April 16, 2019

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Natural Gas Continues To Feel The Impact Of Bearish Temperature Outlook As Prices Fall Under $2.60/MMBTU; Gas Demand To Fall Today With Storage Deficit Versus The 5-Year Average Contracting Under -400 BCF; Oil & Natural Gas Portfolio Eclipses New 2019 High

6:00 AM EDT, Tuesday, April 16, 2019
The week got off to a rough start for natural gas bulls with the commodity slumping 7 cents or 2.6% to $2.59/MMBTU. It was the lowest close for the Front-Month Contract since February 14. Since peaking at $2.86/MMBTU on March 14, natural gas is down 9.4% in the past month in what has been a slow, grinding pullback. As the Figure to the right show, this year's prices have diverged from those of a year ago over the past week and the commodity is now trading at a 6% discount to 2018. The driving force behind the sell-off has been the ongoing forecast of generally seasonable temperatures for the next several weeks which, in the settling of a loosening supply/demand imbalance and the historically soft shoulder season, is expected to result in a rapid increase in inventories over the next 6 weeks, flipping the year-over-year deficit to a surplus and cutting the long-standing deficit versus the 5-year average by over 300 BCF to just over -100 BCF. For this reason--and the absence of any meaningful bullish catalyst--I remain bearish near-term on natural gas. My price target for the front-month contract had been $2.60/MMBTU, but I am now eying $2.60/MMBTU for the June 2019 contract--which closed Monday at $2.63/MMBTU--as this is what the 3X leveraged ETFs UGAZ and DGAZ are currently holding. And this target may ultimately be conservative. However, should prices drift towards $2.50/MMBTU, I believe natural gas--despite its near-term headwinds becomes an increasingly attractive long bet.

Meanwhile crude oil saw its pursuit of a seventh straight week of gains get off to a sour start as WTI fell 49 cents or 0.8% to $63.40/barrel. Brent fell 37 cents to $71.18/MMBTU. The dip seems most likely a routine pullback and profit-taking opportunity following the commodity's mammoth first quarter rally. My price target for WTI remains at $65/barrel as I feel that the commodity is merely establishing a new base before the next move higher. However, I will be keeping a close eye on Wednesday's Petroleum Status Report given the large inventory builds over the past two weeks. In particular, I will be looking for a swift rebound in refinery input demand heralding the ramp up into the summer driving season, the absence of which would force me to re-evaluate my current sentiment.

My Oil & Natural Gas Portfolio was nearly flat on Monday, rising less than +0.1%, as the dip in natural gas prices was essentially offset by the drop in oil. However, it was enough to push 2019 year-to-date gains to a new high of +12.3% or +43%. I made no trades on Monday. As discussed above, my natural gas downside price target in $2.60/MMBTU for the June 2019 contract and $65/barrel for WTI. As discussed in Monday's commentary, the next large trade I am considering 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.

Natural gas demand will fall for a second straight day today as milder temperatures overspread the Midwest. Chicago, Minneapolis and Milwaukee will all reach the mid-60s today while Des Moines, Kansas City and St Louis will hit the mid-to-upper 70s, all 10F-20F warmer-than-normal. Further south, highs in parts of Kansas and Oklahoma could reach the 80s. Readings will be more seasonal across the Eastern Seaboard with Washington, DC, Philadelphia, New York City, and Boston all reaching the low-to-mid 60s, around 5F warmer-than-normal. The largest below-average anomalies will be ound across the Desert Southwest where Las Vegas struggling to climb out of the mid 60s, nearly 15F colder-than-normal which, more than anything, will restrict early-season cooling demand. Overall, today's forecast mean population-weighted mean nationwide temperature will warm by 0.6F from Monday to 58.3F, 0.7F warmer-than-normal. Total Degree Days will slump to 8.4 TDDs, 1.3 TDDs fewer than normal and the 14th fewest for April 16 in the last 38 years. 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 +13 BCF/day daily natural gas storage injection, nearly 3 BCF larger than Monday's build and 6 BCF bearish versus the 5-year average +7 BCF/day. By tonight, projected Realtime natural gas inventories will rise to around 1288 BCF while the storage deficit versus the 5-year average falls under -400 BCF for the first time since February 20. The year-over-year deficit will fall to a negligible -3 BCF and will flip to a surplus in the early hours of Wednesday morning. Click HERE for more on today's projected daily injection and Realtime natural gas inventories.

For the remainder of the week, I project that demand will continue to fall on Wednesday and Thursday with exceptionally bearish injections of around +16 BCF/day each day. As a result, I am projecting a +91 BCF storage build for April 13-19, 44 BCF bearish versus the 5-year average and a massive 112 BCF larger than last year's withdrawal. As the Figure to the right shows, it would be the single largest injection all-time for the period. Inventories would rise to 1336 BCF while the storage deficit versus the 5-year average would slip to -373 BCF and the year-over-year deficit would flip to a +52 BCF injection. The EIA will release its official storage numbers for the week next Thursday, April 25 at 10:30 AM EDT. Click HERE for more on this week's injection.