January 18, 2019

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Natural Gas Can't Hold Gains After The EIA Reports A Smaller-Than-Expected Storage Draw & Near-Term Temperature Outlook Moderates--But Bulls Are Still In The Fight; Crude Oil Recovers After US-China Rumors; Domestic Supply Rises To All-Time Record High; Gas Demand To Bottom Today As Arctic Air Returns This Weekend

6:00 AM EDT, Friday, January 18, 2019
In its weekly Natural Gas Storage Report for January 5-11, the EIA announced Thursday morning that natural gas inventories fell by -81 BCF. This was 4 BCF smaller than my -85 BCF projection and, thanks to extensive warmth throughout the week, was 137 BCF bearish versus the 5-year average. All 5 storage regions saw bearish withdrawals, led by the South Central region which, despite having the largest 5-year average withdrawal of any region (-73 BCF) actually saw the smallest draw of just -4 BCF, 69 BCF bearish all on its own. 3 out of the 5 storage regions are now at year-over-year surpluses according to the EIA data with only the Mountain and Pacific regions holding onto deficits. However, all 5 regions maintain robust deficits versus their 5 year average led, on an absolute basis by the South Central region at -136 BCF despite its exceptionally bearish draw this report, and by the Pacific region on a percentage basis at -26%. With the draw, natural gas inventories fell to 2533 BCF while the storage deficit versus the 5-year average contracted down to -327 BCF, down 55% from its November highs. Additionally, the year-over-year deficit tumbled to just -77 BCF. Click HERE for more on the latest EIA inventories.

After the morning storage data, the EIA then released its weekly natural gas supply and demand numbers later in the afternoon, covering the period of January 10-16. Note that this differs from the storage week which ran from January 5-11. Perhaps the most notable data point is that natural gas production appears to have begun rising again, averaging 88.0 BCF/day on the week, up 0.6 BCF week-over-week. It is the first time that production has topped 88 BCF/day since the week ending December 5, when output hit an all-time high of 88.6 BCF/day. Production is up 11.1 BCF/day year-over-year, although that number is somewhat inflated by the fact that this time last year roughly 2 BCF/day had been taken offline temporarily by freeze-offs associated with lingering arctic air, perhaps a preview of what may happen next week when arctic air surges southward across the Marcellus Shale. Additionally, the EIA reported that Canadian imports rose another 0.3 BCF/day week-over-week to 6.0 BCF/day, recovering the entirety of its Autumn losses when imports had dropped as low as 3.5 BCF/day. As a result, Total Supply--composed of production, imports, and LNG imports which were a mere 0.1 BCF/day--rose to 94.4 BCF/day. Despite the fact that production is off its record high, thanks to the rebound in imports, this represents a new all-time high in total supply, as the Figure to the right shows, up a massive 11.2 BCF/day year-over-year. It is because of this substantial year-over-year growth in supply that natural gas investors are so pre-occupied with the computer model outlook as it will take considerable cooperation from Mother Nature to overcome the production-driven market looseness and drive the storage deficit back up. On the demand side, there were no major surprises and levels were very comparable to year-ago levels with Powerburn (25.3 BCF/day) and industrial demand (25.0 BCF/day) within 0.2 BCF/day of 2018 numbers and residential/commercial heating demand up 2.5 BCF/day year-over-year at 46.9 BCF/day. Mexican imports remained static at 4.7 BCF/day, up 0.3 BCF/day year-over-year, while LNG exports backed off slightly after reaching 5.0 BCF/day for the first time last week, sliding to 4.8 BCF/day, still up 85% from last year's 2.6 BCF/day mark. Click HERE for more on the latest EIA supply and demand data.

In a near carbon-copy of Wednesday's session, natural gas gapped up 5% Thursday morning, trading as high as $3.59/MMTBU. Immediately following the EIA's mildly disappointing withdrawal number, the commodity halved these gains falling under $3.50/MMTBU. Natural gas then kept right on falling after the 12Z GFS and ECMWF models both trended milder. Ultimately, the commodity finished the session up 3 cents or 0.9% to $3.41/MMBTU, snapping a two day losing streak, but certainly not earning any style points in the process. The March 2019 contract, held by UNG, BOIL, and UGAZ/DGAZ, closed at $3.17/MMBTU, a 24 cent backwardation. There is no doubt that it was a rough day for the short-term computer models with both the ECMWF and GFS trending towards more localized and shorter-lived shots of arctic air through the end of the month. It is this shift that likely fueled the intra-session selling on Thursday. However, despite the day-to-day fluctuations in these short-term models, the overall pattern--a blocking Greenland High and eastern Pacific ridge--continues to favor consistently below-average temperatures into February. Yesterday evening, the gold-standard twice-weekly 44-day ECMWF-EPS came out and continued to show a cold pattern persisting across the eastern half of the nation over the next 6 weeks. The model's total forecast 44-day gas-weighted degree days (GWDDs) are roughly unchanged from Monday's run as the model trended even colder for the first half of its run before moderating somewhat in its second half. Nonetheless, combined with the short-term ECMWF ENS and GFS OP and long-term stablemate CFSv2, my Hybrid Model is forecasting above-average daily GWDDs through the entire period from January 20-March 2, as shown in the Figure to the right. Should this outlook verify, the natural gas storage deficit could very well climb back above -600 BCF by the end of February and withdrawal season-ending inventories could fall below 2018 levels, which bottomed at 1281 BCF. Click HERE for more on my Hybrid Model as well as ECMWF and GFS model trends.

With overnight short-term models continuing their warming trend, natural gas could continue to face selling pressure near-term. However, I feel that, while downside risk may outweigh upside potential as a result, the magnitude of upside greatly outweighs downside, which I feel is limited. According to my Fair Price Model, natural gas is undervalued by 10.9% and, even with the blunted near-term temperature outlook, this undervaluation widens to 20% by mid-February as my Fair Price increases to near $4.00/MMBTU due to the pending spike in gas demand and futures fall due to Backwardation. And as the Figure to the right shows, even accounting for underlying market looseness due to record production, this undervaluation remains above 10% heading into the summer. Should models trend back colder, investors will be forced to re-value natural gas both in the context of this baseline undervaluation on top of the cold, leading to a potentially sharp rally. Since inventories are much higher and it is later in the season, I do not expect a rally of the same level that we saw in November given the much lower risk of any sort of storage crunch. Thus, at this time, I am maintaining an upside price target of $4.00/MMBTU for the February 2019 contract and $3.60/MMBTU for the March 2019 contract. Should the March contract fall under $3.00/MMBTU, which I view as a price floor, I would be an aggressive buyer. While natural gas could continue to trend lower due to the trends in the near-term forecast, I would be very nervous holding a large short position into the 3-day extended holiday weekend. Overall, this is not the time to place a large amount of money at risk, either long or short, though, between the two, I favor a small long position.

Meanwhile, crude oil dipped Thursday but recovered from steep early-session losses after rumors flew that the US was considering lifting tariffs on China. WTI prices dipped 24 cents or 0.5% to $52.07/barrel after briefly slumping under $51/barrel early in the day while Brent dropped 14 cents to $61.18/barrel. It was only the third loss for WTI since December 28. Despite rumors and whispers like these propping oil prices up, I remain concerned about the near-term health of the sector as the EIA continues to release bearish weekly Status Reports and domestic production climbs to new record highs. Additionally, oil remains tightly correlated with equities and any pullback could translate to weakness in the oil sector as well. Nonetheless, should rumors of a softening of the US-China persist, I would not be surprised to see WTI top $53/barrel or $54/barrel near-term. At this level, I would likely consider taking closing my long position and even adding a short position for a swing trade.

My Oil and Natural Gas Portfolio saw a nearly flat day as gains in natural gas were largely offset by losses in oil. The Portfolio finished the session up +0.1% to push 2019 year-to-date gains to +7.6% through the first 2 days of the year. I will probably take it easy to wrap up the week, not wanting to overexpose myself heading into a 3-day weekend. Should March 2019 natural gas fall towards $3.00/MMBTU I will likely add to my net long position, either by taking profits on my UGAZ short or adding to my DGAZ long. And should WTI prices top $53/barrel, I will consider exiting my DWT short and even adding a small UWT short, betting on a near-term pullback. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will tumble to finish the week today as much milder temperatures overspread the major population centers of the Northeast. Washington, DC, Philadelphia, and New York City will all reach the mid-40s while Boston will approach 40F, each 10F warmer than Thursday and 5F-10F warmer-than-normal. Temperatures will remain unseasonably mild across Texas and the Deep South. Dallas, San Antonio, and Houston will reach the low-70s while Oklahoma City, Little Rock, and Jackson, MS will all reach the mid-to-upper 60s, 10F-15F warmer-than-normal. For a third straight day, arctic air will remain bottled up across the far northern Plains with Bismarck and Fargo in North Dakota struggling to clear 0F while Minneapolis, the major demand center in the area, will only reach the lower teens. A winter storm--the beginnings of the powerhouse that will impact the Eastern Seaboard this weekend--will overspread the area today, bringing 5-8 inches of snow to the Dakotas, Iowa, and southern Minnesota before reaching Chicago by tonight. Nonetheless, thanks to the warming trend across the East, today's forecast mean population-weighted nationwide temperature will warm by 2.8F from Thursday to 44.8F, a balmy 5.8F warmer-than-normal. Total Degree Days will fall to a mere 20.2 TDDs, 6.3 TDDs fewer than normal and the 8th fewest 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 -14 BCF/day daily natural gas storage withdrawal, 5 BCF smaller than Thursday's draw and 12 BCF bearish versus the 5-year average. Click HERE for more on today's temperature and degree day outlook.

The EIA will release its weekly Natural Gas Storage Report for the week of January 12-18 that ends today next Thursday, January 24. At this time, I am projecting a -156 BCF weekly storage withdrawal, 32 BCF bearish versus the 5-year average and an ugly 120 BCF bearish versus the same week in 2018. As the Figure to the right shows, such a draw would be the second smallest in the last 5 years behind only 2014's -124 BCF draw. The bearishness of the projected withdrawal was driven primarily by above-average temperatures across the South and East with daily draws smaller than the 5-year average on 6 out of 7 days. Mean population-weighted nationwide temperatures averaged 40.2F, 5F colder than the previous week but still 1.3F warmer-than-normal. Additionally, supply/demand balance suffered thanks to weekly rises in domestic production and Canadian imports boosting total supply to a new all-time high, as discussed earlier. Should a -156 BCF withdrawal verify, natural gas inventories would fall to 2377 BCF while the storage deficit versus the 5-year average would contract to -298 BCF. The fresh year-over-year deficit will finish the week at -40 BCF. Click HERE for more on this week's projected draw.

Natural gas demand is likely to bottom for the foreseeable future today. Looking ahead to next week, a major winter storm will pummel the Great Lakes and Northeast and behind it will come the first wave of arctic air of 2019. Winter Storm Watches are up from Chicago eastward through Indianapolis, Cleveland, Pittsburgh, New York City and Boston in anticipation of a large-scale storm beginning this evening and lasting through Sunday. Chicago could receive in excess of a foot if a Lake Effect Snow event verifies while parts of interior New England could top 2 feet. New York City could pick up 3-5 inches before transitioning to rain while Boston could see anywhere from 4 to 12 inches depending on when the transition to rain--and then back to snow--occurs. Behind this storm, highs will be 15F-25F colder-than-normal--a 40F cooldown from today's readings across parts of the Northeast. By Sunday, daily natural gas storage withdrawals could top -30 BCF/day and approach -40 BCF/day by Monday. While temperatures will moderate thereafter, I expect gas demand to remain at or above-average through the end of the week, as shown in the Figure to the right. Despite the recent moderation in the near-term temperature outlook, I am still projecting the season's first -200 BCF draw at -203 BCF, 53 BCF bullish versus the 5-year average and 77 BCF than last year's draw. This will push the storage deficit versus the 5-year average back over -350 BCF and the year-over-year surplus back to a -40 BCF deficit. The EIA will release its official storage numbers for the week on Thursday, January 31. Click HERE for more on next week's withdrawal.