January 21, 2019

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Holiday Snippet Edition: Natural Gas Looks To Give Up Friday's Gains In Holiday Electronic Trade As Models Back Away From Record-Setting Arctic Outbreak, But Large Undervaluation Should Limit Losses; Gas Demand To Rise To New Seasonal High Today As Arctic Air Remains Entrenched; Crude Oil Surges On Falling Rig Count, But Gains Could Be Tenuous

6:00 AM EDT, Monday, January 21, 2019
Natural gas staged a dramatic reversal on Friday, rebounding from an early 6% hole to finish the session up 2% to $3.48/MMBTU, pushing the commodity up 12% on the week. The rally was driven by an exceptionally cold early afternoon 12Z run of the ECMWF model on Friday that projected a potentially record-setting blast of arctic air to overspread the Eastern US during the last few days of January. With a correspondingly cold 18Z GFS run, I was briefly projecting only the second ever -300 BCF weekly natural gas storage withdrawal for the week ending February 1. However, over the weekend, somewhat unsurprisingly, both models back away from this extreme scenario, as shown in the Figure to the right, forecasting instead a series of exceptionally cold, but short lived shots of arctic air, the exact timing of which remains to be resolved. While I am still projecting a -200 BCF draw for the week ending January 25 and a nearly -250 BCF draw for the week ending February 1, natural gas futures opened Sunday evening electronic trade down over 6% or 20 cents with the February contract trading as low as $3.28/MMBTU. The March 2019 contract, held by natural gas ETFs UGAZ and UNG dropped a more modest 4% to $3.09. At the time of publication of this commentary, the Front Month contract had trimmed its losses somewhat and was down just over 4% to $3.35/MMBTU. This remains a challenging trading environment as the near-term forecast is undoubtedly not as favorable as it was on Friday and the EIA reported a day earlier that total natural gas supply had risen to a new all-time high, setting the market up for a potentially loose spring once heating demand fades. On the other hand, even with the recent string of bearish withdrawals, natural gas is undervalued by 13% according to my Fair Price model and the natural gas storage deficit versus the 5-year average will, at minimum, rise back over -400 BCF in the weeks to come, despite the moderation in the near-term outlook, pushing the undervaluation to over 20%. At this time, I remain cautiously long natural gas. Should the March 2019 contract held by the ETFs fall under $3.10/MMBTU and the temperature outlook remain favorable, I will consider adding to my long position and if it falls under $3.00/MMBTU, I definitely will. My near-term price target for the February 2019 contract is $3.75/MMBTU after the weekend warming trend and $3.50/MMBTU for the March 2019 contract.

Meanwhile, WTI crude oil soared $1.73 or 3.3% on Friday to settle at $53.80/barrel while Brent rose 2.5% to $62.70/barrel. On the week, WTI rallied 4.3% while Brent was up a comparable 3.7%. Friday's rally was bolstered initially by ongoing optimism regarding a thawing of US-China relations and was then jolted higher after Baker Hughes reported that the Rig Count tumbled by 21 rigs last week to 852 rigs, the third straight decline and the largest weekly drop in almost 3 years. Despite these bullish signals, I remain somewhat skeptical of the near-term sustainability of WTI prices above $54/barrel as the US storage surplus and domestic production continue to grow. At this time, I am favoring a pullback towards $50/barrel, especially if US equities markets weaken. Long-term, I still expect a tightening of supply/demand balance and am maintaining a $60/barrel 2019 price target.

Natural gas demand will rise for a third straight day today to a 2018-2019 Heating Season high as much of the eastern half of the nation remains gripped in the arctic chill. The core of the cold will be centered over the Northeast. After falling to near 4F this morning, highs in Boston today will struggle to reach double digits today, 25F colder-than-normal. New York City and Philadelphia will only reach the upper teens while Washington, DC tops out in the lower 20s, all 15F-20F colder-than-normal and the coldest air of the season. Further west, parts of Ohio, including Columbus, may drop below zero this morning, aided by a fresh snow pack, 25F-30F below-average. Across the Plains and upper Midwest, temperatures will warm a few degrees from Sunday ahead of a developing modest snowstorm, but will still be far below average. After falling to below zero for a third straight night, Minneapolis will warm to near 20F today, 5F colder-than-normal. Warmer-than-normal temperatures today will be restricted to parts of west Texas and the Intermountain West with El Paso reaching the low 70s and Denver the mid 50s, 10F-15F warmer-than-normal. However, the primary driving force of gas demand today will be the warmth across the East and the mean population-weighted nationwide temperature today will plunge by 8.4F from Sunday to 31.0F, 8.1F colder-than-normal. Total Degree Days (TDDs) today will rise to 33.5 TDDs, 7.2 TDDs greater than normal and the 6th most for January 21 in the last 38 years since 1981. 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 -43 BCF/day daily natural gas storage withdrawal, 15 BCF larger than Sunday's draw and 22 BCF bullish versus the 5-year average -21 BCF/day draw. By tonight, projected Realtime natural gas inventories will have fallen to near 2288 BCF. Overnight last night, the storage deficit versus the 5-year average rose back above -300 BCF and by tonight will top -320 BCF. The year-over-year storage surplus will be nearing the end of its fleeting existance, falling by 29 BCF today to +20 BCF and should flip back to a deficit by Wednesday morning. Click HERE for more on today's projected storage withdrawal and Realtime natural gas inventories. Gas demand will fall rapidly on Tuesday and Wednesday as temperatures quickly moderate, but should see a late-week surge with daily draws again topping -40 BCF, potentially driving the season's first -200 BCF draw, a reinforcing shot of arctic air moves southwards. Click HERE for more on this week's projected storage withdrawal.