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April 15, 2019

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Natural Gas Facing Stiff Headwinds As Late April & Early May Outlook Trends Seasonal Amidst Loose Supply/Demand Imbalance; Natural Gas Bulls Steadily Liquidating Their Holdings While Oil Bulls Take Control; Gas Demand To Fall This Week With Year-Over-Year Deficit Flipping To A Surplus By Wednesday


6:00 AM EDT, Monday, April 15, 2019
The front-month May 2019 natural gas contract was nearly flat on Friday, settling down less than a penny or 0.2% at $2.66/MMBTU. The commodity continues its aimless trading, sans-catalyst, finishing flat on the week yet again. Natural gas has now settled at $2.66/MMBTU each of the past three Fridays. Of note, the 3X leveraged ETFs--UGAZ and DGAZ--have now rolled their holdings into June 2019 contracts, which closed Friday at $2.70/MMBTU, a modest 4 cent contango. Natural gas remains in a state of limbo right now with no strong bullish catalyst. 14-day forecast gas-weighted degree days, as the Figure to the right shows, have fallen below average over the weekend, as forecast by both the GFS and ECMWF, with consistently warmer-than-normal temperatures expected over the major population centers of the Northeast through early May. LNG feedgas demand for the past week has been dismal--at times under 50% capacity--thanks to ongoing maintenance at Sabine Pass. While demand has recovered steadily over the weekend, it has been nearly a month since LNG feedgas has set a new high. Additionally, nuclear reactor outages fell well below both the 5-year average and year-ago levels last week as the seasonal maintenance season has so far disappointed, leaving daily natural gas substitution demand a steep 1.3 BCF/day lower than 2018. And finally, while domestic natural gas production has failed to break out above 90 BCF/day, it is still up a robust 8.1 BCF/day from 2018 and poised to rise further when Permian takeaway capacity comes online later this summer. As a result of these factors, I am projecting a string of weekly storage injections above +90 BCF, with late April builds potentially reaching triple digits. For these reasons, I am bearish on the sector right now, targeting a front-month price under $2.60/MMBTU, and perhaps lower should the bearish outlook verify.


Meanwhile, crude oil recovered about a third of Thursday's losses with WTI rising 31 cents or 0.5% to settle at $63.89/barrel after losing 1.6% a day earlier. Brent oil rose a stronger 71 cents to $71.55/barrel. On the week, WTI was up 1.3% while Brent gained 1.7%. Friday's rally was multifactorial. Chevron's purchase of Anadarko was likely viewed as a positive acquisition by the industry. Additionally, ongoing violence near the Libyan oil fields threatens global supply with the head of that country's National Oil Corporation claiming that the latest civil strife is the greatest threat to the industry since the 2011 Revolution. Countering these bullish catalysts, Baker Hughes reported that the oil rig count grew for a second straight week, gaining 2 to 833. This follows the gain of 15 rigs from a week earlier. Thanks to the recent reversal in the rig count, active rigs are up 18 from the same week last year. This suggests that producers are finally responding to the huge 1st quarter rally which could result in an acceleration of production growth during the second half of the year, particularly as Permian takeaway capacity comes online. However, the increase in a rig count is a long-term problem for the bulls. A near-term problem faces the bears: the upcoming driving season and the seasonal spike in refining demand which should lead to some headline-grabbing storage drawdowns, especially if imports hold under 7 MMbbls/day. At this time, I am maintaining my $65/barrel price target for WTI. Above this level, I will re-assess and consider whether to continue holding or start taking profits, likely the latter out of an abundance of caution.


My Oil & Natural Gas Portfolio rose +0.2% on Friday to finish at a new 2019 high, the third set last week. Year-to-date gains through the first 71 trading days of 2019 stand at +12.3% or +43.6% annualized. I made only two trades on the week, both on Monday, April 8. The two involved a transfer of funds from long natural gas to short natural gas, flipping my position in the sector due to my increasingly bearish sentiment on the commodity, as discussed above. I covered a 4% stake in DGAZ and, using these funds along with a portion of my large cash position, shorted an 8% stake in UGAZ. Presently, my new net short position stands at a small 4.3% of my portfolio with an 11.7% short UGAZ position partially offset by a 7.4% DGAZ short. As discussed previously, the purpose of these partially offsetting positions--rather than just shorting a 4.3% UGAZ position or buying a 4.3% DGAZ position--is to benefit from the leverage-induced decay that impacts all 3x ETFS without overexposing myself in a single direction. At this time, I plan to continue holding this position until the June 2019 contract--currently held by both ETFs--drops below my near-term price target of $2.60/MMBTU, at which time I will evaluate market conditions before closing the trade or continuing to hold. My mid-size oil long trade via short DWT currently stands at 5.8% of my holdings and is up +36.3% from my basis. As discussed above, my WTI price target is $65/MMBTU, at which point I will likely take profits on this trade. One thing I am considering doing before then is to take out a long bet on volatility, which is also a bet on a broad market correction, as a hedge against this long oil position. With underlying fundamentals improving, the primary threat to oil is underlying market weakness and this would protect against that. With the VIX falling toward 12, historical trends strongly favor a reversion towards the long-term mean of 18-20. For this reason, I am considering shorting a 10% stake in SVXY, the VIX inverse ETF, thus providing long exposure. Stay tuned. Click HERE for more on my current oil and natural gas holdings.


On Friday, the Commodity Futures And Trading Commission (CFTC) released its weekly detailing money manager oil and natural gas holdings on the NYMEX exchange through Tuesday, April 9. Starting with natural gas, investors are becoming steadily more bearish on the sector as long holdings fell 16,130 contracts last week to 193,979 while short positions rose 6,204 to 85,052 contracts. As a result, the Bullish Sentiment--the percentage of contracts held long--fell 3% week-over-week to 70%. While this is 17% below December's highs and 4% below the 52-week average of 74%, it is still 7% above last year's level at this time, despite prices this year being 3% lower than a year ago. Bulls may cheer the apparent increased confidence that investors are showing the commodity. However, in this rather aimless environment, such positioning is more likely a cause of concern since it suggests that there is still a relative excess of longs in the trade and there remains room for bears to exert further downward pressure before the short position starts to become excessive. At this time, the year-over-year bullish excess currently stands at 5241 contracts which, with each contract worth 10,000 MMBTUs, amounts to $139.4 Million based on Friday's close. Click HERE for more on the latest natural gas investor position data.


Turning to crude oil, the CFTC announced that the V-shaped recovery in investor confidence continued. Open long positions soared 26,149 contracts to 344,229--the highest since October 2, 2018--while shorts slid 8,207 to 24,171 contracts, as shown in the Figure to the right. The crude oil Bullish Sentiment rose 3% last week to a sky-high 93%, up more than 30% from the January lows, just 4% shy of the all-time high set last summer and a full 10% above the 52-week average. However, it is flat year-over-year suggesting that there is not yet a significant excess of either long or short positions. It may be tempting to claim that such a wide disparity between long and short positions--344,229 versus 24,171, respectively--is not sustainable, but the Bullish Sentiment held above 90% for nearly all of 2018 before the collapse in prices in late October. Nonetheless, as Bullish Sentiment climbs above 95%, one must be highly wary of any change in fundamentals. Should US production start climbing, OPEC+ start to ease their production restrictions, or global demand concerns re-emerge, any pullback could be greatly exaggerated if these longs decide to suddenly reverse course or shorts start to pile back into the trade, as happened late last year, as well as back in 2015 and before than in 2009. Click HERE for more on the latest CFTC-reported crude oil money manager positions.


The EIA will release its weekly Natural Gas Storage Report for April 6-12 this Thursday at 10:30 AM EDT. At this time, I am projecting an exceptionally bearish +89 BCF storage injection. Such a build would be 68 BCF bearish versus the 5-year average and 125 BCF larger than last year's -34 BCF draw. As the Figure to the right shows, a +89 BCF build would be the largest in the last 5 years by a 19 BCF margin, handily topping 2015's +70 BCF injection. The bearishness of the build was driven by temperatures which have been unseasonably mild throughout the week, particularly across the East, with a mean nationwide temperature averaging 61.4F, nearly 5F warmer-than-normal. Additionally, despite the spike in the past 2 days, total LNG feedgas demand fell for a third straight week to 23.0 BCF, down 2.5 BCF from the previous week and the lowest since the week ending February 8. Should a +92 BCF injection verify, natural gas inventories would rise to 1244 BCF while the storage deficit versus the 5-year average would contract to -419 BCF. The storage deficit versus the 5-year average would contract to -60 BCF, or just 4%. Click HERE for more on the week's projected build.


Over the weekend, natural gas demand held slightly below average as mild temperatures dominated the major demand centers of the Eastern Seaboard. Projected daily withdrawals were +10 BCF/day on Saturday and +9 BCF/day on Sunday as compared to the 5-year average +7 BCF/day. Demand will fall today, beginning a pattern of steadily rising injections throughout the work-week. Behind another powerful springtime Midwest storm system, highs will be 10F-20F colder-than-normal as unseasonably chilly Canadian air spreads southward. St Louis will be lucky to crack 50F today while Chicago and Detroit will be stuck in the lower 40s, all around 15F below-average. On the other hand, in the warm southerly flow ahead of said storm system, temperatures will be equally warmer-than-normal. Pittsburgh could reach the mid-70s while Richmond, VA, Raleigh, NC, and Columbia, SC all reach the 80F mark, and Washington, DC could come close. Such readings are all around 15F warmer-than-normal. Overall, the two will largely offset, although end the end, population density will trump spatial extent. Today's forecast mean population-weighted nationwide temperature will cool 1.7F from Sunday to 57.7F, but will remain 0.4F warmer-than-normal. Total Degree Days (TDDs) will fall to 9.9 TDDs, 0.2 TDDs fewer than normal and the 17th fewest for April 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 +10 BCF/day daily natural gas storage injection, 1 BCF larger than Sunday's build thanks to decreasing cooling degree days across the South, and more than 3 BCF bearish versus the 5-year average +7 BCF/day build. By tonight, projected Realtime natural gas inventories will have risen to near 1275 BCF while the storage deficit inches lower to -405 BCF. The year-over-year deficit will tumble by 13 BCF to under 20 BCF and is within 72 hours of flipping back to a surplus, one which will likely grow to over +100 BCF by the end of the month. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.