Natural Gas Demand Opens The Week On A Low Note With Bearish +10 BCF Daily Injection Today As Mild Temperatures Dominate; Preliminary Bearish +46 BCF Weekly Storage Injection Projected For Thursday's EIA Report; Seasonal Temperature Forecast & Steep Contango Continue To Drive Natural Gas Overvaluation
6:00 AM EDT, Monday, April 17, 2017
Natural gas rose 4 cents or 1.6% on Thursday to finish the holiday-shortened trading week at $3.23/MMBTU. For the week, the commodity finished the week down 3 cents or less than 1% as expectations for seasonally mild temperatures and the short week suppressed volatility. On Thursday, the EIA announced that natural gas inventories for the week of April 1-7 increased by +10 BCF, which was 6 BCF larger than my +4 BCF projection but still 2 BCF less than the 5-year average. Natural gas inventories rose to 2061 BCF while the storage surplus versus the 5-year average inched lower to +263 BCF or +15%. Despite the near-average weekly build, supply/demand balance was a bullish 3.2 BCF/day bullish versus the 5-year average if temperature was removed as a variable.
In similar low-volatility fashion, crude oil rose 7 cents or 0.1% on Friday to close at $53.18/barrel. For the week, the commodity gained 1.8% as a bullish -2.1 MMbbl decline in crude oil inventories and continued sociopolitical concerns in the Middle East fueled sentiment.
The EIA will release its weekly Natural Gas Storage Report for the week of April 8-14 this Thursday at 10:30 AM EDT. I am projecting a preliminary +46 BCF storage injection for the week, which would be 10 BCF larger than the 5-year average and a bearish 40 BCF larger than last year's bullish +6 BCF storage injection, which was the smallest in the last 5-years. A +46 BCF injection would be the second largest in the last 5 years behind only 2015's disastrous +78 BCF build, as shown in the Figure in the right. The above-average storage injection was driven by a mean nationwide average weekly temperature of 60.5F, the warmest week since October 29-November 4 and 3F warmer than average. LNG feedgas demand to Sabine Pass did not significantly influence the week's demand as the 15.64 BCF in weekly feedgas was essentially unchanged from the previous week.
Should a +46 BCF storage injection verify, natural gas inventories would rise to 2107 BCF while the storage surplus would climb slightly to +273 BCF or +15%. The year-over-year storage deficit would fall sharply to -374 BCF, the smallest since March 10. See more on this week's projected injection my Weekly Natural Gas Page HERE. This remains a preliminary projection and will be revised further over the next 48 hours as finalized temperature and pipeline data is integrated into my model.
Over the weekend, natural gas demand slumped with daily storage injections rising as high an estimated +11 BCF build thanks to above-average temperatures as well as the Easter holiday suppressing commercial and industrial demand. Demand likely bottomed over the weekend as temperatures will steadily cool through the upcoming work week. After high temperatures reached the upper 70s to lower 80s across much of the I-95 corridor on Sunday, readings across this region will drop by 5F-15F day-over-day to the low 70s across the entire region, still around 10F warmer than average. Further west, highs today will cool across the northern Plains from the low 60s to the low 50s from the Dakotas to Minneapolis to Green Bay, near average for this time of year. Overall, the forecast nationwide population-weighted mean nationwide temperature today is 65.5F, down 1.4F day-over-day and 7.5F warmer than average. Total Degree Days (TDDs) today will tally just 5.8 TDDs, 3.7 TDDs less than average and the 3rd fewest for the date in the last 37 year 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 bearish +10 BCF daily storage injection today, 1 BCF smaller than yesterday but still 2 BCF greater than the 5-year average +8 BCF/day. See more on today's projected injection and intraday storage details HERE.
Demand looks to steadily rise for the remainder of the week as the forecast mean population-weighted temperature cools to around 61F by Friday, less than 1F warmer than average. As a result, I project that daily storage injections will fall to around +6 BCF by Friday, 2 BCF bullish versus the 5-year average. However, the combination of early-week warmth and holiday-induced demand suppression will have already done their damage and I am projecting a mildly bearish +63 BCF storage injection for the week of April 15-21. Such a build would be 6 BCF larger than the 5-year average and would be the third largest injection in the past 5 years for the April 15-21 period. Should it verify, natural gas inventories would rise to 2169 while the storage surplus versus the 5-year average would drift higher to +279 BCF. See more on this week's projected storage injection on my Weekly Storage Page HERE. Looking longer term, there are some indications that a colder airmass could infiltrate the US by the week of April 22-28 bringing an increase in demand, although the expected magnitude of any below average temperatures has been lessened over the weekend. I am currently projecting a modestly bullish +47 BCF weekly storage injection for the period, 15 BCF smaller than the 5-year average. Stay tuned.
With natural gas trading sideways over the past week and the storage surplus expected to be generally flat between +260 BCF and +280 BCF for the remainder of April, natural gas continues to trade at a modest overvaluation. Based on current inventories alone, the commodity is trading at a 10% overvaluation versus its Fair Price. With natural gas supply/demand balance tight versus the 5-year average, I expect that the storage surplus will contract over the next few months assuming average temperatures as we move into the summer. At the same time, however, the natural gas futures market remains in contango and the commodity will become increasingly expensive during this time which will help to preserve the overvaluation despite the declining surplus, particularly as we head into next winter. As a result, the overall 8-Month Average Overvaluation is a substantial 7% overvaluation. The overvaluation by week is shown in the Figure to the right. See more on the natural gas Fair Price HERE. As a result, I continue to hold a short position in natural gas via a short stake in the 3x leveraged ETF UGAZ worth 25% of my target position size. I plan to continue to hold this position until the 8-month overvaluation falls at least under 5%, which could be achieved either via a pullback in the commodity or a tightening of supply/demand balance.