May 17, 2017

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Oil & Natural Gas Each Rise 4%+ On The Week Yet Both Remain Undervalued; Natural Gas Demand Poised To Rise Throughout The Week As The Heartland Heats Up; Exceptionally Bullish +31 BCF Storage Injections Expected For Each Of The Next 2-Weeks As Temperature Forecast Remains Hot

6:00 AM EDT, Monday, July 17, 2017
Natural gas rose 2 cents or 0.6% on Friday to close at $2.98/MMBTU, up 4.1% on the week. While the EIA reported a modestly bullish +57 BCF in-line with expectations, natural gas got a boost from Mother Nature as the temperature outlook for the second half of July trended warmer. Despite the rally, natural gas remains undervalued according to my Fair Price Model, trading at a 4.9% undervaluation based on estimated current inventories alone and a similar 4.6% undervaluation averaged over the next 8 months based on long-term projections. This suggests that natural gas has further upside potential that could take the commodity back above $3.00/MMBTU. Crude oil also had a strong week, capping off a 5.2% weekly rally with a 46 cent or 1% gain on Friday to settle at $46.54/barrel, the highest close since July 3. The rally was driven by an exceptionally bullish -7.5 MMbbl weekly crude oil inventory drawdown--even as estimated domestic production rose to a new 2017 high--plus news of a pipeline shutdown in Nigeria. Thanks to declining inventories and a tight market, oil remains significantly undervalued according to my oil Fair Price model, trading at a 10.4% undervaluation based on current inventories alone with a Fair Price of $52.12/barrel, rising to 15.9% averaged over 8 months based on long-term projections.

On the week, my Oil & Natural gas portfolio rose 3.7% on strength in the energy sector, boosting gains since May 1 to 11.3% within about 1% of a new high. Subscribers can view my portfolio holdings as well as a new Trading Discussion for today by clicking HERE. Click HERE to learn more about signing up and supporting the site.

The EIA will release its weekly Natural Gas Storage Report for July 8-14 this Thursday at 10:30 AM EDT. I am projecting a preliminary +31 BCF, an exceptionally bullish 28 BCF bullish versus the 5-year average +59 BCF and 7 BCF bullish versus last year's build. As the Figure to the right shows, it would be the second-smallest injection in the last 5 years, just behind 2012's +28 BCF build. By contrast, the injection would be nearly 70 BCF smaller than 2014's +99 BCF build. The bullish injection was driven by above-average temperatures across much of the eastern half of the nation last week, particularly across the Plains, Mid-Atlantic, and Southeast. The mean nationwide population-weighted temperature last week averaged 79.0F, a 2017 high and nearly 2F warmer than average. As a result of the heat, Natural Gas Powerburn averaged 33.2 BCF/day last week, also a new 2017 high. The projection also got a bullish boost from natural gas production which, based on a preliminary analysis dropped by around 0.5 BCF/day on the week. Should a +31 BCF injection verify, natural gas inventories would rise to 2976 BCF while the storage surplus versus the 5-year average would drop sharply to +146 BCF, the lowest since February 10 when it was +87 BCF. See more on this projection on my Weekly Inventories Page HERE. This remains a preliminary projection and will be revised further over the next 48 hours.

Over the weekend, natural gas demand fell slightly as cooler-than-average temperatures overspread the Great Lakes region with highs only in the 70s. Nonetheless, with daily injections of around +6 BCF/day, the builds remained slightly bullish versus the 5-year average +7 BCF/day. Natural gas demand will hold steady today as temperatures remain quite cool across the Great Lakes region from Minneapolis to Chicago to Detroit to Pittsburgh. Highs in Chicago and Cleveland today will be luck to break 80F, around 6F cooler than average. Elsewhere across the country, highs will generally be seasonally cool with readings within 5F of average with the I-95 corridor from Richmond, Va to New York City in the mid-80s and much of Texas in the low-to-mid 90s. The exception will be across eastern North and South Dakota where Fargo could reach 95F, 10F hotter than average, and the Central Valley of California where Fresno and Sacramento could approach 110F and 100F, respectively, 5F-10F warmer than average. Overall, the forecast mean population-weighted for today will fall by 0.3F to 77.5F, right at normal for the date. Forecast total degree days will fall to 12.8 TDDs today, 1.6 TDDs fewer than normal for July 17 and the 12th fewest in the last 37 years since 1981. See more on today's temperature and degree days outlook HERE. Based on this forecast and early-cycle pipeline data, natural gas demand will fall slightly but I am still projecting a +6 BCF/day daily storage injection today, still 1 BCF bullish versus the 5-year average +7 BCF/day. By the end of the day, I project that natural gas inventories will be around 2994 BCF and poised to top 3000 BCF by late Tuesday night or early Wednesday morning. See more on today's projection and intraday natural gas inventories HERE.

For the remainder of the week, natural gas demand will steadily rise through Thursday as heat builds across the Eastern Seaboard and the Heartland. Excessive Heat Watches have already been hoisted from eastern Kansas through central Illinois including Kansas City and St Louis as temperatures will likely exceed 100F multiple days this week. Across the East, all of the major metros from Miami to Boston will reach 90F, 5F-10F warmer than average. In fact, around 65% of the US population will see temperatures over 90F this week with exceptions being the interior Northeast, most of the Great Lakes region, and the Pacific Northwest. Forecast mean population-weighted nationwide temperatures will likely peak on Thursday at 81.2F, a new 2017 high and nearly 4F warmer than normal. For the temperature forecast this week, please see my near-term forecast page HERE. Based on this forecast, I expect daily natural gas storage injections to fall as low as +2 BCF/day on Thursday and Friday, less than one-third the 5-year average, as shown in the Figure to the right. Based on current forecasts, I am projecting a preliminary +31 BCF storage injection for the week of July 15-21, identical to the previous week and a bullish 17 BCF smaller than the 5-year average, which could take the natural gas storage surplus versus the 5-year average under +130 BCF. It would be the third smallest storage injection for the week in the last 5 years behind 2012's +27 BCF injection and last year's +19 BCF injection. For the latest projection and additional historical data, please see my Weekly Storage Page HERE. The EIA will release its official data for this week on Thursday, July 27 at 10:30 AM EDT. Looking long term, even as temperatures may cool somewhat by next weekend, the latest long-term models continue to indicate temperatures persistently at or above average across much of the US through the end of July and into August. As the National Weather Service's 10-14 day outlook to the right shows, the northern Plains and Deep South will likely continue to be hot spots. On the other hand, the seasonally cool temperatures this week across the Great Lakes may shift into the Northeast by next week, which could suppress demand across some major population centers. Nonetheless, I am continuing to project above-average natural gas demand with sub-50 BCF week storage projections throughout the period. By the week ending August 4, I am projecting that the natural gas storage surplus versus the 5-year average may have dropped to as low as +105 BCF or +4% versus the 5-year average. While storage projections remain bullish, it is worth mentioning that the year-over-year deficit will actually be contracting sharply over the next month--by in excess of 50 BCF--due to the combination of an exceptionally tight market and hot temperatures last summer that even drove a rare -3 BCF storage drawdown the week of July 28 last year. Stay tuned as this forecast evolves over the next week.