fair Price Model. And despite the larger-than-expected storage build, crude oil inventories are still averaging 1.7 MMbbls/week tight versus the 5-year average over the past month. As a result, this Fair Price climbs above $65/barrel by late summer as shown in the Figure to the right, driving an average 8-month undervaluation of 12%, accounting for the slight contango that WTI futures prices are in. While somewhat disappointing, this week's storage don't significantly change my sentiment towards oil and I am maintaining a $60/barrel 2019 price target on the commodity. Click HERE for more on crude oil Fair Price analysis.

Despite significant exposure to the long natural gas trade, the blow of that commodity's sharp pullback was softened by strength in oil and my equity holdings. The Portfolio fell 0.2% on Wednesday, reducing 2019 year-to-date gains to +4.3%. With the sell-off in natural gas, my net long exposure stands at a steep 11.8%, with a 16% DGAZ short partially offset by an 4.2% UGAZ short. My traditional safety margin for short 3X ETFs is net 12%, although I may be willing to exceed that level slightly given the steep undervaluations in the sector. Unfortunately, I am not able to safely add to my position at this time. My upside price target has been reduced to $2.90/MMBTU, although I may consider taking some exposure off the table above $2.75/MMBTU. I remain pleased with my DWT short trade, worth 3% of my holdings and up +9% from my basis. My sentiment is unchanged and I am targeting $60/barrel WTI. I only wish I had more exposure, but will not chase the commodity unless prices fall under $52/barrel. All four of my equity holdings were in the black yesterday with small gains, led by GLNG at +1.6%. My newest holding, a long 8.3% position in Kinder Morgan (KMI), is up a solid +4.1% in just over a week. While I like the company and the position, I am considering taking profits in the name should prices top $19.00/share (or maybe even lower) as I am concerned about a pending pullback in US equities. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for February 2-8 this morning at 10:30 AM EDT. At this time, I am projecting a -78 BCF weekly withdrawal. Thanks to record-setting mid-week warmth, such a draw would be 82 BCF bearish versus the 5-year average and 105 BCF smaller than last year's draw. The draw would also be a massive 159 BCF smaller than the previous week's -237 BCF withdrawal thanks to mean nationwide temperatures this week averaging 47.1F, an incredible 11.8F week-over-week warm-up. Demand also took a hit as weekly LNG feedgas fell to a nearly 1-year low 18.5 BCF, down more than 10 BCF week-over-week. It would be the single smallest withdrawal for the February 2-8 period in the last 5 years. Even more impressively, it would be the second smallest draw all-time for the period, behind only 1999's -64 BCF draw, as shown in the Figure to the right. The exceptionally bearish storage projection was driven by unseasonably mild temperatures across the major demand centers of the Eastern Seaboard and Ohio Valley. Temperatures reached 80F as far north as North Carolina and 60s spread into Pittsburgh and Cleveland. The mean population-weighted temperature for the week was 47.7F, more than 6F warmer than normal. Should a -78 BCF withdrawal verify, natural gas inventories would fall to 1882 BCF while the storage deficit versus the 5-year average would contract sharply to -333 BCF. The year-over-year deficit would narrow to a mere -33 BCF. Click HERE for more on the week's projected draw.

While this week's bearish draw has already been more than priced into levels, emboldened natural gas bears remain on the warpath and are looking for any excuse to drive prices even lower. I feel that a reported draw of -75 BCF or smaller would be viewed as just another excuse to do so, driving prices back to last week's 2-year lows under $2.55/MMBTU. I feel that it would take a reported draw of -85 BCF or larger to prompt a rally, although any bounce would likely be transient unless we see the near-term outlook stabilize and cool. A reported draw between -75 BCF and -85 BCF would be neutral versus expectations with prices equally likely to rally or pullback.

Check back at 10:30 AM EDT for the official EIA storage withdrawal on my Current Natural Gas Inventories Page HERE. Also, I now have weekly natural gas supply and demand statistics on my Natural Gas Supply & Demand Page HERE that should be updated between 3 pm and 4 pm EDT.

Natural gas demand will fall sharply today as warmth expands across all areas east of the Mississippi River and across much of Texas. Across the latter, highs will approach 80F in Dallas, a balmy 20F warmer-than-normal with 70s and 80s likely statewide. Further east, highs will reach the low 50s in Columbus, OH and Pittsburgh, PA will reach the low 50s, 10F-15F warmer than normal while along the I-95 corridor, highs will generally be in the mid-40s from Washington, DC to Boston, 5F-10F warmer-than-normal. Below-average temperatures will be limited to a sparsely-populated area of the northern Rockies and Plains with Bismarck, ND struggling into the lower single digits and Billings, Mt only reaching the upper teens, each 20F-25F warmer-than-normal. However, given the largely differences in population density between East and West, the above-average anomalies will drive natural gas demand today. Overall, the forecast mean population-weighted nationwide temperature will rise to 46.9F today, 3.3F warmer than yesterday and 4.8F warmer-than-normal. Total Degree Days (TDDs) will fall to 18.1 TDDs, 5.4 TDDs fewer than normal and the 6th fewest in the last 38 years since 1981. Click HERE for more on today's temperature and degree day data.

Based on this forecast and early-cycle pipeline data, I am projecting a -13 BCF/day daily natural gas storage withdrawal for today, 8 BCF smaller than both yesterday's draw and the 5-year average. LNG feedgas demand will dip 0.2 BCF from Wednesday to 4.3 BCF/day today thanks to a drop in flows to Corpus Christi. By tonight, Realtime natural gas inventories will fall to 1750 BCF while the storage deficit versus the 5-year average will contract to around -347 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories. Gas demand will rise slightly tomorrow to around -16 BCF/day. While this will still be bearish versus the 5-year average, strong early-week demand will drive a projected -158 BCF/day, 9 BCF bullish versus the 5-year average. More on this week's projected withdrawal in Friday's commentary.