6:00 AM EDT, Tuesday, October 15, 2019
It was an unsteady session, but, in the end, natural gas hung on for a much-needed win. The front-month November 2019 contract jumped 7 cents or 3.0% to settle at $2.28/MMBTU, erasing more than half of last week's 5.9% loss. After gapping up over 4% to $2.31/MMBTU at the open, the commodity gave up nearly all of its gains by the lunch hour, dropping to an intra-session low of $2.23/MMBTU. The commodity then got its act together in the hours before the close to rebound and settle just below session highs.
The December 2019 contract--held by the 3x ETF UGAZ--was up a more modest 4 cents or 1.5% to $2.50/MMBTU. It was for this reason that UGAZ was up "only" 4.6% on Monday in what may seem disappointing to some investors who had been hoping for the 9%+ gain that may have been expected from looking at the spot price. On the other hand, UNG, which still holds November 2019 contracts, was up the expected +2.9%.
Monday's rally was driven by a sharp cooling trend in the near-term computer models over the weekend that extended into Monday. The ECMWF ENS, which, compared to the GFS ENS, had been consistently warmer for much of last week, finally started to converge towards the much colder GFS late Sunday into Monday. Additionally, Monday's run of the gold standard long-term ECMWF-EPS model trended significantly colder as well, even as the CFSv2 model stayed unseasonably mild through the 6-week period. However, at this time, it appears increasingly likely that there will be a sustained shot of early-season heating demand during the October 24-November 3 or so period, as shown in the Figure to the right which plots projected departure-from-average gas-weighted degree days (GWDDs) according to my Hybrid Model. This is different from earlier forecasts that had, for the most part, suggested a rapid warm-up following this week's quick-hitting shot of arctic air. Click HERE for more on the near- and long-term temperature outlook.
As a consequence of this cooldown, my end-of-season peak natural gas inventory projection has fallen steadily from a maximum of 3866 BCF on October 5 to 3805 BCF as of Monday evening, as shown in the Figure to the right. This would knock 2019 from the fourth largest down to the seventh largest peak. Nonetheless, storage would still top out at a +77 BCF surplus versus the 5-year average and a massive +560 BCF larger than last year. Click HERE more on my long-term natural gas storage projections.
What does this mean for natural gas? With an overcrowded short trade and beleaguered bulls desperate for a catalyst, it is certainly possible that natural gas can rally further from here as the forecast is undeniably more favorable than it was this time last week. This being said, the temperature outlook for the second week of November onwards still looks warmer-than-normal, though less so than previously and, honestly, temperature forecasts at that range are very low-confidence. Further though, even with the downgraded season-ending peak inventory outlook, natural gas is right at its 4-week projected Fair Price of $2.50/MMBTU which alone would limit further sustained upside.
Beyond peak storage, however, with temperatures currently expected to be above-average and natural gas supply/demand imbalance loosening in response to record production and weakening powerburn demand, I project the storage surplus to continue rising after the early-November peak. As a result, my Fair Price falls and the commodity quickly becomes overvalued by upwards of 10% in December and January. Over the full 8-month period for which I issue projections, the commodity is overvalued by an average of 1.7% with a Fair Price of $2.38/MMBTU and a Futures Price of $2.42/MMBTU, as shown in the Figure to the right. In the end, the upcoming cold blast, while having a marked impact on near-term inventories and, more importantly, investor sentiment, will be but a blip on the radar longer term. And long-term, the balance still favors the favors. For these reasons, I feel that natural gas bears will once again use this weather-driven rally to load back up on shorts and take advantage of bulls who jump in over the next couple of days out of a fear of missing out. Don't be that guy. I am not adding to my long holdings here and my upside for the December 2019 contract (currently priced at $2.50/MMBTU) is just $2.60/MMBTU, at which point I will likely unwind my long trade and even consider adding shorts.
Meanwhile, crude oil gave up Friday's gains in another rough session yesterday. WTI slid $1.11 or 2% to settle at $53.59/barrrel--albeit well off intra-session lows--while Brent fell $1.16 to $59.35/barrel. The breakdown can once again be attributed to oscillating investor optimism (or pessimism) towards a US-China trade deal as well as a string of downward revisions of global demand heading into 2020 and beyond. At this time, I continue to feel that the market is going to tighten up into the end of the year and am maintaining my upside price target of $65/barrel which is in agreement with my Fair Price Model output. Because I am still concerned about further inventory builds for the next two weeks, I have held off adding to my long position via short DWT for now unless prices were to fall under $50/barrel.
Natural gas demand will inch slightly higher, though will remain bearish for this time of year. Across the Eastern Seaboard, temperatures will be generally at or above-average with highs generally in the upper 60s from Washington, DC to Philadelphia and low-to-mid-60s in New York City and Boston, within 5F of normal. Texas--the nation's largest natural gas-consuming state--will earn some late-season cooling demand as highs reach the upper 80s to lower 90s from San Antonio to Houston to Dallas, 10F warmer-than-normal. Jump north a thousand miles and a tight temperature contrast will drive some early-season heating demand as highs across Nebraska, the Dakotas, and Minnesota will only reach the upper 30s and lower 40s--including in the major demand center of Minneapolis--10F-15F colder-than-normal. Overall, today's forecast mean population-weighted nationwide temperature will rise by 0.6F to 62.0F thanks to the warming trend across the eastern half of the nation, 1.2 warmer-than-normal. Total Degree Days (TDDs) will rise slightly to 8.6 TDDs, 0.2 TDDs greater than normal and the 9th most for October 15 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, roughly 0.1 BCF smaller than Monday but still nearly 4 BCF/day bearish versus the 5-year average +10 BCF/day build and 5 BCF/day bearish versus 2018. By tonight, projected Realtime natural gas inventories will reach 3572 BCF while the storage surplus versus the 5-year average will grow to +25 BCF. The year-over-year surplus, meanwhile, will top +510 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.
October 15, 2019
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