6:00 AM EDT, Wednesday, October 23, 2019
Natural gas recovered from Monday's sell-off yesterday with front-month prices jumping 3 cents or 1.5% to settle at $2.27/MMBTU. However, I expect that this rally missed the majority of natural gas traders.
The popular 1x ETF UNG fell -0.2% while the 3x ETF UGAZ slid -0.5%. This divergence is due to the fact that these ETFs have already rolled their funds from the front-month November 2019 contract to the December 2019 contract ahead of net week's expiration. The December 2019 contract--and all subsequent contracts--sat out the front-month's rally, holding nearly flat at $2.45/MMBTU. In this environment, even when natural gas rallies, it doesn't. Over the past 24 hours, there has been little change in the near-term temperature outlook. Both the ECMWF ENS and GFS ENS are still forecasting much below-average temperatures across the majority of the lower 48 beginning late next week into early November, as shown in the Figure to the right, though Monday's run of the long-term 6-week ECMWF-EPS model suggests that this cooldown will be relatively short-lived with readings quickly rising to above-average by the second week of the month. In the long run, the cooldown will have minimal impact on the building storage surplus and buyers have remained cautiously on the sidelines. For now, I continue to see the commodity rangebound with December 2019 prices stuck between $2.60/MMBTU upside and $2.25/MMBTU downside.
Meanwhile, oil prices logged their first gain in three days on Tuesday on news that OPEC was considering implementing further production cuts during its upcoming December meeting. This suggests that the cartel was adopting a "whatever it takes" mentality to support Brent prices above $55/barrel or so. On the news, WTI rose 85 cents or 1.6% to settle at $54.16/barrel while Brent gained 74 cents to $59.70/barrel. At the close, the November 2019 WTI front-month contract expired and will be replaced by the December 2019 contract, which settled up 97 cents or 1.8% to $54.48/barrel.
This new contract will be challenged right away as the EIA will release its weekly Petroleum Status Report for October 12-18 this morning at 10:30 AM EDT. After the close of trading on Tuesday, the American Petroleum Institute (API) announced that it was expecting a disappointing +4.5 MMbbl crude oil inventory build. This would be the sixth straight weekly build and 1.1MMbbls bearish versus the +3.5 MMbbl 5-year average. Should it verify, oil stocks would rise to 434.9 MMbbls, the highest since August 16. The storage surplus versus the 5-year average would rise to +11.4 MMbbls while the year-over-year surplus would actually fall to +16.6 MMbbls thanks to last year's outsized +6.4 MMbbls. Meanwhile, refined product stocks will be largely offsetting with a bearish -0.7 MMbbl gasoline drawdown (5-year average: -3.0 MMbbls) opposed by a -3.5 MMbbl distillate draw (5-year average: -2.5 MMbbls). Overall, the API expects Total Petroleum Inventories (crude oil + gasoline + distillates) to rise by +0.2 MMbbls, a modest 2.3 MMbbls bearish versus the 5-year average -2.1 MMbbl draw.
Should the API's numbers verify, this looks to be another disappointing report and could certainly result in further near-term downside to the sector. Immediately after the API's numbers were released, WTI fell nearly 1% to back under $54/barrel. This being said, I would not be surprised to see a smaller-than-expected EIA number as the EIA has diverged bearishly from the API over the past month and this usually results in a re-balancing where it flips to bullish versus the API. Additionally, even if today's numbers do match the API, I expect the magnitude of downside to be limited. I do expect draws to return very soon which will result in some very bullish year-over-year comparisons given the EIA reported builds in each of the next 6 weeks this time last year of: +6.4 MMbbls, +3.2 MMbbls, +5.8 MMbbls, +10.3 MMbbls, +4.8 MMbbls, and +3.6 MMbbls. At this time, I am maintaining my aggressive $65/barrel upside price target on WTI, but will not be adding to my already large long position above $50/barrel.
Check back after 10:30 AM EDT on my crude oil storage page HERE for the latest EIA storage numbers.
Meanwhile, natural gas demand will rise slightly for a second straight day today as colder-than-normal temperatures amplify across the Northern Plains--but won't be nearly enough to drive even a normal daily storage injection. Bismarck, ND will struggle to reach 40F today while Minneapolis will only reach the mid-40s, each 10F-15F colder-than-normal. Denver will reach the mid-50s today--just 5F cooler-than-normal, but is under a Winter Weather Advisory for tonight for 3-5 inches of snow as temperatures will rapidly cool. On the other hand, highs across most areas east of the Mississippi River will be within 5F of normal, a rather bearish set-up during the Shoulder Season with a loose supply/demand balance. Atlanta will only see the low 70s while Washington, DC and Philadelphia will reach the mid-60s, either side of average. Boston and New York City will see some of the largest anomalies in the country with each approaching 70F, more than 10F above-average, though such readings aren't enough to generate much in the way of cooling demand. It will also be a hot day in California with San Francisco topping 80F and Sacramento the mid-to-upper 80s, 10F-15F warmer-than-normal and sufficient to drive at least some very late season cooling demand. Overall, today's forecast mean population-weighted mean nationwide temperature will cool -2.0F from Tuesday to 59.6F, still 1.2F warmer-than-normal. Total Degree Days (TDDs) will rise to 8.5 TDDs, still the 15th fewest for October 23 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.
Based on today's temperature forecast and early-cycle pipeline data, I am projecting a +13 BCF/day daily natural gas storage injection, around 0.5 BCF/day smaller than Tuesday but still 4 BCF/day bearish versus the 5-year average +9 BCF/day build. By tonight, projected Realtime inventories will reach 3680 BCF while the storage deficit versus the 5-year average will rise to +55 BCF. The year-over-year surplus will gain a sharper +7 BCF to +559 BCF. Click HERE for more on today's temperature and degree day outlook.
October 23, 2019
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