April 16, 2018

Home --> Daily Commentary & Archive --> April 16, 2018 Daily Commentary

Natural Gas Demand Soars With Injections Flipping Back To Withdrawals As Winter Storm Pummels The Heartland; Natural Gas Production Tops 80 BCF/Day For The First Time, But Mother Nature Has It Covered...For Now; New Natural Gas Pricing And Volatility Data Now Available On The Site

6:00 AM EDT, Monday, April 16, 2018
Natural gas rose 5 cents or 1.8% on Friday to erase early-week losses and settle at $2.74/MMBTU, up 1.3% on the week. Yet again, despite both a favorable near-term temperature outlook as well as a larger-than-expected natural gas storage withdrawal in what would typically be the first week of the injection season, the commodity continues to struggle to find its footing. On Thursday, the EIA announced that natural gas inventories fell by -19 BCF during the week of March 31-April 6, 4 BCF larger than my -19 BCF projected draw and 28 BCF bullish versus the 5-year average +9 BCF injection. The reported draw drove the year-over-year storage deficit to -725 BCF and the deficit versus the 5-year average to -375 BCF. This was a reversal from the previous 3 weeks in which reported withdrawals were consistently smaller than expected, raising concern about a loosening market. The bullishness of the report was tempered somewhat by the announcement that natural gas production averaged 80.1 BCF/day for the week of March 31-April 6, up an enormous 8.1 BCF/day year-over-year, as shown in the Figure to the right. However, the market has staved off the impact of surging production by remaining consistently colder-than-average throughout March and April. This trend continued last week and into the weekend, accompanied by a rare April blizzard that brought up to 2 feet of snow in South Dakota, Minnesota, and Wisconsin. With unseasonably cool temperatures expected to continue for at least the next week, the storage deficit versus the 5-year average could be nearing -500 BCF by the end of April. Nonetheless, I expect that investors will continue to find it hard to ignore the impact of record production and limited demand compensation. Once temperatures finally moderate, storage injections will come fast and furious, cutting into the storage deficit. I continue to maintain a $2.50/MMBTU near-term price target on the commodity, which, in my opinion, is needed to help rebalance supply and demand heading into the summer cooling season.

Crude oil, meanwhile, overcame a disappointing EIA Status Report and surged a massive 8.6% last week to settle at $67.39/barrel. Brent oil was up 8.2% to $72.58/barrel. Both of these closes are 4-year highs. Oil was driven higher on the week largely on geopolitical news with rising concerns about Middle East tensions and the US-Russia relationship over Syria. The gains came despite the EIA announcing a bearish +3.3 MMbbl inventory build for March 31-April 6 as imports rose and exports tumbled even though the Brent-WTI spread topped $5/barrel on the week. It is likely that the build was due to a transient import/export mismatch that will correct itself in the weeks to come. I am maintaining a 4-month $70/barrel price target for WTI oil, although I will be closely monitoring EIA storage data to make sure that fundamentals are not beginning to erode.

After 2 weeks of treading water, my Oil & Natural Gas Portfolio climbed to new all-time highs last week. Despite a -0.2% decline on Friday, the portfolio rose +3.8% last week, its largest weekly gain this year. I was particularly pleased with these gains as they came despite natural gas, which remain my largest holdings, trading sideways. The portfolio is up +47.1% since the fund's inception on May 1, 2017 and +12.4% through the first 71 trading days of 2018, or +44.2% annualized. For subscribers, I have published a new Monday Investing Commentary HERE. Subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

The EIA will release its weekly Natural Gas Storage Report for April 7-13 this Thursday at 10:30 AM EDT. In what is typically the second week of the storage injection season, I am projecting a -21 BCF inventory drawdown, a massive 59 BCF bullish versus the 5-year average +38 BCF injection. The draw was driven by record-setting cold across the Midwest and Ohio Valley during the first three days of the storage week with daily draws exceeding -12 BCF/day on Saturday and Sunday. Late in the week, record warmth built northward across the southern Plains and East leading to the first sizable daily injections of the year, but it was too little, too late. A -21 BCF storage withdrawal would be the only draw in the past 5 years, as shown in the Figure to the right, and only one of seven in the full 24 year period of record. It would be 25 BCF bullish versus the smallest injection since 2013, a +4 BCF build in 2016, and 95 BCF bullish versus the largest injection, an ugly +74 BCF build in 2015. Should a -21 BCF withdrawal verify, natural gas inventories would drop to 1314 BCF, although I estimate that storage levels bottomed out around 1296 BCF intra-week before storage injections on Thursday and Friday. With weekly storage injections likely to begin this week, last week's inventory level will go down as the season nadir, the smallest since 2014. The storage deficit versus the 5-year average would climb to -434 BCF or -25% while the year-over-year deficit would roar higher to -793 BCF or -38%. This remains a preliminary projection and will be revised over the next 48 hours as finalized temperature and pipeline data is integrated into my model. Click HERE for more on this week's projected withdrawal.

In other news, I am pleased to have added two new features to the site. The first is natural gas futures pricing data with a year-over-year comparison for each of the first four futures contract. As the Figure to the right shows, the front-month contract is around 13% cheaper year-over-year compared to 2017 when prices were at $3.16/MMBTU. This should support fuel switching into the summer but I continue to expect that it will be insufficient to counter surging domestic production. That being said, with the storage deficit versus the 5-year average likely to approach -500 BCF by the end of April, inventories are now dealing with a much larger cushion than expected just a few weeks ago. It is now very unlikely that inventories will approach 4,000 BCF by the end of the injection season and by next winter, new LNG export plants and other conventional power plants will begin to help rebalance the market. This should support natural gas prices with a floor near $2.50/MMBTU.

The second new feature I've added is natural gas volatility data. This is based on a 10-day rolling average move, expressed as percent change per day. As the Figure to the right shows, the current 10-day average volatility is +/-0.84% per day, which is considerably below last year's +/-1.46% per day. Surprisingly, natural gas investors have taken the colder-than-average temperatures largely in stride rather than overreacting to the upside, such as in January of this year, resulting in a spike in volatility. This has implications for natural gas investors holding long positions in leverage-induced ETFs. As most know, over time these products are susceptible to leverage-induced decay and tend to underperform their corresponding 1x ETF and underlying commodity. This degree of underperformance is directly correlated to volatility with a higher-volatility accelerating leverage-induced decay. With volatility down considerably year-over-year, expect leverage-induced decay to be reduced, allowing investors to hold onto ETFs such as UGAZ or BOIL for a longer period of time before the drag of leverage-induced decay becomes a serious issue.

To view pricing and volatility data, please see my Natural Gas Investing Page HERE.