6:00 AM EDT, Thursday, October 17, 2019
Natural gas staged a sharp intra-day reversal to finish with its first loss this week. The front-month November 2019 contract gapped up more than 1% to $2.38/MMBTU but then the profit-takers stepped in and the commodity ultimately finished the session down 1.5% to $2.30/MMBTU.
Of note, the 1X ETF UNG began its monthly rollover Wednesday, successfully rolling 25% of its natural gas holdings from the November 2019 contract to the December 2019 contract ahead of the front-month's expiration in 10 days. The rollover will likely be complete by Monday. The December 2019 contract settled at $2.50/MMBTU on Wednesday, meaning that this rollover is going down into a 21 cent contango. This is comparable to that experienced by UGAZ when it rolled last week. This effectively amounts to selling and buying high and will contribute to the ETF's long-term underperformance as these sort of rollovers have for years. It is for this reason that I stick to almost exclusively to shorting the inverse leveraged ETF when I go long natural gas (short DGAZ instead of long UGAZ). The short DGAZ trade will still lose money from the rollover but leverage-induced losses associated with the ETF help to compensate. Click HERE for more on current natural gas ETF holdings.
Wednesday's selling had little to do with significant changes in the near-term temperature outlook, which had been the primary driver of this mini-squeeze over the past several days. Yes, the 12Z GFS operational trended warmer, but this was only a transient move and the GFS ENS and ECMWF ENS have remained just as cold, or even trended colder, as shown in the Figure to the right plotting 14-day accumulated gas-weighted degree days (GWDDs). The most likely driver of the selling was simply profit-taking. As I have discussed previously, while natural gas demand will indeed soar late next week, the shot of cold air will not meaningfully impact what are certain to be ample inventories heading into the heating season. With the long-term models still insisting that weeks 2-4 of November will quickly revert to warmer-than-average and, with the supply/demand imbalance steadily loosening, there seems little to stop the year-over-year surplus from topping +700 BCF sometime in November or December. I expect that many traders that have been stuck in an unsuccessful long trade to sought to cut their losses and sold into Wednesday's early move higher. While it is certainly possible that the commodity could chop around here and perhaps even trade higher again should models cool further--with the November contract reaching $2.40/MMBTU and the December contract $2.60/MMBTU--any gains will be difficult to maintain and I expect that the sector is in for more selling pressure this fall.
Meanwhile, oil prices saw their first daily gain in 3 sessions, though the gains seem likely to be short lived. WTI rose 55 cents or 1% to $53.36/barrel while Brent added 68 cents to $59.42/barrel. Investors seemed willing to buy the dip yesterday after stalled out trade talks between the US and China had dominated negative sentiment for the previous week.
It will be a busy day for the EIA today as that agency will issue its Natural Gas Storage Report as normally scheduled at 10:30 AM EDT but will then also release its Petroleum Status Report at 11:00 AM EDT, delayed one day due Monday's Columbus Day Holiday.
Starting with natural gas, for today's Storage Report covering October 5-11, I am projecting a +106 BCF inventory build, the third triple digit injection in the last four weeks. This would be a bearish 25 BCF larger than the 5-year average and, as the Figure to the right shows, would easily be the single largest injection for the week in the last 5-years, handily topping the +93 BCF from 2014. It would be the second largest all time since 1994, just behind 2007's +107 BCF. The projection lies towards the upper limit of my projections for the week over the past month, which have ranged from +78 BCF to as high as +119 BCF on October 4. Should a +106 BCF injection verify, natural gas inventories would jump to 3521 BCF while the long-standing storage deficit versus the 5-year average would flip to a +16 BCF surplus. Storage would be up +495 BCF compared to the same week last year. Click HERE for more on last week's projected injection.
With investors laser-focused on the temperature outlook and a triple digit build likely already priced in, I expect investors will largely overlook today's report unless it is much lower or much higher than expectations, though I feel a bearish bias will persist. I expect it would take a reported injection of under +100 BCF to be viewed as bullish versus expectations and could give November 2019 prices another shot at $2.40/MMBTU near-term. On the other hand, a reported injection of +110 BCF or larger would be suggestive of a looser-than-expected market and could result in November 2019 prices pulling back to $2.20/MMBTU near-term. An injection between +100 BCF and +110 BCF would be neutral versus expectations with prices equally likely to rally or pullback.
Check back at 10:30 AM EDT for the official EIA storage withdrawal on my Current Natural Gas Inventories Page HERE. Also, I now have weekly natural gas supply and demand statistics on my Natural Gas Supply & Demand Page HERE that should be updated between 3 pm and 4 pm EDT.
Thirty minutes after the Natural Gas Storage data is published, the EIA will then release its delayed Petroleum Status Report, also for October 5-11. After Wednesday's close, the American Petroleum Institute (API) announced that it was expecting a massive +10.5 MMbbl crude oil inventory build. This would be the fifth straight weekly injection and would be the largest for any week since February 3, 2017. Such a build would be 6.0 MMbbls bearish versus the 5-year average +4.4 MMbbls and would be an enormous 16.2 MMbbls larger than last year's bullish -5.7 MMbbl draw. Should it verify, crude oil inventories would jump to 436.1 MMbbls, the highest since August 16 while the storage surplus versus the 5-year average would climb to +11.5 MMbbls. As the Figure to the right shows, the very bearish build in crude oil will be only slightly countered by refined product draws. The API is expecting a nearly neutral -0.9 MMbbl storage decline and a slightly bullish -2.9 MMbbl distillate draw versus the 5-year average -0.9 MMbbls. As a result, the API is expecting Total Petroleum Inventories (crude oil + gasoline + distillates) to rise by +6.7 MMbbls, 4.2 MMbbls bearish versus the 5-year average +2.5 MMbbls. Unsurprisingly, following the API data, WTI oil gave back all of the day's gains, falling swiftly back under $53/barrel. And there is no denying, this would be a very bearish report. Personally, I expect the large build to be due to a timing issue between imports and exports and still expect a series of very large draws to begin the following week. However, a sharp rise in inventories coupled with the sour sentiment already in place regarding global demand could result in prices retreating further. While I still feel that oil is undervalued--even if the API's numbers verify my calculated Fair Price will only fall to around $62/barrel--the bears have the upper hand her and this will only embolden them. For this reason, I plan to hold off adding to my short DWT position that provides long exposure unless WTI were to fall under $50/barrel.
Check back after 11:00 AM EDT on my Crude Oil Storage Page HERE for the latest on the EIA's official storage numbers and supply/demand data.
October 17, 2019
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