April 20, 2018

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Natural Gas Fails To Take Advantage Of Larger-Than-Expected EIA Inventory Withdrawal; Storage Withdrawal Season To Finally End Today With First Ever Storage Draw For Third Week Of April Projected For April 14-20; Freeport LNG Project To Be Delayed Until 2019

6:00 AM EDT, Friday, April 20, 2018
In its weekly Natural Gas Storage report for April 7-13, the EIA announced Thursday morning that natural gas inventories tumbled by -36 BCF. This was an impressive 13 BCF larger than my -23 BCF projection and a massive 74 BCF bullish versus the 5-year average +38 BCF injection. It was the largest (and only) storage withdrawal for the April 7-13 period in the past 5 years and the second largest for the week in the full 24 year history for which EIA data is available, behind only 2007's -46 BCF draw. With the withdrawal, inventories dropped to 1299 BCF and likely fell under 1290 BCF intraweek before daily builds on Thursday and Friday of the week. This was the lowest inventory level since May 18, 2014. The storage deficit versus the 5-year soared to -449 BCF or -26% while the year-over-year deficit climbed to -808 BCF. All 5 storage regions are at large deficits, led by the Midwest region at a -129 BCF deficit versus the 5-year average and, at 228 BCF, is less than half its 487 BCF mark from a year ago. Even given expectations of an exceptionally bullish draw, yesterday's report was a huge surprise, especially as recent withdrawals had trended towards underperformance versus expectations.

Further adding to the bullishness of the report, the EIA also announced that natural gas production stabilized at 80 BCF/day for April 7-13, unchanged week-over-week, and will fall to 79.6 BCF/day this week. Canadian imports meanwhile dropped by 0.1 BCF/day to 6.1 BCF/day. Production is still up 8 BCF/day year-over-year while imports are up 0.8 BCF/day. On the demand side, LNG exports averaged 3.6 BCF/day last week, up 1.3 BCF/day year-over-year while exports to Mexico were up 0.4 BCF/day year-over-year at 4.4 BCF/day. Natural gas powerburn averaged 23.8 BCF/day last week, up a modest 1.8 BCF/day year-over-year. All-told, temperature-independent natural gas supply/demand balance was 7.1 BCF/day loose, 0.6 BCF/day tighter than the previous week. Click HERE for more on current natural gas inventories or HERE for more on supply/demand data.

Natural gas open down over 2% on Thursday, trading as low as $2.68/MMBTU, but rebounded sharply following the larger-than-expected withdrawal, climbing to as high as $2.72/MMBTU. However, the commodity quickly lost ground and finished the day near session lows, down 6 cents or 2.9% at $2.66/MMBTU. It was the lowest close since March 26. Some of the day's weakness may have been attributable to much milder temperatures next week and the (long overdue) beginning of the storage injection season. As the Figure to the right shows, natural gas is now trading at a steep 18% discount relative to its price of $3.24/MMBTU from a year ago. This departure should fuel natural gas fuel switching this summer, boosting powerburn, industrial demand, and residential/industrial demand, although it is highly doubtful that gains in these elements will be able to completely counter the aforementioned 7.1 BCF/day year-over-year loosening unless we see a record hot summer. This being said, I was quite surprised that natural gas rolled over as it did yesterday. I have long been a proponent of natural gas needing to fall to under $2.60/MMBTU or even $2.50/MMBTU in order to rebalance the market, and have been positioned short the commodity for the past 6 weeks of rangebound trading awaiting such a move. However, that was before this remarkable late-season stretch of cold air that is now pushing into the third week of the Shoulder Season. According to my Fair Price Model, the commodity is now trading at a steep 31% discount to its Fair Price of $4.02/MMBTU. While this undervaluation declines over the summer as I do expect the storage deficit to narrow, the commodity remains undervalued by 15% or more throughout the period. For this reason, I could see natural gas staging a near-term bounce--a sort of "buy the news" event--when inventories finally bottom over the next few days as investors come to realize that they may have overplayed the record domestic production narrative.

Crude oil, meanwhile, topped $49/barrel in early-session trading on Thursday but, like natural gas, was unable to hold onto its gains and closed down 18 cents or 0.3% to $68.29/barrel. Brent crude, however, bucked the trend and rose by 30 cents to $73.78/barrel, a new 4-year high. This pushed the Brent-WTI spread to a new 2018 high of $5.50/barrel, which should continue to favor US exports and suppressed imports. My Oil & Natural Gas Portfolio gained 0.2% to push gains since the portfolio's inception on May 1, 2017 to +49.4%. Gains briefly topped +50% early in the session. Through the first 75 trading days of 2018, the portfolio is up +14.2%, or +47.7% annualized. I made another trade on Thursday, pushing my total to 3 on the week, a relatively active trading week by recent standards. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE. Natural gas demand will rise today as temperatures cool further across the Eastern Seaboard with one final daily storage withdrawal in the interminable 2017-18 heating season expected. Highs along the I-95 corridor will be around 10F below-average today with Washington, DC, Philadelphia, and New York City only reaching the mid-to-upper 50s while further south areas from Jacksonville, FL through Raleigh, NC will be around 15F colder-than-normal with readings only in the low 60s. Similar anomalies will be seen across the southern Plains, and particularly west Texas from Amarillo, TX through Dodge City, Ks where readings will only be in the mid-50s under much-needed showery conditions, 15F colder-than-average and 40F-50F cooler than a week ago when some regions saw triple digit heat. Overall, the forecast mean population-weighted nationwide temperature today will cool by 1.7F from Thursday to 52.4F, 6.5F colder-than-normal. Forecast Total Degree Days will climb to 13.2 TDDs, 4.3 TDDs greater than normal and the third most for April 20 in the last 37 years since 1981. Click HERE for more on today's temperature and degree day outlook. Based on this forecast, I am projecting a -2 BCF/day daily natural gas storage withdrawal today, 1 BCF larger than yesterday and 11 BCF bullish versus the 5-year average +9 BCF/day build. Click HERE for more on today's projected daily withdrawal and for more on Realtime natural gas inventories.

For the natural gas storage week of April 14-20 that ends today, I am projecting a record-setting -13 BCF storage withdrawal. Such a withdrawal would be 73 BCF larger than the 5-year average +60 BCF build and would be the only storage withdrawal for April 14-20 in the 24-year history for which EIA storage data is available, 17 BCF more bullish than the previous smallest storage build. In comparison, the smallest build in the last 5 years was +31 BCF in 2013 while 2015 was nearly 100 BCF more bearish with a +86 BCF injection, as shown in the Figure to the right. It would typically be the third week of the storage injection season. Should a -13 BCF withdrawal verify, natural gas inventories would fall to 1286 BCF, the lowest season-ending mark since 2014 and 522 BCF below the 5-year average. The year-over-year deficit, meanwhile, would climb to 892 BCF. Click HERE for more on this week's projected storage withdrawal. This does remain a preliminary projection and will be revised over the next 3-5 days as finalized temperature and pipeline data is integrated into my model.

Looking ahead to next week, the natural gas storage injection season will finally arrive, even as the build remains comfortably below the 5-year average. After today's projected small storage withdrawal, inventories will likely be flat on Saturday and will thereafter ramp up quickly, with daily injections reaching double digits by Thursday or Friday, as shown in the Figure to the right, which details daily storage injections for the April 21-27 period. The rapid weakening natural gas demand will be driven by rebounding temperatures across the Plains and Northeast with Minneapolis, which saw 18 inches of snow just last week, likely topping 65F on multiple days and the Megalopolis from New York City southward climbing above 70F. This will dramatically curtail heating demand and will finally provide some more consistent data on the impact of record production levels on supply/demand balance. Despite the rising demand, I am still projecting a weekly storage injection of just +46 BCF for next week, 23 BCF smaller than the 5-year average +69 BCF and the smallest injection for the April 21-28 period in the last 5 years. Should such a build verify, natural gas inventories would climb to 1334 BCF but the storage deficit versus the 5-year average would top -544 BCF or -29%. The EIA will release its official storage numbers for this week on Thursday, May 3 at 10:30 AM EDT. Click HERE for more next week's projected storage injection.