August 21, 2019

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Natural Gas Holds Its Ground Above $2.20/MMBTU Even As Demand Likely Peaks For The Summer; EIA Expected To Report Modest Inventory Drawdown In Neutral Petroleum Status Report Today; LNG Feedgas Demand Continues Rapid Recovery As Flows To Corpus Christi Record All-Time Highs

6:00 AM EDT, Wednesday, August 21, 2019
Natural gas recovered from an early-session 2% loss to somehow finish in the black on Tuesday, despite a near-term temperature outlook that continues to weaken. The front-month September 2019 contract rose 1 cent or 0.4% to settle at $2.22/MMBTU after trading as low as $2.16/MMBTU early on. Nonetheless, natural gas prices are a steep 24% lower year-over-year. The rally comes despite the GFS and ECMWF models in good agreement that temperatures will dip considerably for the final week of August and first week of September. Powerburn will likely fall from the 2019-high 45 BCF/day levels of the past two days to under 38 BCF within the next 5 days. As a result, projected daily storage injections could approach the +13-15 BCF/day range, 5 BCF/day bearish versus the 5-year average, as shown in the Figure to the right. With production topping 92 BCF/day to repeatedly hit record highs and the strong powerburn demand that has been propping up supply/demand balance this summer fading, I would not be surprised to see some significant loosening in the supply/demand balance. While I am maintaining my $2.40/MMBTU price target, I feel that there is a sizable chance that natural gas could fall under $2.00/MMBTU near-term before establishing a bottom, especially if the EIA starts reporting larger-than-expected builds again. While I remain long the sector, I am doing so via short DGAZ and will therefore benefit from leverage-induced decay, even if the commodity doesn't immediately turn higher.

Meanwhile, crude oil staged a rally of its own, climbing 13 cents or 0.2% to settle at $56.34/barrel after dropping under $55.30/barrel in the morning. The front-month September contract expired at the end of the session and will be replaced by the October 2019 contract, which settled at $56.13/barrel, a slight 21 cent backwardation. Brent saw prices top $60/barrel for the first time in a week, closing up 29 cents at $60.03/barrel. Crude oil continues to find support globally after Houthi rebels attacked the massive Shaybah Oil field in Saudi Arabia as well as domestically as investors expect crude oil inventories to continue to fall.

Speaking of such things, the EIA will release its weekly Petroleum Status Report for the week of August 10-16 this morning at 10:30 AM EDT. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting a -3.5 MMbbl inventory drawdown, a slight -0.7 MMbbl bullish versus the 5-year average. Should such a draw verify, crude oil inventories would fall to 437.0 MMbbls, the second lowest since November 2, 2018. The storage surplus versus the 5-year average would contract to +13.5 MMbbls. Inventories would be +28.6 MMbbls higher than a year ago, a time when the commodity was trading at $65.46/barrel, a 16.1% premium over current prices. Countering this slightly bullish crude oil draw projection is an equally slightly bearish build in refined products. The API is expecting distillates to rise by +1.8 MMbbls (5-year average: +0.3 MMbbls) while gasoline inventories are expected to fall by -0.4 MMbbls, right at the 5-year average. Overall, this is a nearly neutral report with Total Petroleum Inventories (crude oil + gasoline + distillates) expected to fall -2.1 MMbbls, just -0.7 MMbbls smaller than the 5-year average -2.8 MMbbls, as shown in the Figure to the right. With my Fair Price holding at $60.94/MMBTU based on current inventories--a 9% discount versus current prices--and unlikely to be affected by a neutral report such as this, I continue to feel that oil is a good buy at or under $55/MMBTU. With storage expected to continue falling, through the Fall, I am maintaining a $65/barrel upside price target on WTI and feel that the commodity has greater near-term upside potential than natural gas.

Check back on my Oil Inventories Page HERE after 10:30 AM EDT for the EIA's official storage numbers.

With Powerburn demand topping 45 BCF/day for a second straight day and a daily storage injection of just +6 BCF/day, it is very possible that Tuesday's build will be the lowest for the rest of the summer cooling season. Temperatures will still be above-average across the southern Plains and Eastern Seaboard, though the magnitude of such departures will be on the order of 5F or so. Dallas could just reach 100F while Oklahoma City sees the upper 90s. Further east, Washington, DC and Philadelphia should top around, around 5F above-normal. The big-time heat will have shifted to the far west where Excessive Heat Warnings and Heat Advisories are up for Phoenix, AZ and Las Vegas, NV which could see 114F and 110F, respectively. On the cooler edge of things, highs will be unseasonably chilly across much of the northern Plains and western Great Lakes yet again today. The largest anomalies will be centered over Omaha, Ne which will only see the low 60s, 20F cooler-than-normal. Elsewhere, highs will be a more modest 5F-10F below-average regionwide, including the cities of Minneapolis, Omaha, Milwaukee, and St Louis. Overall, today's forecast mean population-weighted nationwide temperature will cool -0.7F from Tuesday to 78.7F today, still 2.4F warmer-than-normal. Total Degree Days (TDDs) will fall to 14.0 TDDs, 0.9 TDDs greater than normal and the 4th most for August 21 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.

Based on this outlook and early-cycle pipeline data, I am projecting a +7 BCF/day daily natural gas storage injection, 1 BCF larger than Tuesday, but still 1 BCF bullish versus the 5-year average. As temperatures cool, natural gas powerburn will finally begin to retreat, falling under 42 BCF/day, still up around 7 BCF/day year-over-year. LNG feedgas demand will continue its rapid recovery with total flows reaching 5.8 BCF/day, up 0.5 BCF from Tuesday, 2.9 BCF from 2018 and the highest since July 20. For a second straight day, flows to Corpus Christi will set new highs at 1.5 BCF/day while Sabine Pass recovers to 79% of capacity. At this pace, weekly LNG demand will reach 32.0 BCF, up 4.4 BCF from last week. Overall, by tonight, I project Realtime natural gas inventories to reach 2836 BCF while the storage deficit versus the 5-year average rises to -104 BCF. Storage levels will finish the day +361 BCF higher than this time last year. Click HERE for more on today's projected injection and Realtime natural gas inventories.