November 17, 2017

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Natural Gas Falls For 4th Straight Day Despite Impressive Weekly Storage Withdrawal As Supply Concerns Weigh; Gas Demand Steady Today Before Rebounding Over The Weekend With Near-Average Storage Draws Expected The Next 2 Weeks; Natural Gas Storage Contest Rankings Through Week 2 Of 10 Now Available Plus Profile Upgrade

6:00 AM EDT, Friday, November 17, 2017
In its weekly Natural Gas Storage Report for November 4-10, the EIA announced Thursday morning that inventories decreased by -18 BCF, marking the first weekly storage withdrawal of the 2017-2018 heating season. The draw was 1 BCF larger than my -17 BCF projection and 30 BCF bullish versus the 5-year average +12 BCF injection. It was also above the analyst consensus, which was generally calling for a -5-15 BCF withdrawal. Four out of the five storage regions saw weekly draws with the East Region, the site of record lows across the Mid-Atlantic and Northeast that boosted heating demand, seeing the largest draw at -10 BCF. Unsurprisingly, only the South Central Region, which includes the Gulf Coast States, saw a weekly injection at +2 BCF. However, all five region saw bullish inventory changes. With the -18 BCF draw, natural gas inventories fell to 3772 BCF while the storage deficit versus the 5-year average widened to a nearly 1 year high of -101 BCF or -3%. The year-over-year deficit meanwhile rose to -271 BCF, a 5-month high, but is poised to go much higher over the next few weeks. Click HERE for more on current natural gas inventories.

Overall, I considered the EIA Report to be a very strong one in that it was bullish versus the 5-year average and the reported draw was larger than was expected. However, others did not share my sentiment and natural gas quickly gave up its small pre-report gains, finishing the day down 3 cents or 0.9% at $3.05/MMBTU. It was the fourth straight loss this week for the commodity. However, as the storage deficit continues to widen, so too does the commodity's undervaluation versus its Fair Price. According to my Model, with a projected storage deficit this morning near -122 BCF, the commodity is undervalued by a massive 13% versus its Fair Price of $3.53/MMBTU. Throughout the full 8-month period for which I issue projections, the commodity is undervalued by at least 10% each week, peaking at as high as 24% next spring as seasonal backwardation brings futures prices to near $2.90/MMBTU. While this undervaluation does not necessarily mean natural gas has to rally right now, it should limit further downside and I expect a price floor to establish near $3.00/MMBTU with subsequent whipsaw trading action similar to what we've seen in the past two weeks likely. Crude oil, meanwhile, continued its steady pullback, dropping another 19 cents or 0.3% to settle at $55.14/barrel as investors begin to eye the November 30 OPEC meeting which will likely result in a decision regarding extending production curbs through 2018. My Oil & Natural Gas Portfolio continued an organized pullback of its own on Thursday, dropping a negligible 0.02% to "reduce" gains since May 1st to +27.2%, down from last week's yearly high of +30%. Losses this week have been softened by profit-taking last week as well as a new hedging strategy I have initiated. Subscribers can view my current holdings and trades and read twice-weekly Investing Commentaries on my Portfolio Page HERE. To learn more about subscribing and helping to support the site, please click HERE.

Following the EIA's Storage Report, I updated the rankings of my Natural Gas Storage Contest through Week 2 of 10. As expected this early in the tournament, there was a lot of movement. Dclong nailed the -18 BCF draw and came within 4 cents of the closing price of natural gas with a $3.09/MMBTU forecast. He/she also submitted early enough last week to earn a 2.86x bonus multiple, driving a spectacular 68.7 weekly score. Saintsinneridiot jumped 5 spots to second place with a strong 60.2 points while newcomer Quad slid into 3rd with a 59.6. Last week's leader, rm516, remains in striking distance in 4th with 59.6 points. Quite_Easy made the biggest jump in the field, surging 62 spots from a stones throw from the basement last week all the way up to 12th. Through Friday morning, the field is now up to 90. Overall, the field averaged 6.2 raw points from storage projections and 3.0 raw points from closing price projections, which is a much better balance than last week. As such, there will be no changes to the scoring algorithm for Week 3. Additionally, I have upgraded the contest section of the site to now include a detailed profile and performance breakdown of each entrant. This includes submission, scoring, and ranking information for previous weeks, a comparison of each element of the weekly score to the rest of the field to point out strengths and weaknesses, and information on next week's submissions. This includes whether that person has submitted yet or not--which serves as a confirmation for the entrant as well as giving the competition a heads-up on his/her level of aggression--as well as each entrant's actual projection numbers, which will be revealed after closure of submissions on Tuesday afternoon. These profiles can be found on the ranking table off the contest homepage. Week 3 is now open for submissions which will run through next Tuesday at 5 pm EDT. Click HERE to submit your picks now. Because the bottom 2 scores out of the 10 weeks are thrown out, the contest is still wide open for anybody to enter and compete for the cash prizes as "0s" for the first two weeks will be discarded. Remember to use the identical username and password for each week, or your scores may not be counted. If you have questions about your username or password, or any other contest-related questions or concerns, please email me at CelsiusEnergyFM@gmail.com.

One reason that natural gas may have closed down Thursday despite the otherwise bullish withdrawal is that once again domestic production climbed to a new record high of 75.7 BCF/day. Production is now up a whopping 5.3 BCF/day year-over-year. Despite year-over-year gains in Mexican exports and LNG exports totaling around 2 BCF/day, temperature-independent supply/demand has loosened considerably over the past several months, falling to a new low last week of 3.9 BCF/day loose year-over-year. I feel that temperature-independent natural gas demand--which includes production, LNG imports, imports from Canada, LNG exports, and exports to Mexico--is the best overall indicator of the health of the natural gas sector under neutral conditions. The market was as much as 2 BCF/day tight year-over-year as recently as late August when we were consistently seeing bullish storage builds despite mediocre temperatures, but has loosened rapidly as production has grown and LNG export growth has slowed. This is shown in the Figure to the right. Right now, this looseness is masked by strong year-over-year gains in temperature-dependent demand variables such as residential and commercial heating demand. But there has to be heating demand for the growth in these sectors to be realized and, as I've said before, if and when we warm, supply/demand balance could loosen very quickly leading to some ugly wintertime withdrawals. Fortunately, we have a large storage deficit to act as a cushion so that even a near-average winter could drive bullish season-ending inventories. But should the forecast trend mild over an extended period, things could turn bearish in a hurry. It is likely this fear that is driving natural gas to be priced so far below my aforementioned Fair Price. Click HERE for more on natural gas supply/demand balance.

Natural gas demand will inch slightly higher today to near-normal levels as nationwide mean temperatures remain above-average. The largest anomalies today will be found across Texas, Oklahoma, and Kansas where highs could climb into the 80s today, an impressive 25F-30F warmer than normal and enough to prompt some very late season cooling demand. This will be contrasted by continued seasonally cool readings across the Northeast where highs will only rise into the low 50s today from Washington, DC to Boston, after starting the morning in the upper 30s. Such readings are generally 5F-10F cooler than normal and sufficient to prompt some slight heating demand. Overall, the forecast mean population-weighted nationwide temperature today will be nearly flat day-over-day at 53.1F, still 3F warmer than normal. Total Degree Days will rise to 14.3 TDDs, still 2.1 TDDs fewer than normal and the 17th fewest in the last 37 years dating back to 1981. Click HERE for more on today's temperature and degree day outlook. However, if nationwide temperatures had to be above average in mid-November, this is the way to do it, with much above anomalies across the south prompting cooling demand and below-average readings across the major heating centers of the Northeast. As a result, based on the temperature outlook and early-cycle pipeline data, I am projecting a -4 BCF/day daily natural gas storage withdrawal today, very close to the 5-year average daily draw. Click HERE for more on today's projected storage withdrawal and intraday natural gas inventories.

For the natural gas storage week of November 11-17, I am projecting a preliminary -47 BCF weekly storage withdrawal. Such a withdrawal would be a bullish 21 BCF larger than the 5-year average -26 BCF draw and a huge 50 BCF bullish versus last year's injection. As the Figure to the right shows, a -47 BCF draw would be the second largest in the last 5 years behind only 2014's -79 BCF. The 29 BCF week-over-week larger withdrawal was, unsurprisingly, driven by gains in demand. I estimate that res/com demand rose by over 5 BCF/day week-over-week to just under 27 BCF/day, a new seasonal high and 8 BCF/day higher year-over-year, while industrial demand was also up around 0.5 BCF/day to just over 21 BCF/day. Powerburn demand and LNG exports were nearly flat. Domestic production inched higher by 0.3 BCF/day to just under 76 BCF while Canadian imports unexpectedly jumped 0.7 BCF/day to 6.0 BCF/day, up 1 BCF/day year-over-year, likely a transient gain. The week is once again illustrative of temperature dependent demand--res/com and, to an extent, industrial demand--masking large year-over-year gains in supply. This remains a preliminary projection and will be revised over the next 72 hours as finalized pipeline and temperature data is integrated into my model. Due to the Thanksgiving Holiday next Thursday, the EIA will release is report for this week a day early on Wednesday, November 22 at 12:00 PM EDT. Click HERE for more on this week's projected withdrawal.

Looking ahead to next week, natural gas demand will be highly volatile throughout the week. Demand will likely rebound through the weekend as a very quick shot of modified arctic air sweeps southward across the Plains and Great Lakes on Saturday and Sunday and off the East Coast by Monday. As temperatures drop below normal, daily natural gas storage withdrawals could fall to around -11 BCF/day on Sunday, versus the 5-year average -7 BCF/day. After temperatures quickly rebound dropping withdrawals back below-average, a second, equally short-lived reinforcing shot of arctic air could sweep southward on Thanksgiving, boosting daily withdrawals back into the double digits. Projected daily storage withdrawals for November 18-24 are shown in the Figure to the right. This forecast continues to evolve as there are continued discrepancies amongst the different models and is subject to considerable revision over the next few days. As it stands now, I am projecting a neutral -46 BCF withdrawal for November 18-24, 1 BCF bearish versus the 5-year average. This would still be the third largest withdrawal for the week in the last 5 years, but a far cry from 2014's -102 BCF draw. Click HERE fore more on next week's projected draw.