April 22, 2019

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Natural Gas Falls To 3-Year Low, But Is Ready For A Deadcat Bounce; Gas Demand To Fall To 2019-Low Today As Seasonal Temperatures Dominate The Lower 48; Largest Weekly Injection Since 2015 Expected This Week Amidst Entrenched Bearish Temperature Pattern & Loosening Supply/Demand Imbalance

6:00 AM EDT, Monday, April 22, 2019
In its weekly natural gas storage report for the week of April 6-12, the EIA announced Thursday morning that inventories rose by +92 BCF. This was 3 BCF larger than my +89 BCF projection and a massive 71 BCF bearish versus the 5-year average +21 BCF. With the build, inventories rose to 1247 BCF while the storage deficit versus the 5-year average contracted to -414 BCF or -25%. The year-over-year deficit plummeted to -57 BCF and has since flipped to a surplus. All five storage regions saw bearish injections versus their respective 5-year averages, led by the South Central region for a third straight week with a +48 BCF injection, 31 BCF bearish all on its own. Nonetheless, this region still holds a -168 BCF deficit versus the 5-year average, the largest of any region, tough its -35 BCF year-over-year deficit has dropped to second place behind the Pacific region's -47 BCF. Speaking of which, both the East and Midwest regions have flipped to year-over-year surpluses of 21 BCF and 26 BCF, respectively, and will likely be followed in the weeks to come by the Mountain and South Central regions.

Click HERE for more on the latest EIA-reported natural gas inventories.

Following the morning release of storage data, the EIA also issued its weekly supply/demand update just after the market close, covering the week of April 11-17. Of note, this differs from the storage week (April 6-12). After last week's dip, domestic production gain moved higher, rising 0.5 BCF/day week-over-week to 89.4 BCF, up 9.3 BCF/day year-over-year and within 0.3 BCF/day of the all-time high set two weeks ago. Canadian imports rose 0.1 BCF/day to 5.1 BCF/day, but is down 0.7 BCF/day versus 2018. On the demand side, powerburn, industrial, and residential/commercial demand all continue to trail 2018 by considerable margins--0.8 BCF/day, 0.7 BCF/day, and 4.0 BCF/day--thanks to weak degree days. As I have discussed, LNG feedgas demand has turned sharply higher over the past week, rising 1.6 BCF/day from last week to 4.8 BCF/day, up 1.4 BCF/day from 2018. Nonetheless, I project that temperature-adjusted supply/demand balance fell for a third straight week as the market continues to loosen. As the Figure to the right shows, I calculate that supply/demand balance is 2.8 BCF/day loose versus 2018 when the impact of variable temperatures is eliminated. This means that, for any given temperature, I would expect the daily natural gas storage injection to be 2.8 BCF/day larger--or bearish--compared to the same temperature with last year's underlying fundamentals. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make accurate long-term storage and price projections. The market tightened up during the winter as production plateaued and LNG feedgas spiked, but has since cooled considerably as LNG demand has lagged amidst maintenance and nuclear reactor outages have so far fallen significantly short of 2018, cutting estimated substitution demand by 0.7 BCF/day. It goes without saying that this is a bearish prognostic indicator for the sector, especially when Mother Nature is providing minimal support right now. Click HERE for more on the latest EIA-reported supply/demand data.

Despite the bearish and slightly larger-than-expected injection, natural gas prices initially bounced following the EIA's Report, trading as high as $2.52/MMBTU. However, the gains did not hold and the commodity finished the session down 3 cents or 1.1% to $2.49/MMBTU, a fresh 3-year low. For the holiday-shortened trading week, natural gas lost a steep 6.4%. Over the weekend, natural gas bulls may have gotten a glimmer of hope for a bounce as the near-term temperature outlooks trended slightly colder bringing the 14-day total GWDD outlook closer to the long-term average, or in the case of the GFS ENS, even back above-average, as shown in the Figure to the right. As a result, natural gas prices rose more than 0.6% in Sunday evening electronic trading. Nonetheless, with production rising and the supply/demand imbalance loosening, this will only slow the rate of contraction in the storage deficit. I feel that a bounce to the $2.60-$2.65/MMBTU range is certainly possible, but above this level, the short sellers will likely start pouring back into the trade. Barring a sudden surge in LNG exports or a larger-than-expected year-over-year increase in Powerburn once we start to see more consistent Cooling Degree Days, any bounce will be of the deadcat variety and I could easily see natural gas trading as low as $2.25/MMBTU before the end of the shoulder season. While I am currently long the sector, this will likely be a short-term trade on a bounce and I will look to get back short again above $2.65/MMBTU.

Meanwhile, oil prices resumed their upward trajectory with WTI rising 24 cents or 0.4% to $64.00/barrel and Brent tacking on 35 cents to $71.97/barrel. The commodity extended its gains in electronic trading on Sunday evening with WTI trading up more than 2% to north of $65.50/barrel. This is above my $65/barrel price target and, while it is certainly possible that commodity trades higher with the approaching driving season set to boost demand, I will likely begin taking profits on my long position in DWT.

My Oil & Natural Gas Portfolio finished Thursday down -0.4% thanks to falling natural gas prices, erasing early-week gains that saw the Fund rise to a new 2019 high. Ultimately, the Portfolio finished down -0.3% on the week with 2019 year-to-date gains standing at +11.8% or +40% annualized. I made a total of three trades on the week. The first, on Tuesday, was a short sale of SVXY--a long bet on volatility--to hedge my oil long position against a pullback in equity prices. The second and third was a pair trade--covering UGAZ and shorting DGAZ--to flip the Portfolio from net short to net long natural gas for a swing trade. Click HERE for more on my current Oil & Natural Gas Holdings.

The EIA will release its weekly Natural Gas Storage Report for April 13-19 this Thursday at 10:30 AM EDT. At this time, I am projecting a +90 BCF storage injection, 43 BCF larger than the 5-year average and a massive 111 BCF bearish versus last year's -21 BCF draw. As the Figure to the right shows, it would be the largest withdrawal in the last 5 years--for the third week in a row-- for the week of April 13-19 just topping 2015's +87 BCF build. It would also be the largest injection all-time for the week. The exceptionally bearish build was driven, unsurprisingly, by seasonally mild temperatures nearly nationwide. Mean population-weighted temperatures averaged 60.6F for the week, 2.7F warmer-than-normal. However, it is worth noting that the projected build did trend lower from a mid-90s build earlier last week. However, thanks to rising LNG feedgas demand, this projection has retreated slightly. Nonetheless, should a +90 BCF injection verify, natural gas inventories would rise to 1337 BCF while the storage deficit versus the 5-year average would contract to -371 BCF or -22%. The newly-minted year-over-year surplus would rise to +54 BCF or +4%. Click HERE for more on last week's projected storage injection.

Over the weekend, natural gas demand fell slightly and remained much below-normal as mild temperatures continued to dominate the major population centers of the Eastern Seaboard. I project daily storage injections of +15 BCF/day and +17 BCF/day on Saturday and Sunday, respectively, well above the 5-year average +10 BCF/day. Gas demand will continue to fall today as the same overall pattern remains entrenched. Highs could reach the upper 70s in Chicago with low-to-mid 70s likely in Des Moines, Detroit, and Indianapolis, all 10F-15F warmer-than-normal. Across the I-95 corridor, highs will reach the mid-70s in Washington, DC and Philadelphia, near 70F in New York City, and the mid-60s in Boston, 5F-10F warmer-than-normal. Below-average readings will be restricted to the Northern Plains where rainy and windy conditions will keep highs suppressed. Both Minneapolis and Denver will struggle to reach 50F, around 10F colder-than-normal, in what promises to be a dreary day. Overall, today's forecast mean population-weighted nationwide temperature will warm 2.5F from Sunday to 63.4F, 4.1F warmer-than-normal. Total Degree Days (TDDs) will slump to just 4.9 TDDs, 3.8 TDDs fewer than normal and the 2nd fewest for April 22 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.

Such a pattern will suppress both late-season heating demand and early-season cooling demand. Based on today's temperature forecast and early-cycle pipeline data, I am projecting a +19 BCF/day daily natural gas storage injection, 2 BCF larger than Sunday and 9 BCF bearish versus the 5-year average. It will be a new 2019-high injection. By tonight, projected Realtime natural gas inventories will rise to near 1388 BCF while the storage deficit versus the 5-year average will contract to near -345 BCF. The year-over-year surplus will rise to near +90 BCF, the highest since September 18, 2016. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.

For the remainder of the week, not much will change. Temperatures will remain mild across key demand areas. Projected daily injections look to peak on Tuesday at just under +20 BCF/day before slowly fading to near +15 BCF/day, but will remain well above the 5-year average, as shown in the Figure to the right. As a result, I am projecting a gargantuan +119 BCF storage injection for April 20-26, 49 BCF bearish versus the 5-year average. It will be the first triple digit injection since May 11, 2018 and the largest since May 29, 2015. Should it verify, inventories would soar to 1456 BCF while the year-over-year deficit will jump to +122 BCF. Click HERE for more on this week's projected injection. Unfortunately for the bulls, this could be only the first of at least three consecutive weekly injections heading into mid-May, which will likely cap any attempt at a rally.