September 19, 2017

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Natural Gas Rises To 4-Month High As September Heatwave Boosts Demand; Hurricane Irma Rapidly Intensifies To Category 5 Strength As It Pounds Dominica & Heads Towards Puerto Rico; Natural Gas Still Undervalued, But Steep Contango & Record Production May Limit Further Near-Term Gains

6:00 AM EDT, Tuesday, September 19, 2017
Natural gas rose 12 cents or 4% to close at $3.15/MMBTU, its highest settlement since May 26. The November T+1 natural gas contract, into which the 3x leveraged ETF UGAZ has rolled all of its holdings and the 1x ETF UNG has rolled half of its holdings, closed 5 cents higher at $3.20/MMBTU. The natural gas rally was likely driven by near-term forecasts showing a late-season heatwave that will boost powerburn and likely drive a bullish storage injection this week, the first in a month. Additionally, LNG feedgas demand remains near record levels which has helped to counter record domestic gas production. Crude oil, meanwhile, took the day off, rising just 2 cents to close at $49.91/barrel. The EIA will release its weekly Petroleum Status Report on Wednesday for September 9-15 with the API releasing its forecast this afternoon after the market close. I expect that we will see natural gas demand, which had been suppressed after Hurricane Harvey shut down Gulf refineries, begin to normalize. As a result of strength in natural gas, my energy portfolio rose 1.2% on the day to a new 2017 high, up 19.5% since May 1 and 7.3% in the past month alone. Click HERE to learn more about subscribing for live portfolio holdings, trades, and a twice-weekly investing commentary.

Natural gas demand will inch higher today as a September heatwave gathers strength across the Plains and East. Gas demand along the immediate I-95 corridor from Philadelphia to boston will be tempered by cloudcover and a stiff onshore wind in association with Hurricane Jose passing more than a hundred miles offshore. While I am not expecting a large number of power outages that will significantly impact demand, showers and cloudy conditions will keep highs in Philadelphia near average in the mid-70s while Boston will be a few degrees cooler than normal in the upper 60s. Further inland, however, the sun will return and highs from Buffalo to Pittsburgh to Richmond will rise into the low-to-mid 80s, 5F-10F warmer than average. Across the Great Plains, the anomalies will be even more impressive. 90s will be possible as far north as South Dakota today with spotty triple digit readings possible into Oklahoma and southern Kansas. For the major cities, Oklahoma City and St Louis can expect to see the lower 90s while Minneapolis, Chicago, and Indianapolis will all reach the low-80s or better, all around 10F warmer day-over-day and around 15F warmer than normal. In contrast to the East, the Intermountain West will remain chilly with Boise only reaching 60F, 20F cooler than normal, and Salt Lake City only the mid 60s, 12F cooler than normal. Nonetheless, thanks to the heat across the far more populous East and Midwest, the forecast mean population-weighted nationwide temperature today will climb slightly to 73.5F today, 3.9F warmer than average, with Jose's influence across the densely-populated I-95 corridor preventing an even larger anomaly. Total Degree Days today will be 9.7 TDDs, 2.0 TDDs greater than average and the 6th most for September 19 in the last 37 years. Based on this outlook and early-cycle pipeline data, I am projecting a +11 BCF/day daily natural gas storage injection today, down less than 1 BCF from yesterday and 1 BCF bullish versus the 5-year average +12 BCF/day.

The big weather story today remains Hurricane Maria. The storm put on a dramatic piece of rapid intensification over the past 24 hours doubling its wind speed from the evening of 9/17 to 9/18 to become a 160 mph category 5 storm, only hours before plowing into Dominica. We are still awaiting a damage assessment from the island, but, unfortunately, I expect the reports to be catastrophic. Maria will likely remain an exceptionally strong storm today as it tracks west-northwestward across the northeastern Caribbean Sea with only an eyewall replacement cycle to potentially weaken the storm. Based on the current track forecast, Maria will either landfall in Puerto Rico or pass just east of the island early Wednesday morning as a Category 4 or 5 storm. Only 4 Category 4 storms have made landfall on the island, most recently in 1932. Such an impact would likely be severe to catastrophic with the island's highly vulnerable electrical grid suffering extreme damage and rainfall of 15-20 inches causing life-threatening flash flooding. The storm will then move northwest around a ridge of high pressure and possible affect the Turks and Caicos or southern Bahamas. Thereafter, the forecast for Maria becomes very complex and will demand in large part on what Jose ends up doing. The current thinking is that Jose, or what is left of it, will get left behind by a passing trough (again), and interact with Maria helping to steer it north and then northeast out to sea, missing the United States, as shown in the Figure to the right. This forecast remains subject to change, but at, at any rate, it appears very unlikely that Maria will directly impact the Gulf of Mexico and its oil/natural gas infrastructure.

Natural gas demand will likely rise to finish out the week as Hurricane Jose moves away and heat builds further to encompass nearly all of the eastern 2/3rds of the nation. As a result, I am projecting a bullish +66 BCF storage injection for the current week of September 16-22, with a similar build for the following week of September 23-29. However, beyond that time, it appears that temperatures will trend cooler closer to seasonal averages. The Figure to the right shows the NWS 10-14 day outlook which suggests seasonally cool temperatures across the Plains, even as both coasts remain mild. As a result, I expect weekly injections to rise into the low +80s BCF/week by early October, or even higher if Rover Pipeline takeaway from the Marcellus Shale increases, there are any disruptions to LNG exports, or if nuclear power outages don't see a seasonal increase. Regardless, at this time, I expect that natural gas inventories will drop to right near the 5-year average by the end of September or early October, but likely won't drop into a significant deficit at least near-term. Click HERE for more on the long-term temperature outlook. Looking even longer term, I am projecting that natural gas inventories will finish the 2017 injection season near 3877 BCF, which would be +4 BCF larger than the 5-year average. While this projection is up roughly 100 BCF from a month ago on account of the cool first half of September and record domestic production, it would still be more than 150 BCF lower than last year's season ending mark of 4047 BCF, which was a record high. It would also be the lowest season-ending mark since 2014. Stay tuned as this forecast evolves. Click HERE for long-term natural gas storage projection data.

While I am thrilled with the recent strong performance in the natural gas sector and acknowledge that the demand picture for natural gas looks quite rosy for the next 7-10 days, I fear that natural gas may be getting a little bit ahead of itself after Monday's rally. While the commodity remains undervalued by around 3.6% based on current inventories, this undervaluation flips to a small overvaluation by late October lasting until early January thanks to the seasonal contango present in the natural gas futures market. As shown in the Figure to the right, natural gas prices look to jump by around 5 cents next week when the October 2017 contract expires and is replaced by the November 2017 contract as the Front-Month Contract. Thereafter, prices rise to as high as $3.44/MMBTU in January and February. With this steep contango and further concerns about record natural gas production as discussed in Monday's Daily Commentary, I do not see a catalyst to maintain the rally near-term much beyond current levels. As I've stated before, my price target for natural gas is $3.25/MMBTU and with UGAZ and UNG now holding November 2017 contracts, this target is only 5 cents away. As a result, I would not be surprised to see a near-term pullback, especially if natural gas rises another few more percentage points. Thereafter, I expect re-establishment of rangebound trading, though with increased volatility as natural gas inventories hover near the 5-year average heading into the end of the Shoulder Season. For more details on my trading strategy, please see Monday's Investing Commentary (subscribers).