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January 2, 2019

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2019 Starting Gun Edition: Natural Gas Plunges 11% on Monday To Finish Worst Month Since 2003, But Is Now Very Undervalued; Gas Demand To Peak Today Before Beginning A Week-Long Slide; Long-Term Models Indicate Warmer-Than-Average Temperatures Through The Third Week Of January Before Possible Return To More Supportive Weather Pattern


6:00 AM EDT, Wednesday, January 2, 2019
As computer models continued to trend milder, the ongoing sell-off in natural gas prices accelerated to wrap up 2019, as the commodity tumbled 36 cents or 11% on Monday to close at $2.94/MMBTU. It was the largest daily decline since November 15 and the second largest since February 1. For the month of December, natural gas prices were down 36%, the largest monthly decline on a percentage basis since 2003, a month when natural gas inventories were bottoming at the lowest levels on record following a brutally cold winter and had driven prices to double between December and February. After peaking at a closing high of $4.84/MMBTU on November 14, natural gas prices are now at their lowest level since September 19, having given up the entirety of the November-December rally. But, as the Figure to the right shows, despite the sell-off, prices remain up 2 cents or just under 1% year-over-year. However, it is highly likely that prices will soon be trading at a large year-over-year discount as year-ago prices surged in January on the heals of the largest storage withdrawal on record at -359 BCF for the first week of January 2018. Prices ultimately peaked at $3.61/MMBTU during the final week of January. The driving force behind the abrupt collapse in natural gas prices has been the sudden transition from an exceptionally cold start to the Heating Season in November and December to a consistently above-average latter half of December consistent with an El Nino pattern. This has resulted in the natural gas storage deficit versus the 5-year average falling from a very bullish -740 BCF to a projected -540 BCF as of Sunday evening. And this deficit will continue to contract further in the weeks to come. Near-term computer models continue to point towards exceptionally mild temperatures for the next week and, while there could be a bit of a cooldown thereafter, the longer term models support a return to a warmer pattern through at least the third week of January. As shown in the Figure to the right, after the steady drop in forecast gas-weighted degree days over the weekend that contributed to Monday's fierce sell-off, the forecast has stabilized over the past 48 hours, with the ECMWF holding steady and the GFS trending a bit colder, although both models remain well below-average for the 14-day period. Click HERE for more on the near-term outlook on my Advanced Models Page.


Even with the 200 BCF contraction of the natural gas storage deficit versus the 5-year average over the past 6 weeks, natural gas is still undervalued by a steep 28% versus a Fair Value of $4.19/MMBTU based on projected Realtime inventories according to my Fair Price Model. Additionally, even with the storage deficit expected to continue to rapidly contract over the next month or more, the Fair Price only falls to around $3.60/MMBTU, an undervaluation of 18%. There is no doubt that current sentiment is absolutely abysmal given the extended stretch of warmer-than-average temperatures that has occurred and is still to come which could allow natural gas to defy fundamentals and continue to drop further. However, at under $3.00/MMBTU, I feel that potential upside--especially if the late-January return to winter verifies--outweighs downside risk. While it is foolish to go all-in on the natural gas long trade at this time, slowly building a long position at these levels seems reasonable. As I've discussed previously, I would strongly advise against buying UGAZ or even BOIL given the high volatility and accelerated leverage-induced decay. For the risk-averse, buying UNG is good while for the more aggressive trader, selling short DGAZ is even better as this trade, over time, will actually capitalize on leverage-induced decay. My near-term price target is $3.50/MMBTU which I feel is attainable on a verified arctic outbreak.


Meanwhile, crude oil had a much tamer end to 2018 on Monday. WTI rose 8 cents or 0.2% to settle at $45.41/barrel, but did retreat from intra-session highs that topped $46.50/barrel. Brent prices rose a better 59 cents or 1.1% to at least temporarily stop the contracting Brent-WTI spread and settle at $53.80/barrel. WTI finished December down 10.8% but, more impressively, down a massive 38% for the fourth quarter. Despite four consecutive small inventory drawdowns, the storage surplus versus the 5-year average has continued to rise and currently stands at +28.8 MMbbls, boosting investor fears of a domestic supply/demand mismatch. This has further reinforced concerns about sagging worldwide demand and record output from OPEC, Russia, and the US that, even with a bevy of pledged production cuts, has prevented a sustained rally. However, even with the rising storage surplus, crude oil, like natural gas, is trading at a large undervaluation versus its Fair Price. Based on current inventories, the commodity is trading at a 24% discount versus a Fair Price of $60.20/barrel and, with the supply/demand mismatch at a mere 0.11 MMbbls/week loose versus the 5-year average, this Fair Price holds nearly steady at $60/barrelf or the next several months, as shown in the Figure to the right. At this time, I am maintaining $60/barrel 2019 price target on crude oil. I feel that any price under $45/barrel represents a reasonable entrypoint for a long trade, though ideally I would like to see the impact of OPEC+ production cuts successfully rebalancing the market before I get too aggressively long here.


Natural gas demand will rise to a weekly high today a unseasonably cold temperatures dominate Texas, the nation's largest natural-gas consuming state, and the Desert Southwest. Winter Weather Advisories are flying for parts of northern Texas and Oklahoma today as a weak system brings the chance of freezing rain and drizzle to the region. More impressive will be temperatures across the region which will be 15F-20F below-normal with Dallas only reaching the upper 30s and San Antonio the mid-40s. Further west, the Southwestern US will be dealing with its third major winter storm in a week with Winter Storm Warnings again flying for most of New Mexico, including Albuquerque. That city will only reach the low 30s today while Salt Lake City will be stuck in the 20s and even Phoenix in the heart of the desert, will only reach the low 50s, all 10F-15F colder-than-normal. Across the rest of the US, however, temperatures will generally be above-average, including the major demand centers of the Eastern Seaboard. Highs will be 10F-15F warmer-than-normal across the Southeast with Columbia, SC and Charlotte, NC both reaching the 60s while the Northeast will see readings 5F-10F above-average with highs generally in the 40s from Washington, DC through New York City. Thanks to the chill across Texas, today's forecast mean population-weighted nationwide temperature will drop a robust 5.1F from Tuesday to 41.4F, but thanks to continue above-average readings elsewhere, this will still be 2.3F warmer-than-normal. Total Degree Days will rise to 23.6F today, 2.8 TDDs fewer than normal and the 14th fewest for January 2 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 -19 BCF/day daily natural gas storage withdrawal today, up 7 BCF from Tuesday's draw but still a bearish 7 BCF smaller than the 5-year average -26 BCF/day withdrawal. By tonight, projected Realtime natural gas inventories will have dropped to 2615 BCF while the storage deficit versus the 5-year average will have contracted to -536 BCF. The year-over-year deficit will tumble another 32 BCF today to -308 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories. Today's draw will likely be a weekly peak with warmer temperatures building across the northern Plains, driving daily storage withdrawals down to -12 BCF/day by the end of the week, a downtrend which will extend through much of next week as well. I am projecting a -90 BCF weekly storage withdrawal for December 29-January 4, a massive 93 BCF bearish versus the 5-year average.


On Monday evening, the latest run of the 44-day ECMWF-EPS model came out which trended sharply warmer from the previous run last Thursday and further supported what the long-term CFSv2 model and the short-term GFS and ECMWF ENS had been saying loud and clear: any chance of widespread, sustained arctic air will hold off at least until the final week of January. This is highlighted in the Figure to the right, b my Hybrid Model, which integrates ECMWF ENS, GFS, 44-day ECMWF-EPS, and CFSv2 model data to generate forecast daily Gas-Weighted Degree Day (GWDD) data. As this chart shows, GWDDs will be well below normal through around January 22, peaking at 12 GWDDs below normal on January 7. Both the CFSv2 and ECMWF-EPS are consistent in forecasting colder-than-normal temperatures returning by late January, but these anomalies look to be relatively minor albeit sufficient to stop the slide in the natural gas storage deficit. Click HERE for more on my 44-day Hybrid Model. Based on this forecast, I am projecting that the natural gas storage deficit versus the 5-year average could tumble all the way to under -400 BCF by the week ending January 18.