April 17, 2019

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Death By A Thousand Paper Cuts: Small But Consistent Daily Drops Continue To Punish Natural Gas Bulls In The Absence Of A Positive Catalyst; EIA Expected To Announce Bullish Crude Oil Inventory Drawdown In Today's Status Report; Gas Demand To Fall To Fresh 2019-Low Today As Projected Realtime Inventories Top 1300 BCF

6:00 AM EDT, Wednesday, April 17, 2019
Natural gas continued its slow-motion sell-off on Tuesday, falling another 2 cents or 0.7% to settle at $2.57/MMBTU. With the storage deficit versus the 5-year average falling under -400 BCF yesterday, the year-over-year storage deficit flipping to a surplus overnight, and a prolonged period of generally seasonal temperatures expected for the next several weeks, there is no obvious catalyst besides oversold dip buying to support a sustainable rally right now. Yes, LNG feedgas demand has rebounded sharply over the past 5 days. However, it remains nearly 1 BCF/day below the recent highs and is barely keeping pace with recent production growth. At this time, I remain bearish on the sector and see few near-term positives in the sector. However, at $2.62/MMBTU, the June 2019 contract held by the 3x natural gas ETFs UGAZ and DGAZ is nearing my downside price target of $2.60/MMBTU. Below this level, I feel that, even with the bearish conditions, upside potential begins to outweigh downside risk. The path downwards will meet increasing resistance with further downside requiring a continuance of nearly ideal bearish conditions and/or production growth while relief rallies will be triggered by much smaller events such as a heating trend in the models or a better-than-expected EIA storage report. For this reason, I am coming close to taking profits on my natural gas short trade and will even consider flipping back to long, accepting that I may be a bit too early on the trade with further downside to $2.50/MMBTU still not out of the question.

Meanwhile, oil recovered from Monday's losses, with WTI rallying 65 cents or 1% to $64.05/barrel and Brent rising 54 cents to $71.72/barrel ahead of today's Petroleum Status Report. The commodity remains just below my upside price target of $65/barrel. Opposite to the situation natural gas faces, I feel that above this level, downside drag will begin to outweigh near-term upside potential. In particular, I worry that domestic producers will begin to ratchet up production--something we may already be starting to see with the rig count up each of the past two weeks after a months-long decline--and that OPEC+ may start to relax production curbs and that some early demand destruction may start to take hold. Additionally, there is always the wild card of Donald Trump injecting himself into the picture via tweet. For this reason, should prices break $65/barrel, I will likely take profits on my long trade and even consider going short to capitalize on a healthy pullback.

My Oil & Natural Gas Portfolio saw another tiny gain on Tuesday, but one that took the fund to a new 2019 high. The Portfolio gained +0.2% to push 2019 year-to-date gains to +12.5% or +43.2% annualized. As the Figure to the right shows, the Portfolio has seen steady, if slow, growth over the past 6 weeks after a mid-winter pullback, and is on pace for its best year yet. I made a single trade on Tuesday, a long bet on volatility and a broad market pullback via short SVXY as I had discussed for the past several days. While not an oil or natural gas position per say, the trade is primarily intended as a hedge against my long trade as I feel that a sudden market correction is the biggest threat to the oil sector right now as its own underlying fundamentals are and will likely remain solid near-term. This position is my single largest net holding at this time at 9.5% of my holdings and is essentially flat versus my basis. With the trade, my cash position fell to 53.3% which is closer to my target 30%-50% cash position size. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Petroleum Status Report for the week of April 6-12 this morning at 10:30 AM EDT. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting a very strong -3.1 MMbbl inventory drawdown, 6.3 MMbbl bullish versus the 5-year average +3.2 MMbbl build. Should such a draw verify, crude oil inventories would fall to 456.6 MMbbls while the storage surplus versus the 5-year average would flip back to a -2.2 MMbbl deficit. Inventories would still be +25.9 MMbbls higher year-over-year. Additionally, the API is forecasting that gasoline stocks fell by -3.6 MMbbls, modestly bullish versus the 5-year average -0.8 MMbbl draw. The only red mark on the API's ledger is distillates which are expected to rise +2.3 MMbbls, 3.9 MMbbls bearish versus the 5-year average -1.6 MMbbl draw. Nonetheless, overall Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to fall by -4.3 MMbbls, 5.2 MMbbls bullish versus the 5-year average. As discussed above, the key metric that most investors will be focused on besides the storage figure will be refinery input demand which, if these numbers verify, will have likely begun its delayed springtime ramp up. Overall, this looks to be a very strong report and only reinforces my bullish outlook. Should it verify, I may even consider raising my near-term oil price target. Other investors agree, and WTI tacked on another 50 cents in Wednesday evening electronic trade to over $64.50/barrel.

Check back after 10:30 AM EDT today for the EIA's official storage numbers HERE.

Natural gas demand will fall for a third straight day today to a new 2019 low today as warm temperatures dominate the eastern half of the nation. Another powerful spring storm--the third in the past week--will dominate the Heartland with warm, Gulf of Mexico air being pumped northwards ahead of the system. The largest anomalies will be found across the Ohio Valley with Columbus, OH, Pittsburgh, PA, and Indianapolis, IN all reaching the mid-70s today, 10F-15F warmer-than-normal. Along the Eastern Seaboard, highs will reach the 80s as far north as Richmond, VA, although there will be a fair rapid drop off north of there with Washington, DC struggling to 70F, and Philadelphia, New York City, and Boston all within 5F of average in the lower 60s. An area of below-average highs will be found across the northern Midwest in the area impacted by heavy rain throughout the day with Minneapolis struggling to 50F, around 10F colder than normal. Overall, today's forecast mean population-weighted nationwide temperature will soar 3.5F from Tuesday thanks to the warming trend across the East to 61.8F, a balmy 3.9F warmer-than-normal. Total Degree Days will fall to 7.0 TDDs, 2.5 TDDs fewer than normal and the 8th fewest for April 17 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 +16 BCF/day daily natural gas storage injection for today. This would be 2 BCF larger than Tuesday's build, 9 BCF bearish versus the 5-year average, a massive 19 BCF larger than last year's build on the same date, and would be a new 2019-high. The magnitude of the injection is blunted slightly by LNG feedgas demand which will be 4.55 BCF/day, up more than 1.5 BCF/day from a week ago as Sabine Pass flows have rebounded sharply following 2 weeks of maintenance, as shown in the Figure to the right. Total feedgas demand is projected to reach 32.4 BCF this week, up 9.4 BCF from a week ago which should help the market tighten up slightly, notwithstanding other impacts from production, nuclear outages, etc. Click HERE for more on the latest LNG export numbers. By early this afternoon, projected Realtime natural gas inventories will top 1300 BCF and will finish the day near 1306 BCF. The storage deficit versus the 5-year average will fall under -390 BCF while the fresh year-over-year storage surplus will climb to +18 BCF. Click HERE for more on today's projected build and Realtime natural gas inventories.