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March 19, 2019

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Natural Gas Jumps 2% After Late March Outlook Trends Colder, But Upside Likely Limited As Mild April To Cut Into Storage Deficit; Crude Oil Reaches New 5-Month High As OPEC Likely To Table Production Discussion Until June; Gas Demand To Fall For A Second Straight Day Today, But Will Hold Above-Average


6:00 AM EDT, Tuesday, March 19, 2019
After opening electronic trading softly Sunday night, natural gas moved sharply into the black Monday morning and settled up 2% at $2.85/MMBTU, reversing much of last week's -2.4% loss as the near-term temperature outlook trended colder. Crude oil, meanwhile, continued its hot streak with WTI rising 57 cents or 1% to $59.09/barrel--the highest settlement since November 12, 2018--while Brent added 38 cents to $67.54/barrel. It appears increasingly likely that OPEC will forego any sort of discussion on backing off of production cuts until June, helping to support an increasingly tight market. My Oil & Natural Gas Portfolio broke out to new 2019 highs on Monday, rising +0.7% to push year-to-date gains to +10.4%, or +49% annualized. The primary driver for Monday's gains in the natural gas sector was a bullish turn in the near-term temperature outlook. As the Figure to the right shows, after GFS ENS 14-day forecast gas-weighted degree days (GWDDs) dropped below-average for the first time this month on Saturday, the forecast has trended higher for five straight model runs through Tuesday's 00Z run, bringing both the GFS and ECMWF outlooks comfortably back above-average. The reason for the rise in forecast GWDDs is the developing trend for a trough across the Northeast and Great Lake in the March 25-April 1 period that could allow colder air to settle southward and boost late-season heating demand. This is a rather significant change from earlier forecasts that had a stronger ridge in place. As a result, my projection model has flipped from a small storage injection for the week of March 23-29, back to a -8 BCF storage withdrawal. Should the current outlook verify, it is even possible that we see a small withdrawal for the week ending April 5. And after increasing by nearly 100 BCF over the previous 10 days, my end-of-season natural gas storage projection has stabilized at 1075 BCF, the lowest since 2014 and more than 550 BCF smaller than the 5-year average.


Despite this favorable trend in the near-term outlook, available long-term guidance continues to favor at or above-average temperatures across the Lower 48 during the key shoulder month of April. In particular, Monday's run of the twice-week gold standard 44-day ECMWF-EPS model showed persistently mild temperatures across the major demand centers of the Northeast, Ohio Valley, and eastern Great Lakes throughout the month, although it does depict persistent troughing across the Rockies and Great Plains that could keep readings cool there. The daily CFSv2 model is even more bearish, maintaining unseasonably mild temperatures across the entire northern tier, suppressing late-season heating demand, while maintaining cooler-than-normal readings across the Desert Southwest and California, suppressing early-season cooling demand. The Figure to the right depicts the forecast departure from normal Gas-Weighted Degree Days (GWDDs) for the next 44 days according to my Hybrid Model, which integrates GFS ENS, ECMWF ENS, ECMWF-EPS, and CFSv2 data. After intermittent above-average GWDDs in late March due to the aforementioned cooling trend across the Northeast, the model is forecasting a prolonged period of consistently below-average GWDDs for the first three weeks of March. As a result, I am projecting natural gas inventories will top 1350 BCF by the first of May with the storage deficit versus the 5-year average falling under -475 BCF, down over 100 BCF from current levels. However, should the more bearish CFSv2 verify, inventories could be another 75 BCF higher than this. Click HERE for more on the short- and long-term temperature outlook on my Advanced Modeling Page.


Based on this outlook, I took advantage of Monday's 2% natural gas rally to flip from net long to net short for a swing trade by selling short more UGAZ. This was a challenging decision since, as I mentioned Monday, I am long-term bullish on the sector and feel that natural gas trades over $3.00/MMBTU before the end of the summer. However, I feel that near-term downside outweighs upside given the April forecast. As it stands right now, I am net long a small-to-moderate 5.4% position with a 13.5% short UGAZ position partially offset by an 8.1% short DGAZ position. The trade also boosted total 3X natural gas ETF exposure to 21.6% of my portfolio (13.5% UGAZ + 8.1% DGAZ), which should help the portfolio benefit from leverage-induced decay long-term. This is only intended as a swing trade and my downside price target is $2.75/MMBTU, at which point I would likely cover off most of my UGAZ holdings or add further to my DGAZ short. Should natural gas rally above $2.90/MMBTU, I will consider adding to this short position up to 10% of my holdings. Click HERE for more on my current oil and natural gas holdings.


Natural gas demand will fall for a second straight day today as temperatures moderate across the Great Lakes and Midwest. Minneapolis, Chicago, and Des Moines will all reach the low-to-mid 40s today, 5F-10F warmer-than-normal. Further south, 60 degree readings will spread northwards into southern Kansas while Oklahoma City approaches 70F, 5F-10F warmer-than-normal. Across the Northeast, temperatures will be seasonally mild with Washington, DC, Philadelphia, and New York City all reaching the upper 40s to lower 50s, generally within 5F of normal--but upwards of 15F-20F cooler than last weekend. However, temperatures will remain chilly across the Southeast. Freeze Warnings are in effect for northern Georgia and Alabama this morning and Atlanta will only climb into the mid-50s this afternoon, around 10F colder than normal. And it will be a wet day across South Florida today with Miami only reaching the lower 70s, more than 10F colder-than-normal, suppressing early-season cooling demand. Overall, today's forecast mean population-weighted nationwide temperature will rise by 1.0F from Monday to 48.9F, still 1.1F colder-than-normal. Total Degree Days (TDDs) will fall to 16.2 TDDs, 0.2 TDDs greater than normal and the 17th most for March 19 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 -9 BCF/day daily natural gas storage withdrawal for today, 2 BCF smaller than yesterday's draw but still 3 BCF bullish versus the 5-year average -6 BCF/day draw. Projected Realtime natural gas inventories will fall below 1100 BCF by early this afternoon and will finish the day near 1097 BCF while the storage deficit versus the 5-year average reaches -578 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories.