June 16, 2017

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Natural Gas Surges 4% Off 3-Month Lows After EIA Reports Smaller-Than-Expected +78 BCF Weekly Storage Injection; Preliminary Exceptionally Bullish +55 BCF Weekly Storage Injection Projected For June 10-16, Smallest In 23 Years; Early-Season Tropical Storm(s) Possible In Atlantic Next Week

6:00 AM EDT, Friday, June 16, 2017
In its weekly Natural Gas Storage Report for June 3-9, the EIA reported Thursday morning that inventories rose by +78 BCF. This was 4 BCF smaller than my +82 BCF projection and 9 BCF bullish versus the 5-year average +87 BCF build. It was also a solid 8 BCF smaller than the analyst consensus of a +86 BCF injection. The bullish build was driven by strong demand in the Midwest and South Central regions which saw injections of +20 BCF and +14 BCF, 7 BCF and 6 BCF bullish versus each region's respective 5-year average. The East region prevented the storage injection from being more bullish as its +34 BCF was 6 BCF bearish versus the 5-year average +28 BCF. Overall, natural gas inventories rose to 2709 BCF while the storage surplus versus the 5-year average slid to +228 BCF or +9%, which is at the very bottom of the 4-month range of +225 BCF to +300 BCF, with a decisive break lower likely next week. While above-average temperatures boosted powerburn to 2017-highs and help drive strong gas demand last week, even with temperature eliminated as a variable this report was bullish. I calculate that temperature-independent supply/demand balance was 3.3 BCF/day tight versus the 5-year average last week, up from 1.2 BCF/day tight the week before and considerably above the 1-month average 2.0 BCF/day tight. It was, however, 0.8 BCF/day loose versus the same week in 2016. Year-over-year looseness notwithstanding, this suggests that, even with normal temperatures, natural gas demand will be greater than the 5-year average and would drive the storage surplus to continue to contract.

Through the first 11 weeks of the storage injection season, a total of 660 BCF of natural gas has been added to natural gas inventories since they bottomed at 2049 BCF in late March. This is the third smallest 11-week injection to-date in the past 5-years behind only last year's +573 BCF and 2012's +446 BCF. It is also the 5th most bullish build in the full 23 period for which EIA storage data is available dating back to 1994. In contrast, 2015 saw the largest build through the first 11 weeks of its storage injection season at a mammoth +972 BCF.

See more on the EIA's storage report and injection season statistics on my Current Inventories Page HERE.

After natural gas had overextended itself to the downside over the past 3 weeks to March lows, Thursday's report was exactly what natural gas bulls needed to right the ship. After trading near flat immediately prior to the report, natural gas surged post-10:30 AM finishing the day up 12 cents or 4.2% at $3.06/MMBTU. The 1x ETF UNG rose 3.7% while the 3x leveraged product UGAZ was up 11.4%. Even with the rally, natural gas remains undervalued according to my Fair Price model. Thanks to the tightness of the market, as discussed above, the commodity is trading at a 3.6% undervaluation versus its 8-month average Fair Price as I expect the natural gas oversupply to continue to contract. While the commodity is now trading at a tiny 0.5% overvaluation based on current inventories alone, thanks to continued above-average demand through the weekend, I expect this flip to an undervaluation by Saturday or Sunday (barring a spike in natural gas price today). Natural gas bulls are further supported by a favorable Futures profile. As the Figure to the right shows, natural gas futures contracts through October are essentially flat. As a result, investors who trade natural gas ETFs can avoid the contango-induced losses that frequently plague these products over the long term. This favors investors looking to buy and hold throughout the summer and into the fall while ETF shortseller will, at least for now, be unable to count on the easy returns associated with contango-induced decay. I remain modestly bullish on natural gas at these levels and continue to hold a natural gas long position via short DGAZ. Crude oil, meanwhile, continued its slump as worries of a worsening domestic supply glut mount with the commodity falling 27 cents or 0.6% to $44.46/barrel, the second straight day it record a fresh 7-month low. See more on my oil & natural gas holdings on my portfolio page HERE or subscribe HERE.

Natural gas demand will rise today to finish the storage week as temperatures warm across the Plains and Southwest. Highs today across the major demand center of Texas will be pushing the upper 90s across most areas including Houston, San Antonio, and Dallas while El Paso will likely see triple digit heat, all 5F-10F warmer than average. Heat Advisories are up for the Texas panhandle including Amarillo and Lubbock where highs will reach the low 100s. Further north, 90F heat will stretch as far north as southern South Dakota with Denver, Omaha, and Des Moines all reaching 90F, around 10F warmer than average. Phoenix, Az will approach 110F today on its way to 120F by next Tuesday while Sacramento and Fresno will both reach the upper 90s to low 100s today, around 10F warmer than average. Temperatures across the Megalopolis will remains seasonably cool for a second consecutive day today with New York City and Boston both 10 degrees cooler than average with highs in the low 70s and mid 60s, respectively. Despite the cool air across the East, the forecast mean population-weighted nationwide temperature today will climb 0.5F day-over-day to 76.5F today thanks to the warming trends across the Heartland and West, 2.8F hotter-than-average. Total Degree Days will rise slightly to 12.3 TDDs today, 1.4 TDDs greater than normal and the 5th most for June 15th in the last 37 years since 1981. See more on today's temperature and degree day outlook HERE. Based on this outlook and early-cycle pipeline data, I am projecting a bullish +7 BCF/day daily storage injection today, 1 BCF smaller than yesterday and 5 BCF bullish versus the 5-year average +12 BCF/day. See more on today's storage projection and intraday inventory levels HERE.

For the natural gas storage week of June 10-16 that ends today, I am projecting a preliminary +55 BCF weekly storage injection. Such an injection would be a very bullish 27 BCF smaller than the 5-year average +82 BCF injection. It would be the smallest injection in the last 5-years, topping 2012's +61 BCF injection and, as the Figure to the right shows, the single most bullish injection in the full 23 year period for which EIA storage data is available dating back to 1994. Injections during this period have ranged from the +61 BCF in 2012 to +120 BCF in 2003. The bullish injection was driven by record-setting heat across much of the Midwest and Northeast that drove natural gas powerburn above 30 BCF on 5 days this week, including today. Should a +55 BCF injection verify, natural gas inventories would rise to 2768 BCF while the storage surplus versus the 5-year average would drop to +206 BCF, a decisive break below the 3-month +225 BCF to +300 BCF range and the lowest since the week ending February 17. Based on this projection, natural gas is trading at a 0.5% undervaluation. The EIA will release its official report for this week next Thursday, June 22, at 10:30 AM EDT. See my Weekly Storage Page HERE for more details.

Looking ahead to next week, natural gas demand will remain well-above average as hotter-than-average temperatures persist across much of the nation. As discussed yesterday, the major weather headline for the next 4-5 days will be the epic heat across the Desert Southwest where Phoenix, Az could approach all-time record highs with forecasts topping 120F Monday and/or Tuesday (all-time record: 122F). Some areas in the open deserts could even reach 125F. The heat will not be restricted to Arizona and many interior cities of California including Fresno, Bakersfield, Sacramento, and Redding can expect multiple days topping 100F and excessive heat warnings and heat advisories have been appropriately raised. This brutal heat will likely boost powerburn across the region. Elsewhere, temperatures will remain hot across the southern and central Plains while a quick shot of much cooler air will drop the northern Plains and Midwest back into the 70s mid-week before temperatures rise again to wrap up the week. I expect daily injections to drop as low as +5-6 BCF/day over the weekend before climbing to around +9 BCF/day mid-week as cooler temperatures briefly suppress cooling demand before dropping back down to +5 BCF/day by the end of the week as the heat builds back in. With a 5-year average daily injection of +10 BCF, natural gas demand looks to hold above-average each day next week. For the full week of June 17-23, I am projecting a preliminary +44 BCF storage injection which would be an exceptionally bullish 28 BCF smaller than the 5-year average injection and just 3 BCF larger than last year's record-setting +41 BCF injection. Should it verify, natural gas inventories would rise to 2812 BCF while the storage surplus will drop to +178 BCF, its first sub-+200 BCF mark since February. See more on this week's projection HERE. The EIA will release its official report for the week on June 29 at 10:30 AM EDT.

In other news that could potentially provide near-term support to the bullish cause, there are indications that the tropics could come to life as early as next week. The 3 top performing tropical models--the American GFS, Europe's Euro, and Britain's UKMET--are all pointing to tropical development somewhere in the southern Gulf of Mexico, Bay of Campeche, or western Caribbean early next week. These models have been holding to this forecast for the past 72 hours. Such confidence is rare this early in the hurricane season and strongly supports cyclogenesis. The National Hurricane Center is currently giving 5-day odds of development at 50%. Should a system develop, it would likely be very large and in close proximity to land, both of which would limit its ability to rapidly spin up and intensify. None of these three models are forecasting strengthening to a hurricane, although a 50-60 mph Tropical Storm Brett seems reasonable. Should a storm develop, it would most likely track west-northwest or northwest and make landfall across Mexico's Gulf Coast south of Texas, although some model runs point to the system being drawn north towards Louisiana, Alabama, Mississippi or western Florida. Regardless, it is unlikely that this system will cause a significant or sustained reduction in natural gas Gulf production and, if anything, the cloudcover and rainfall it produces could decrease powerburn. However, investors tend to get angsty with tropical development in the Gulf this early in the season (although early-season Gulf tropical activity does not historically translate to a more active season) and this system could provide some minor support to natural gas. Further, an unusually strong early-season tropical wave across the Central Atlantic also needs to be watched for development. The system is currently too close to the equator to spin up, but conditions are otherwise reasonably favorable for development. It has limited model support presently and the NHC is only it a 20% chance of developing in the next 5 days. Even if it does develop, it would likely be shredded to pieces as wind shear increases dramatically in the Eastern Caribbean and would be unlikely to reach the Gulf of Mexico. However, unlike our Gulf system, early-season development in the central Atlantic does favor increased seasonal activity. Stay tuned.