March 19, 2018

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Low-Volatility Natural Gas Trading Continues With Seasonally Cool Temperatures Expected Through Early April; Gas Demand To Dip But Remains Above-Average Today As Southeast Warms With Early-Season Severe Weather Outbreak Possible; Natural Gas Undervalued--But Justifiably So

6:00 AM EDT, Monday, March 19, 2018
Natural gas rose 0.3% on Friday to settle at $2.69/MMBTU, but the commodity still finished down a slight 1.6% on the week, erasing the previous week's gains. The decline was driven by profit-taking in the wake of the recent rally and disappointment following Thursday's disappointing EIA-reported -93 BCF storage withdrawal for March 3-9. For the past 6 weeks, natural gas has been constrained to a low-volatility pattern, rangebound between $2.55/MMBTU and $2.75/MMBTU as the temperature pattern has remained generally seasonable, preventing any late fireworks before the withdrawal season concludes in the next two weeks. Additionally, the bullish and bearish camps seem to have finally found a middle ground between inventories that will enter the shoulder season around -350 BCF below the 5-year average, favoring prices well above $3.00/MMBTU, and year-over-year gains in supply exceeding 7 BCF/day, supporting prices under $2.50/MMBTU. With the temperature outlook likely remaining seasonally cool for the remainder of March, I expect rangebound-trading to continue for the next week, although with the shoulder season fast approaching and the recent underperformance of EIA storage reports, I would not be surprised to see natural gas pull back some near-term. However, this bearish sentiment could be somewhat blunted with the EIA expected to a second straight bullish natural gas storage withdrawal at -94 BCF for March 10-16 in this Thursday's Storage Report.

Crude oil, meanwhile, reversed early-session losses on Friday with an impressive, but unexplained, mid-day rally and finished the day up $1.15 or 1.9% to settle at $62.34/barrel. Although the commodity only finished the week up 0.6%, it was the highest close for WTI since March 6. Despite the EIA reporting a larger-than-expected and slightly bearish +5.0 MMbbl inventory build for March 3-9 in Wednesday's Status Report for March 3-9, strong demand and large gasoline and distillate withdrawals meant that the report was overall net bullish. Even with record production, demand gains have more than compensated to keep the market tight and I am expecting to see impressive withdrawals beginning in the next month as the summer driving season begins--in the setting of strong consumer sentiment numbers--driving very strong gasoline demand. With the storage surplus versus the 5-year average at just +3.7 MMbbls, it seems inevitable that inventories will flip to a deficit by the end of March, or early April at the latest for the first time since 2014. Near-term, I would not be surprised to see oil pull back to start the week after Friday's bizarre mid-day spike, but I remain bullish on the commodity and have a 6-month price target for WTI of $70/barrel.

My Oil & Natural Gas Portfolio saw an up-and-down week with early-week losses erased by a late week rally to finish nearly flat, up just +0.2% on the week. However, it was good enough for the portfolio to settle at a new all-time high, up +41.7% since its inception on May 1, 2018. The portfolio is up +8.3% year-to-date in 2018, or +40.2% annualized. I made a single trade last week. The portfolio seems to be "dialed in" with its current holdings and, while perhaps not the most thrilling trading action you have ever witnessed, I am resisting the impulse to overtrade and rock the boat. For subscribers, I have published a new Monday Investing Commentary HERE. Subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

Over the weekend, natural gas demand held steady above-average as seasonally cool temperatures persisted across the Northeast and West with estimated daily storage withdrawals of -11 BCF both Saturday and Sunday, comfortably above the 5-year average -7 BCF/day draw. Gas demand will weaken slightly today to open the work-week as temperatures moderate some across the Southeast and Eastern Seaboard, even as the next push of Canadian air spreads south across the northern Plains. Highs today along the I-95 corridor will generally be 5F-10F cooler-than-normal with Washington, DC reaching 50F, New York City the mid-40s and Boston near 40F. Similarly, much of the West Coast and Intermountain West will be modestly colder-than-normal with Boise, Denver, and Salt Lake City--or what amounts for major demand centers across the region--will see the upper 40s, around 5F colder-than-average. On the other hand, spring-like warmth will overspread the Southeast with Atlanta, Ga reaching 70F, Jackson, Ms and Little Rock, Ar 80F, and Houston, Tx the mid-80s, all 10F-15F warmer-than-average. The heat will come at a price, however, as an early-season severe weather outbreak sets up over the next 48 hours. Overall, the forecast mean population-weighted nationwide temperature today will warm by 1F day-over-day to 50.9F, 0.9F warmer-than-normal. Total Degree Days will dip to 16.0 TDDs, still 0.1 TDDs greater than normal and the 18th most for March 19 in the last 37 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 -9 BCF/day daily natural gas storage withdrawal, 2 BCF smaller than Sunday but still 2 BCF greater than the 5-year average -11 BCF/day draw. By the end of the day today, natural gas inventories will be near 1408 BCF and will be poised to drop below 1400 BCF by Tuesday afternoon for the first time since May 20, 2014, nearly 4 years ago. Click HERE for more on today's projected daily withdrawal and realtime natural gas inventories.

Natural gas demand will rebound on Tuesday as the cold front responsible for today's Southeast severe weather outbreak races eastward, dropping temperatures across areas seeing readings in the 70s and 80s today into the 60s and 70s, driving Tuesday's daily draw up to -12 BCF/day. Across the Mid-Atlantic and New England, temperatures may dip 10F-20F colder-than-average on Tuesday and Wednesday as another Nor'Easter targets the area, although several question marks remain regarding this storm. The remainder of the week will be characterized by seasonally cool readings across the major demand centers of the eastern half of the nation, although by the end of the week spring-like warmth will begin to build across the southern plains, weaning demand. Regardless, daily withdrawals will be at or above-average each day this week. As a result, I am projecting a preliminary -72 BCF weekly natural gas inventory drawdown for March 17-23, a solid 26 BCF bullish versus the 5-year average and 14 BCF larger than last year's draw. As the Figure to the right shows, it would be the second-largest withdrawal for the March 17-23 timeframe in the last 24 years since 2013, behind only that year's -95 BCF draw. It would also be the fourth largest withdrawal for the full 24-year period for which EIA data is available dating back to 1994, which have ranged as strong as that -94 BCF in 2013 or as weak as a +49 BCF storage build in the trainwreck that was the spring of 2012. Should a -72 BCF withdrawal verify, natural gas inventories would fall to 1368 BCF while the storage deficit versus the 5-year average would rise to -363 BCF or -21%, just two weeks after dropping below -300 BCF. This remains a preliminary projection and will likely be revised over the next week as the temperature outlook evolves and as finalized pipeline data is integrated into my model. Click HERE for more on this week's projected storage withdrawal.

Looking longer term, the temperature outlook is likely to remain at least modestly favorable for natural gas demand for the remainder of March into April. Overall, this forecast has not changed all that much over the past week. Through the first week of April, the pattern favors consistently below-average temperatures across the Rockies, northern Plains, and Great Lakes extending into New England. These are unlikely be huge anomalies, probably in the range of 5F-10F colder-than-normal, but will occur across some of the nation's major demand centers, particularly in early April when heating demand begins to quickly fade across the southern half of the nation. Speaking of which, the Southeast is likely to remain at or above average through the period, which will cut down on heating demand across the Carolinas and perhaps Tennessee, but could prompt some slight early-season powerburn cooling demand across Florida and the Deep South. Again, these anomalies are unlikely to be too substantial, up to 10F warmer-than-normal. This forecast is showed in the NWS 8-14 day temperature outlook in the Figure to the right. Click HERE for more on the extended temperature outlook. As a result of this outlook, I am projecting weekly inventory withdrawals that are greater than the 5-year average through the week ending April 6. It is too early to say for sure whether the week ending April 6 will be the last withdrawal of the heating season or the first injection of the shoulder season as my model continues to flip between a single digit draw and build. Regardless, by the end of the first week of April, I am projecting that natural gas inventories will bottom out somewhere near 1330 BCF, or 375 BCF smaller than the 5-year average and 720 BCF smaller versus 2017. This projection is largely unchanged week over week. Typically, such a season-ending mark would be quite bullish, with a Fair Price analysis