November 20, 2017

Home --> Daily Commentary & Archive --> November 20, 2017 Daily Commentary

Natural Gas Demand To Rebound Early This Week As First Of Two Quick-Hitting Shots Of Canadian Air Dominates The East; Volatile, But Near-Average Temperatures Likely To Drive Seasonal Storage Withdrawals Through November Before Possible Sustained Warm-Up In Early December; Natural Gas Remains Undervalued, But At Risk

6:00 AM EDT, Monday, November 20, 2017
Oil and natural gas both rebounded on Friday to help finish an otherwise disappointing week on a high note. Natural gas snapped a 4-day losing streak with a 4 cent or 1.4% bounce to $3.10/MMBTU. However, the commodity still lost 3.6% on the week despite a very bullish EIA storage report following news that US production climbed to a record high--up over 5 BCF/day from 2016--and investors continued to fret over the potential for a mild December. Crude oil, meanwhile, jumped $1.41 or 2.6% on Friday to settle at $56.55/barrel, reducing its weekly loss to just 0.3%. Still, it was the first weekly loss in six weeks for the sector. The weekly loss followed a disappointing EIA-reported storage build and early indications that, like natural gas, domestic oil production had also climbed to an all-time high the previous week. Brent oil closed the week at $62.72/barrel as the Brent-WTI spread narrowed slightly to $6.17/barrel. My Oil & Natural Gas Portfolio rose 1.4% on Friday to reduce its own weekly losses to just 0.6%. With gains since May 1 at +29.1%, the portfolio is within 1% of 2017 highs. For subscribers, I have published a new Investing Commentary for Monday, discussing my recent trades, my current holdings, and strategy for the upcoming week. To learn more about subscribing and gaining this premium access while helping to support the site, please click HERE. Finally, Week 3 of my Natural Gas Storage Contest closes to submissions on Tuesday at 5 pm EDT. Submit your picks now by clicking HERE and compete to win $250.

Of note, the EIA will release its weekly Natural Gas Storage Report for November 11-17 on Wednesday at 12:00 PM EDT this week instead of the traditional Thursday at 10:30 AM EDT due to the Thanksgiving Holiday on Thursday. I am continuing to project a -47 BCF weekly draw for the report, 21 BCF bullish versus the 5-year average. Click HERE for more on last week's storage projection.

Over the weekend, natural gas demand rebounded after a soft end of the week. Following a weak -2 BCF/day daily withdrawal on Saturday, demand jumped an estimated 5 BCF on Sunday as a sharp cold front cleared the East Coast ushering in much colder temperatures behind it, driving the mean population-weighted nationwide temperature down over 3F to near-average levels. The week ahead will be characterized by a volatile temperature pattern in which two shots of cold air quickly moderate after delivering boosts to heating demand. The first shot will reach its maximum extent today as a large area of below-average temperatures dominate the East. After a chilly morning in which frosty conditions will be likely as far south as northern Georgia and Alabama, temperatures will rebound into the upper 50s to lower 60s across this region with mid-to-upper 40 along the I-95 corridor from Washington, DC to Boston, all around 5F-10F cooler than normal. On the other hand, highs will warm to well-above average across the more sparsely-populated northern Plains with Bismarck, ND perhaps reaching 60F, nearly 25F warmer than normal. However, thanks to the cool start across the major demand centers of the East, the forecast mean population-weighted nationwide temperature will cool by 2.4F day-over-day to 47.7F today, 1.2F cooler than normal. Total Degree Days will rise to 17.0 TDDs today, which would be the 14th most for November 20 in the last 37 years. Click HERE for more on today's temperature and degree day forecast. Based on this outlook and early-cycle pipeline data, I am projecting a bullish -10 BCF/day daily natural gas storage withdrawal, 3 BCF bullish versus the 5-year average -7 BCF/day draw. Click HERE for more on today's projected draw and intraday natural as inventories.

Temperatures will quickly rebound on Tuesday across the East Coast ahead of the next cold front with highs rising into the low 50s along the coast and 40s inland. As a result, natural gas demand will tumble with a -2 BCF/day draw expected. Said cold front will then sweep quickly eastward on Wednesday and Thursday bringing seasonally cool temperatures to most areas east of the Rockies by Thanksgiving, driving daily withdrawals quickly back towards double digits. By Friday, however, much warmer temperatures will shift into the Plains with upper 60s or even lower 70s possible as far north as South Dakota--a remarkable 35F warmer than normal in some areas. In the end,, the combination of intervening periods of mild temperatures plus the commercial and industrial demand suppression that typically accompanies Thanksgiving week looks to neatly cancel out the twin intrusions of Canadian air leading to a near-average storage withdrawal on the week. Presently, I am projecting a -48 BCF weekly storage withdrawal for November 18-24, 1 BCF bullish versus the 5-year average and 5 BCF larger than last year's withdrawal. As the Figure to the right shows, such a withdrawal would be the third largest for the November 18-24 period in the last 5 years, behind the huge -102 BC draw in 2014 and -56 BCF draw in 2013. Click HERE for more on this week's projected withdrawal. This EIA will release its official withdrawal numbers for the week on Thursday November 30 at 10:30 AM EDT and projecting the week's withdrawal will form the basis of Week 4 of my Natural Gas Storage Contest.

Looking longer-term, the general pattern of a cooler-than-average East Coast and above-average warmth across the Rockies into the Plains looks to persist for the remainder of November. As the Figure to the right shows, the NWS is forecasting a sprawling area of warmer-than-normal temperatures centered over the Desert Southwest but spreading to encompass much of the Rockies, Texas, and Southern Plains. However, the presence of below-average temperatures even along only the immediate Eastern Seaboard could be sufficient to cancel out the much larger of above-average anomalies due to the much greater population density across the East. Click HERE for more on the medium-term outlook. As a result, I am projecting near-average storage withdrawals for the weeks ending December 1 and December 8, in the ranges of -55-70 BCF and -85-100 BCF, respectively. As a result, by the first week of December, natural gas inventories will likely be somewhere near 3520 BCF with the storage deficit versus the 5-year average around -120 BCF and the year-over-year deficit at -310 BCF. Should this projection verify, natural gas' undervaluation would be near 10%, with a Fair Price of $3.53/MMBTU versus a Futures Price of $3.17/MMBTU. Click HERE for more on the 4-week outlook for natural gas inventories.

While such an undervaluation would typically be supportive of a rally, I would not be surprised to see prices kept down out of concern for the outlook for the remainder of December. As the map of the long-term outlook for the month of December to the right shows, the computer models continue to forecast an above-average temperature pattern across the most important demand regions in the Midwest and Northeast throughout the month. Coupled with production at record highs, natural gas supply/demand balance could loosen dramatically should such a forecast verify, leading to a string of bearish withdrawals to wrap up 2017. Once could argue that the 10% undervaluation is investors' way of pricing this forecast in, but traders often become emotional around weather and it would not be surprising to investors push the commodity even lower heading into the final month of the year. On the other hand, should the December forecast be a bust and we see normal or below-average temperatures, the commodity could very easily see a quick 10% melt-up. The prospect of either scenario is enough to make even this long-term bull very cautious over the last month of the year.