February 20, 2018

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Natural Gas Looks To Bounce In Holiday-Shortened Week As A Colder-than-Average Start To March Looks Increasingly Likely; But Before That, Natural Gas Demand To Tumble Today As Record Warmth Engulfs East, Driving Second Straight Bearish Weekly Storage Withdrawal

6:00 AM EDT, Tuesday, February 20, 2018
Welcome back after the extended President's Day Holiday. Natural gas fell 3 cents or 0.9% on Friday to settle at $2.56/MMBTU, capping a comparatively low volatility week in which the commodity fell just 1%. A larger-than-expected -194 BCF EIA-reported storage withdrawal for the previous week and inventories that are 600 BCF lower than last year provided bullish support while record production and a forecast for bearish temperatures for the remainder of February drove the bearish case, leading to a stalemate last week. For the holiday-shortened week ahead, look for the natural gas demand to tumble, driving a second straight below-average weekly storage withdrawal. Whether or not investors have already priced in this anemic demand remains to be seen. However, the commodity could find support in early-March forecasts which are increasingly pointing to a period of colder temperatures. While US markets were closed on Monday for President's Day, natural gas rose nearly 2% on the day in electronic trading, topping $2.60/MMBTU at least temporarily on this news. Crude oil, meanwhile, rose 34 cents or 0.6% on Friday to close the week at $61.88/barrel, capping a strong 4.2% weekly gain and halving the month's losses to 4.7% after the commodity had fallen under $59/barrel the previous week on fears of surging US production. The commodity also traded higher in Monday electronic trade.

My Oil & Natural Gas Portfolio stretched its record winning streak to 9 days on Thursday before finally succumbing to gravity, falling 0.4% on Friday. Nonetheless, the portfolio finished the week up +0.8% to push gains since May 1, 2017 to +39.1%. The portfolio is up +6.3% in 2018 year-to-date or +48% annualized. In my opinion, the week's performance is particularly impressive since I didn't make a single trade and the portfolio's largest position, a hedged long position in natural gas, lost money. For subscribers, I have published a new Monday Investing Commentary HERE detailing these trades, market outlook, and trading strategy for the week to come. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries. To learn more about subscribing and helping to support the site, please click HERE.

On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly data detailing NYMEX money manager natural gas holdings through Tuesday, February 13. The Commission reported that open natural gas long positions fell by a modest 17,460 contracts week-over-week to 280,172, near the middle of its 52-week range. On the other hand, open short positions spiked by 52,893 contracts to 163,551, a weekly increase of nearly 50%. Over the past year, open short positions have varied widely between a mere 89,431 contracts and an overbearing 323,465 contracts. Open long and short NYMEX natural gas positions over the past year are shown in the Figure to the right. With the decline in long positions and the rise in short positions, the natural gas Bullish Sentiment--the fraction of open positions held long--tumbled 10% week-over-week to 63%. After falling to a multi-year low of 44% during December's downside correction, the subsequent short squeeze, driven in part by this overcrowded short trade, drove the bullish sentiment to 76%, in short order creating the opposite situation with a surplus of weak, late-to-the-party long positions. This has likely fanned the flames of the latest correction. However, with last week's downward adjustment, the Bullish Sentiment is now within 2% of the 52-week average Sentiment of 61%, which will probably take the wind out of the short sellers' sails now that open long and short positions are nearly balanced. With the fundamental picture now much improved compared to December, further downwide risk will likely be limited and, while the commodity may not rally sharply with a mediocre near-term temperature forecast, I expect, at minimum, more rangebound trading. Click HERE for more on natural gas investor positions.

The EIA will release its weekly Natural Gas Storage Report for the week of February 10-16 that ended last Friday this Thursday at 10:30 AM EDT. After last week's surprisingly strong -194 BCF draw, I am expecting bearish withdrawals to return. I am projecting a preliminary -119 BCF storage drawdown, which would be 26 BCF bearish versus the 5-year average -145 BCF. The bearish withdrawal was driven by mild weather suppressing heating demand with the mean nationwide temperature rising 6F week-over-week to 47.8F, more than 5F warmer than the 5-year average 42.1F. Supply/demand balance did catch at least a temporary break as domestic production likely slowed its meteoric rise, climbing less than 0.1 BCF/day week-over-week to average just over 78.0 BCF/day, still up 7 BCF/day year-over-year. As the Figure to the right shows, a -119 BCF draw would be the second weakest in the last 5 years, ahead only of last year's -93 BCF draw. In contrast, 2014 saw a huge -205 BCF draw. Should such a withdrawal verify, natural gas inventories would fall to 1765 BCF while the storage deficit versus the 5-year average would fall to -407 BCF or -19%. Despite the overall bearishness of the withdrawal, thanks to last year's even warmer temperatures, the year-over-year storage deficit will actually rise to -603 BCF or -25%, the largest in 4 years. Click HERE for more on this week's projected draw.

Despite a quick-hitting storm system that brought a heavy wet snow to the major cities of the Northeast, natural gas demand steadily declined over the extended holiday weekend with withdrawals falling from a near-average -17 BCF/day draw on Saturday to a bearish -8 BCF/day withdrawal on Monday. Natural gas demand will fall even further today as an extensive area of exceptionally mild temperatures dominate the densely-populated East. Daily high temperature records are possible across multiple cities of the East Coast today. Philadelphia is forecast to reach 71F today, 26F warmer-than normal, while New York City and Boston will each rise into the lower 60s, each 20F warmer than normal. Perhaps the most impressive will be Pittsburgh, which could climb into the upper 70s, nearly 40F warmer than normal. Unseasonable warmth will also impact areas of the Great Lakes with Detroit rising into the mid 60s (31F warmer than normal) and Chicago the upper 50s (21F warmer than normal). On the other end of the spectrum, further west over the Rockies and northern Plains, an impressive area of arctic cold will slide southward from Canada with Billings, Mt only rising into the single digits--more than 30F colder than normal--and Bismarck and Denver, only reaching the teens, each more than 20F colder than normal. Even areas of the Pacific Coast and Desert Southwest, which have been persistently mild all winter-long will finally get a taste of the arctic with Phoenix not exceeding 60F and Portland struggling to 40F, each around 15F colder than normal. Unfortunately for natural gas bulls, despite nearly equally balanced areas of warmth and cold across the country, this temperature pattern whiffs on geography with the mild and far more densely-populated East Coast being the primary driver of demand. As a result, the forecast mean population-weighted nationwide temperature today will climb to 56.2F, a massive 12.8F warmer than normal. Total Degree Days will be a meager 12.7 TDDs today, 9.6 TDDs fewer than normal and the second fewest for February 20 in the last 37 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 an extremely bearish -2 BCF/day daily natural gas storage withdrawal, 15 BCF bearish versus the 5-year average -17 BCF/day draw. Click HERE for more on today's projected withdrawal and intraday natural gas inventories.

Fortunately for natural gas bulls, gas demand will bottom today and will rebound for the remainder of the week. The strong southerly flow across the eastern third of the nation will gradually shift offshore allowing the arctic airmass centered over the Rockies today to migrate eastward. However, unlike earlier in the winter when such airmasses would extend all the way to Florida, this one will reach the Mississippi River and hit a brick wall, allowing the Southeast, Ohio Valley, and Eastern Seaboard to remain mild. As a result, daily natural gas storage withdrawals will again reach double digits on Thursday and Friday as shown in the Figure to the right, but will remain well below the 5-year average. Overall, the for the current storage week of February 17-28, I am projecting a preliminary -73 BCF natural gas storage withdrawal, 45 BCF bearish versus the 5-year average but 66 BCF larger than last year's record-setting bearish draw. Should a -73 BCF draw verify, natural gas inventories would fall to 1692 BCF while the storage deficit versus the 5-year average would narrow to -362 BCF--124 BCF down from the peak -486 BCF reached in early January--while the year-over-year deficit will climb to -670 BCF. Click HERE for more on this week's projected draw. The EIA will release its official storage report for this week on Thursday, March 1 at 10:30 AM EDT. Looking longer term, computer models are zeroing in on a return to colder-than-average temperatures by the first week of March. It remains to be seen how intense this cold will be or how long it will last, but I do feel that it is essential that it drive the storage deficit versus the 5-year average back above -400 BCF in order to support a sustained rally in natural gas prices. Should the cold air stick around into the second half of the month and somehow push the deficit back above -450 BCF, the commodity could trade to $3.00/MMBTU in a flash. But if the cold is only transient and the deficit only rise to ~-350 BCF, I could see short sellers using this as yet another opportunity to take advantage of a short-lived rally and pile back into the trade and drive prices quickly under $2.50/MMBTU on the subsequent warm-up. I will have much more on this medium-term outlook in commentaries over the next week.