6:00 AM EDT, Friday, September 20, 2019
In its weekly Natural Gas Storage Report covering September 7-13, the EIA announced Thursday morning that inventories rose by +84 BCF. This was a slight 2 BCF bearish versus both my projection and the 5-year average, and was above most analyst expectations which ran in the upper +70s to near +80 BCF.
The bearishness of the build was well-distributed across multiple Regions with the Midwest, Mountain, and Pacific Regions reporting builds slightly above their respective 5-year averages while intense heat across the Deep South led to an injection of just +16 BCF, 4 BCF bullish versus the region's average build. Four out of the five storage regions remain at storage deficits versus their respective 5-year averages, led by the South Central at -43 BCF. The Midwest, the only Region at a surplus, grew its storage surplus to +17 BCF. With a deficit of just -17 BCF or 2%, the East Region seems poised to flip to a surplus as well over the next month or so. On the other hand, all five regions are at year-over-year surpluses, led by the South Central Region at +156 BCF or +19%. Overall, natural gas inventories rose to 3103 BCF--less than 150 BCF from last year's 3247 BCF end-of-season peak--while the storage deficit versus the 5-year average contracted slightly to -75 BCF and the year-over-year surplus grew to +393 BCF. After last week's surprise smaller-than-expected build, this week's injection, while barely above the 5-year average, still must be regarded as slightly disappointing and indicative of a looser-than-expected market.
Click HERE for more on this week's latest EIA-reported natural gas inventories.
Following its morning storage data, the EIA followed up in the afternoon with its weekly supply/demand numbers. Of note, this covered September 12-18, different than the September 7-13 storage week. Domestic production retreated for a second straight week, falling -0.4 BCF/day week-over-week to 91.6 BCF, still 5.6 BCF/day higher year-over-year, though this is the second lowest year-over-year growth so far this year. Canadian imports rose slightly from last week to 4.6 BCF/day, which is equal to year-ago levels thanks to a late season slump this time last summer, the first time that imports have been equal to or higher than last year's levels since February. On the demand side, Powerburn fell by -2.1 BCF/day to 35.4 BCF/day, also equal to 2018 levels. Imports, too, matched 2018 levels at 5.0 BCF/day. On the other hand, LNG exports notched a new all-time high at 6.5 BCF/day, nearly double year-ago levels. Overall, total supply averaged 96.3 BCF/day--up +5.6 BC/day year-over-year--while total demand averaged 83.2 BCF/day, up +3.7 BCF/day year-over-year. As a result, temperature-unadjusted supply/demand balance was a bearish 1.9 BCF/day loose versus 2018. However, if we eliminate temperature as a variable, the temperature-adjusted supply/demand imbalance falls to a mere 0.3 BCF/day loose versus 2018. This means that, for any given temperature, I would expect that day's daily storage injection to be 0.3 BCF/day larger than the 5-year average. This is a better reflection of the underlying tightness of the market, unclouded by a single week's spike in heating or cooling demand due to swings in temperature and has important implications regarding long-term storage projections. As the Figure to the right shows, the temperature-adjusted supply/demand imbalance tightened dramatically over the summer as heavily discounted natural gas fueled a surge in fuel-switching and record per degree day powerburn demand while LNG exports reached all-time highs. However, now that natural gas prices have jumped 25% from the August lows and powerburn is beginning its seasonal decline, I would not be terribly surprised to see the temperature-adjusted imbalance loosen back a bit over the next 6 weeks. Click HERE for more on the latest EIA-reported natural gas supply/demand data.
While the EIA's reported injection was only slightly larger than expected, investors treated Thursday's small miss as an excuse to take profits or load back up on a short position following the recent run-up. The October front-month contract tumbled 10 cents or 3.8% to settle at $2.54/MMBTU. It was the largest single-session drop since July 16 and the lowest close since September 6. The sell-off, combined with a rally this time last year, boosted the year-over-year price decline to -14.7%, as shown in the Figure to the right. Given that inventories are now more than +420 BCF higher than last year, this is a reasonable spread. I calculate that natural gas stands at a small 3.9% discount versus its Fair Price of $2.64/MMBTU based on current inventories alone. This Fair Price will likely fall to near $2.50/MMBTU over the next 2-3 months as the storage deficit contracts further with the commodity flipping to more than 10% overvalued by December. Over the full 8-month period for which I make projections, the commodity is overvalued by an average of 2.3% with a mean futures price of $2.60/MMBTU versus a Fair Price of $2.54/MMBTU. At this time, I am maintaining a $2.50/MMBTU downside price target, though if the October outlook continues to look warm throughout the month, prices could very well fall under $2.40/MMBTU.
Meanwhile, crude oil rose sharply out of the gates after reports surfaced that Saudi Arabia was exploring options to purchase crude oil from nearby Iraq in order to honor its delivery obligations, suggesting that outages associated with the weekend's missile attack were more serious than the Kingdom was reporting. The commodity reached an intraday high of $59.54/barrel early. Prices then steadily sold off after it became apparent that flooding from blink-and-you'd-miss-it Tropical Storm Imelda was becoming more extensive than anticipated. The 370,000 barrel Baytown refinery in Beaumont, Tx shut down on Thursday, likely reducing near-term demand for crude oil, contributing to price weakness. In the end, WTI finished the session up only 2 cents at $58.13/barrel. Brent oil held better, settling up 80 cents to $64.40/barrel, widening the Brent-WTI spread to over $6/barrel. Despite the failed rally and the potential for some further near-term weakness as the Texas flooding situation plays out, I remain bullish on WTI and feel that the combination of geopolitical unrest and relatively tight domestic inventories support an upside price target of near $70/barrel for WTI.
My Oil & Natural Gas Portfolio took advantage of the sell-off in natural gas prices to rise to a new 52-week high. The Portfolio gained +1.8% on Thursday to push 2019 year-to-date gains through the first 182 trading days to +16.0%, or +22% annualized. I have made two trades this week. The first was to close out half of my DWT long position on Monday's record-setting spike, realizing a profit of nearly +50%. Then, on Tuesday's dip under $60/barrel, I began to reaccumulate a modest position which now stands at 6.5% of my holdings via a short DWT stake. Should WTI drop under $57.50/barrel, I will add another ~2% position, with further additions on any subsequent weakness targeting a final position size of around 12%-15% should WTI reach $55/barrel. Regardless, the increased volatility associated with the many market drivers will support my short DWT position via price-independent leverage-induced decay. It is for this reason that I expect my long holders of UWT will be disappointed in the months to come even should WTI trade to $65-$70/barrel that their profits will be lower than expected. Despite the pullback in natural gas, I still remain aggressively short with a 20.5% UGAZ short only partially offset by a 5.3% short DGAZ position, meaning that I am net long by a robust 15.2%. Should natural gas break below $2.50/MMBTU, I will be strongly considering a dramatic swing, closing out most of by UGAZ short and aggressively adding to my DGAZ short to once again flip to net long. I am also debating adding to my CHK position--currently my largest equity holding at a 6.4% stake--on a break below $1.50/share from Thursday's close of $1.64/share. Click HERE for more on my current oil and natural gas holdings.
Natural gas demand will fall to wrap up the week as temperatures cool across the Southeast, even as unseasonably warm weather dominates the upper Midwest and Great Plains. After reaching the low 90s early in the week, highs will only reach near 80F in Raleigh and Charlotte today while Columbia, SC will only reach the low 80s, each around 5F cooler-than-normal. As the remnants of Tropical Storm Imelda only slowly spin down, Houston, Little Rock, and Tulsa, OK will also be around 5F cooler-than-normal ranging from the upper 70s to mid-80s. On the other hand, Chicago, Minneapolis, and Detroit will all reach the low 80s today while St Louis could near 90F, all an impressive 10F-15F warmer-than-normal. More modest anomalies of around 5F will stretch from central Texas to the Colorado Front Range all the way east to New England where Boston could reach the upper 70s to near 80F. Overall, today's forecast mean population-weighted nationwide temperature will rise 0.8F from Thursday to 71.0F, 1.7F warmer-than-normal. Nonetheless, thanks to fall temperatures across the late season cooling demand hotspot that is the Southeast, forecast Total Degree Days (TDDs) will fall to 13.0 TDDs, just 0.2 TDDs greater than average but still the 7th most for September 20 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.
Based on today's temperature outlook and early-cycle pipeline data, I am projecting a +14 BCF/day daily natural gas storage injection, 1 BCF larger than Thursday's injection and a bearish 3 BCF larger than the 5-year average. Click HERE for more on today's projected daily injection and Realtime natural gas inventories. With the cooling across the Southeast, Powerburn demand will likely fall to near 33 BCF/day, more than 2 BCF/day lower than last year. And thanks to the remnants of Tropical Storm Imelda, LNG feedgas will hold far below the recent all-time highs today as the Sabine Pass shipping channel will remain shutdown today. Flows to Sabine Pass will be just 2.0 BCF/day today, up less than 0.1 BCF/day from Friday and down more than 1.5 BCF/day from the recent highs. Total LNG feedgas demand will fall another 0.7 BCF/day from Wednesday to just 4.1 BC/day today thanks to a sharp drop in flows to Cove Point, though I wouldn't be surprised to see this revised higher in later-cycle flows. Nonetheless, as it stands right now, total LNG feedgas demand will be nearly 2.5 BCF/day below all-time highs and up just 1.5 BCF/day from 2018. Click HERE for more on the latest LNG export data.
For the full natural gas storage week of September 14-20 that ends today, I am projecting a 84 BCF injection, a slight 10 BCF bearish versus the 5-year average, but a robust 32 BCF larger than last year's bullish +52 BCF build. It would be the third largest injection in the past five years behind only a pair of triple digit builds in 2014 and 2015. Should a +84 BCF injection verify, natural as inventories would rise to 3187 BCF, within around 5 days of topping last year's November peak. The long-standing storage deficit versus the 5-year average would contract down to -65 BCF while the year-over-year surplus would soar to a new 2019 high of +426 BCF. The EIA will release its official storage numbers for the week next Thursday, September 26, at 10:0 AM EDT. Click HERE for more on this week's projected injection.
September 20, 2019
Home --> Daily Commentary & Archive --> September 20, 2019 Daily Commentary
Subscribe to:
Posts (Atom)