December 15, 2017

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Natural Gas Storage Projection For September 9-15: Third Consecutive Bearish Injection Expected But Bullish Mid-Week Inflection Sets The Stage For The Rest Of September

6:00 AM EDT, Friday, September 15, 2017
Today's commentary discussing my natural gas storage projection for September 9-15 and near-term price outlook is published exclusively on SeekingAlpha. Click the link at the end of the commentary preview below to read. In its weekly Natural Gas Storage Report for September 2-8, the EIA announced Thursday morning that inventories rose by +91 BCF. This was 4 BCF larger than my +87 BCF projection and a whopping 28 BCF bearish versus the 5-year average +63 BCF. It was the largest injection since June 2 and boosted the storage surplus versus the 5-year average back up to +43 BCF after falling as low as +8 BCF two weeks ago. However, given the number of bearish drivers impacting the report--the Labor Day Holiday, demand suppression associated with Hurricanes Harvey & Irma, new supply via the Rover Pipeline, LNG feedgas losses from Sabine Pass, and unseasonably cool temperatures--investors seem to have breathed a sigh of relief that it wasn't larger than it was and natural gas finished higher by 0.4% to settle at $3.07/MMBTU after trading up over 1.5% earlier in the session. The 1x ETF US Natural Gas Fund (UNG) outperformed climbing 0.7% on the day while the 3x VelocityShares ETF (UGAZ), which completed its monthly rollover to the November 2017 contract on Thursday, underperformed relative to UNG, gaining 1.6%. While Thursday's reported injection was the second consecutive bearish weekly build, there is still one more week of bearishness to go: the week of September 9-15 that ends today. However, unlike the past two weeks which saw bearish daily injections throughout the week, this week's build will represent an important inflexion point as changes in the weather pattern and temperature-independent natural gas supply/demand balance both transitioned from bearish to bullish during the course of the week, likely setting the stage for the resumption of bullish builds beginning the following week. This article will discuss my projection for the next natural gas weekly storage injection and its impact on the price of the commodity moving forwards.

For the storage week of September 9-15, I am projecting a preliminary +84 BCF natural gas storage injection. The EIA will release its official injection numbers for the week next Thursday, September 21, at 10:30 AM EDT. Such a build would be 12 BCF bearish versus the 5-year average +72 BCF and an even more bearish 29 BCF larger than last year's +55 BCF build. However, as Figure 1 below shows, the bulk of the gas was injected during the first half of the week as by Thursday and Friday, daily injections fell back towards the 5-year average. The EIA released a heavily Harvey-influenced Petroleum Status Report on Wednesday morning for the week of September 2-8. It announced that crude oil inventories rose by +5.8 MMbbls for the week which, while just below Tuesday's API +6.4 MMbbl forecast, was exceptionally bearish versus the 5-year average -0.2 MMbbl drawdown and was, in fact, the largest injection for the September 2-8 period since 1983. However, a large build was widely expected given the extensive refinery shutdowns in the wake of Hurricane Harvey that dramatically cut demand, and some analysts were calling for a build as high as +10 MMbbl, making +5.8 MMbbl look downright rosy. The large build was driven by weak oil demand which fell a further 0.4 MMbbls/day from last week and, at 14.1 MMbbls/day, was down nearly 4 MMbbls/day from the pre-Harvey peak. Additionally, after dropping over 0.7 MMbbls/day due to Gulf oil platform shutdowns, domestic production quickly rebounded last week, climbing 0.57 MMbbls/day week-over-week to reach 9.35 MMbbls/day last week, still shy of the pre-Harvey peak of over 9.5 MMbbls/day.

On the flipside, due to the cutdown of refinery inputs, gasoline inventories plummeted by -8.4 MMbbls, which was larger than the API forecast -7.9 MMbbl draw and nearly 10 MMbbls bullish versus the 5-year average +1.3 MMbbl build. And most impressively, the -8.4 MMbbl draw was not only the largest on record for September 2-8, but the largest ever, for any week, since 1983. With the gasoline draw, inventories fell to 218.3 MMbbls and are only 3.6 MMbbls above the 5-year average, the smallest surplus in over a year, as shown in the Figure to the right. Combined with a strong -3.2 MMbbl drawdown in distillates (5-year average: +3.2 MMbbls), Total Petroleum Inventories (comprised of crude oil, gasoline, and distillates) plunged by -5.8 MMbbls, over 10 BCF bullish versus the 5-year average +4.3 MMbbls. As a result, the Total Petroleum Inventories surplus versus the 5-year average fell to +95 MMbbls, down over 50% from the February 2017 peak of +203 MMbbls. Thus, despite the large crude oil build, Hurricane Harvey has not had a negative impact on the petroleum sector and, once production, refinery inputs, and imports normalize, I expect the crude oil storage surplus to continue its decline.

Overall, I consider Wednesday's report to be net bullish, a sentiment shared by other investors as, after a brief post-report dip, oil steadily rose throughout the day and closed near its intraday high. With crude oil trading at a Fair Price of $60.22/barrel based on current inventories according to my Fair Price Model, I remain very bullish on oil at this time and feel that it trades above $60/barrel within 6 months. For this reason, I am long the commodity and look to build my position further, as detailed in Wednesday's Investing Commentary. Click HERE for the latest crude oil inventory data or HERE for gasoline and distillate numbers data.

Turning to natural gas, The EIA will release its weekly Natural Gas Storage Report for September 2-8 this morning at 10:30 AM EDT. I am projecting a +87 BCF natural gas storage injection. Such a build would be 24 BCF bearish versus the 5-year average +63 BCF build and 29 BCF larger than last year's +58 BCF injection. It would be the second largest in the last 5 years, behind only 2014's +91 BCF build, as shown in the Figure to the right. Should a +87 BCF injection verify, natural gas inventories would rise to 3306 BCF while the storage surplus versus the 5-year average, after dropping as low as +8 BCF on August 25, would climb back up to +40 BCF after a second consecutive bearish build. It will be the first time we have seen consecutive bearish weekly injections since the two-week period ending April 28, 2017. The year-over-year storage deficit, meanwhile, would contract to -183 BCF, which would be the lowest since December 2, 2016. The driving force behind the bearish injection is multifold, beyond the traditional industrial and commercial demand suppression that comes with Labor Day. First, after a warm start, the September 2-8 period cooled dramatically to finish the week with record low temperatures across much of the Southeast Thursday morning with readings well into the 40s as far south as Tennessee. The mean population-weighted nationwide 7-day average temperature for the week was 73.2F, 0.4F cooler than last week and just below the long-term normal of 73.3F. On the supply side, natural gas production surged following temporary outages associated with Harvey and received an added boost from the Rover Natural Gas Pipeline which transported a total of 4.25 BCF of natural gas last week in its first week in service. On the demand side, LNG feedgas demand to Sabine Pass tallied just 4.2 BCF on the week, down over 8 BCF from the previous week, thanks to a shutdown of the shipping channel used by LNG tankers to access the facility, forcing the plant to restrict feedgas. Between new supply entering via the Rover Pipeline and the sharp decline in LNG feedgas from the previous week, I expect that supply/demand balance for September 2-8 loosened by an ugly 12.3 BCF between these two variables alone, contributing to the large injection. This remains a preliminary projection and will be revised further over the next 48 hours. Click HERE for more on this week's projection.

With the recent rally in natural gas to near September highs and the expectation of a bearish build today, natural gas is vulnerable to a pullback should the report come in larger-than-expected. On the other hand, with the supply/demand outlook for natural gas looking much improved beyond this week, should today's injection come in smaller than expected, investors could breath a sigh of relief that the 2nd of 3 bearish reports wasn't as bad as it could have been and begin looking beyond to the more bullish outlook for the second half of September, bidding natural gas up in the process. I expect that an injection of over +90 BCF--which would place it as the most bearish injection for the week in the past 5 years--would be viewed as a bearish disappointment with prices pulling back towards $3.00/MMBTU. I expect that an injection of under +80 BCF would be viewed as a bullish surprise despite its overall bearishness versus the 5-year average, driving prices to Summertime highs. A reported injection between +80 BCF and +90 BCF would be neutral with prices equally likely to rally or pullback.

Check back at 10:30 AM EDT for the official EIA storage injection 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 continue to climb today to a new 10-day high as temperatures warm and the last vestiges of Irma fade across the Ohio Valley. Highs will rise into the mid-90s from West Texas all the way into central Nebraska and Iowa. Even Minneapolis, Mn could reach 90F today, nearly 20F warmer than average. The Intermountain West will remain hot today as well with Denver and Salt Lake City again approaching 90--10F-15F warmer than normal--although a strong cold front will demarcate this heat from highs only in the low-to-mid 50s across Montana, nearly 20F cooler than normal. Across the Ohio Valley, highs will be 5F-10F cooler than average with Pittsburgh, Pa to Columbus, Oh in the upper 60s and lower 70s as showery conditions from the remnants of Irma persist. Along the Eastern Seaboard, temperatures will feel summerlike with mid-80s from Washington, DC to Boston, 5F-10F warmer than normal. Overall, the forecast mean population-weighted nationwide temperature today will rise over a degree day-over-day to 73.5F, more than 2F warmer than normal. With power outages still lingering across Florida and such an anomaly not driving the same powerburn demand as it would in mid-Summer, I am projecting a +11 BCF natural gas injection today, 1 BCF smaller than yesterday but still nearly 1 BCF bearish versus the 5-year average +10 BCF/day. Click HERE for more on today's projected injection and the latest intraday natural gas inventories.

For the natural gas storage week of September 9-15 that ends tomorrow, I am projecting a +84 BCF storage injection, which would be 11 BCF bearish versus the 5-year average. While temperatures rose during the second half of the week boosting powerburn demand with additional support from record LNG feedgas demand, gains in demand were blunted by extensive power outages in Florida impacting up to 2/3rds of the population, which still persist. Should such an injection verify, natural gas inventories would rise to 3390 BCF while the storage surplus would climb to +49 BCF. Click HERE for more on this week's storage report. The EIA will release its official report for this week next Thursday, September 21 at 10:30 AM EDT.

Looking ahead to next week, I am expecting a major pattern shift that will bring much cooler-than-average temperatures across the West with late-summer heat across the more densely populated East with extensive highs in the 80s as far north as the Great Lakes and New England that should boost late-summer powerburn. Additionally, I expect LNG feedgas demand to hold near record levels of 2.7 BCF/day to 2.9 BCF/day so long as there remains a glut of tankers awaiting in the Gulf of Mexico. For this reason, I am projecting that daily storage injections will hold at +9 BCF/day to +10 BCF/day throughout the week, 2-3 BCF/day bullish versus the 5-year average +12 BCF/day. Projected daily storage injections for the week are shown in the Figure to the right. Overall, for the week of September 16-22, I am projecting a preliminary +68 BCF natural gas storage injection. Such an injection would be a strong 17 BCF bullish versus the 5-year average, dropping the storage surplus versus the 5-year average back to +33 BCF. It would be the second smallest injection for the September 16-22 period in the last 5 years, behind only 2016's +49 BCF build. Click HERE for full details on the week's projection. The EIA will release its official injection for the week on Thursday, September 28 at 10:30 AM EDT.

Overall, I remain bullish long-term on natural gas as I expect that continued strong feedgas demand out of Sabine Pass, the onset of operations at the Cove Point LNG plant this Fall, a colder-than-average temperature forecast for this winter, and cheap gas heading into the Shoulder Season will counter any additions in supply via the Rover Pipeline and other new takeaway capacity. Even after this week's 3-day rally, natural gas remains undervalued according to my Fair Price Model by 6.2% which climbs above 20% based on storage projections over the next 8 months. However, given the rally and upcoming bearish storage reports, I would not be surprised to see a near-term pullback closer to $3.00/MMBTU followed by rangebound trading until the natural gas storage surplus flips to a surplus. My natural gas price target by the end of the Shoulder Season is $3.25/MMBTU.