July 2, 2019

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Natural Gas Falls On Mid-July Cooldown Fears, But Remains Significantly Undervalued; Crude Oil Rises On Continuation Of OPEC Production Cuts, But Finishes Well Off Session Highs; Natural Gas Demand to Rise Today On Eastern Heat With Powerburn To Approach 40 BCF/Day & Drive Bullish Daily Storage Build

6:00 AM EDT, Tuesday, July 2, 2019
Natural gas pulled back on Monday, but finished well off the intra-session lows. The commodity dropped 4 cents or 1.8% to $2.27/MMBTU after dropping briefly to $2.22/MMBTU. Natural gas prices are now down a steep 23% year-over-year compared to July 2018 when the front-month contract was trading at $2.92/MMBTU. Despite the sell-off, natural gas futures contracts for the remainder of the summer have yet to sink into contango as is often during sustained declines with the August, September, and October contracts settling at $2.27/MMBTU, $2.24/MMBTU, and $2.27/MMBTU, respectively. This is good news for natural gas ETF traders as roll-over decay will be minimal. Nonetheless, natural gas volatility is unusually high for this time of year with 10-dayaverage volatility at +/-1.74% per day, up 0.4% from 2018. This is bad news for leveraged ETF traders as leverage-induced decay will be elevated. Monday's drop in natural gas appears to be in response to a cooldown in the second and third weeks of July now seen consistently in both the short term ECMWF and GFS model suites. Even with the market tightening and natural gas powerburn up more than 3 BCF/day from 2018 over the past 30 days, this could significantly cut demand during the height of the summer cooling season and, apparently has left investors skittish. The Figure to the right plots departure from normal daily forecast gas-weighted degree days (GWDDs) for the next 6 weeks, as forecast by my Hybrid Model, which integrates GFS ENS, ECMWF ENS, ECMWF EPS, and CFS v2 data. This chart shows the potential mid-July cooldown, though the back half of July continues to look warmer-than-normal. For this reason, despite Monday's selling, my sentiment towards natural gas is unchanged and I am maintaining my $2.60/MMBTU price target. Click HERE for more on the near- and long-term forecast on my Advanced Model Page.

Meanwhile, crude oil opened strong on Sunday's news that an agreement-in-principle had been reached by OPEC and Saudi Arabia ahead of this week's OPEC meeting to continue production cuts for the next 6-9 months. While Saudi (and OPEC) support had been largely expected by traders, Russia's commitment had been something of a question mark and this announcement was therefore greeted with buying and prices traded up 1.5% in Sunday electronic trading. The gains continued this morning, with WTI opening up above $60/barrel, reaching a peak of $60.28/MMBTU. Thereafter, profit-taking took over, as well as ongoing concerns about global demand, and WTI ultimately settled up a more modest 62 cents or 1.1% at $59.09/barrel. Brent was up 32 cents at $65.06/barrel after reaching intra-session highs of $66.75/barrel. With the OPEC news now largely out of the way, whether WTI can break through the $60/barrel threshold will depend on EIA-reported crude oil inventory draws (or, heaven forbid, builds) over the next few weeks. The EIA's next inventory will be released Wednesday morning while the American Petroleum Institute's (API's) own estimates will be released after today's close. I remain cautiously bullish on the sector and am maintaining an aggressive upside price target of $65/barrel, but would not be surprised to see a pullback after the recent run.

My Oil & Natural Gas Portfolio fell on Monday thanks to the pull back in natural gas prices, but finished well off the session lows due to gains in oil. The Portfolio dipped -0.3% to reduced 2019 year-to-date gains to +13.1%, or +26.3% annualized. I made a single trade on Monday, taking profits on half of my oil long position via short DWT just under $60/barrel, as discussed in Monday's Commentary. I realized a profit of nearly +25% on the position and reduced my exposure to a small 4.0%. Should WTI pull back to $56/barrel, I will look to begin re-accumulating while I will look to close out the remainder of this position should WTI top my price target of $65/barrel. My natural gas long exposure remains a large 10.9% with a 15.6% short UGAZ stake--the Portfolio's largest--partially countered by a 4.7% position short DGAZ, so as to benefit from leverage-induced decay, ideal in this above-average volatility environment. My upside price target remains $2.60/MMBTU--a relatively conservative target given the Fair Price analysis discussed above--while I will consider adding further on a move under $2.20/MMBTU. Finally, after struggling for several months, my Cheniere Energy (LNG) long position, my second largest equity holding worth 5.2% of my holdings, topped $70/share on Monday and is again approaching my long-standing price target of $75/share. The trade is up +16% after Monday's 2.4% rally and I remain committed to taking profits on the position above $75/share. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will rise today as temperatures warm across the Great Lakes and Northeast in what is shaping up to be the warmest nationwide temperature of 2019 to-date. It will be a scorcher across the Southeast with highs 5F-10F warmer-than-normal well into the 90s across most areas with some--such as Columbia, SC--even making a run for triple digits. Further north, 90F readings will make it as far north as Philadelphia while New York City and Boston will be near to a few degrees above-average in the low-to-mid 80s. The warmth will spread into the Great Lakes as well with Detroit and Indianapolis reaching the upper 80s, 5F hotter-than-normal, while Chicago, Kansas City, and Minneapolis near their normals in the mid-80s. On the other hand, look for seasonally cool readings around 5F cooler-than-normal across most of the southern Plains, including the nation's largest natural gas-consuming state of Texas where highs will reach the lower 90s in Dallas, Houston, and San Antonio, comfortable by July standards in this area. Further west, much of the Rockies and West Coast will remain 5F-10F cooler-than-normal again, with California's Central Valley seeing 80s to near 90F and the Pacific Northwest the upper 60s to lower 70s in Portland and Seattle. Overall, thanks to the warm-up across the densely-populated East, today's forecast population-weighted mean nationwide temperature will warm to 1.1F from Monday to 77.9F, a new 2019-high and 1.3F hotter-than-normal. Total Degree Days (TDDs) will rise to 13.6 TDDs, also a new cooling season-high and the 8th most for July 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 +9 BCF/day daily natural gas storage injection, 1 BCF lower than Monday and 1 BCF bullish versus the 5-year average. With cooling degree days hitting a 2019 high today, I would not be surprised to see Powerburn challenge 40 BCF/day. You can see Realtime intraday powerburn demand and today's forecast (released around 11 AM EDT) on my Powerburn Page HERE. Of note, observed intraday powerburn has been consistently underestimated over the past week only to be revised upwards the next day closer to the forecast. Anyways, by tonight, look for projected Realtime natural gas inventories to reach 2416 BCF while the storage deficit versus the 5-year average will rise by 1 BCF to -167 BCF. The storage surplus versus the 5-year average, on the other hand, will rise by +2 BCF to +242 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.