September 23, 2019

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Natural Gas Rally Finally Stopped While Oil Holds Onto Reduced Gains After Early-Week Fireworks; Natural Gas Bullish Sentiment Improves, But Lack Of Buying A Cause For Concern; Gas Inventories Top 3200 BCF Over The Weekend & Shoot Past Last Year's Peak Later This Week

6:00 AM EDT, Monday, September 23, 2019
After 5 weeks and nearly 30%, the late-summer rally in natural gas finally came to an end last week. After riding oil's coattails to a 4% gain to open the week and nearly reaching $2.70/MMBTU for the first time since April, natural gas steadily pulled back thereafter. Thanks to a second straight larger-than-expected natural gas storage injection and expectations that October will be milder-than-normal, natural gas would finish the week down 3.1% to settle at $2.53/MMBTU. The commodity is down 15% compared to September 2018 when prices were at $2.98/MMBTU, thanks to inventories that were more than 430 BCF lower than this year. With natural gas still overvalued long-term by an average of 1.7% according to my Fair Price Model, I continue to see the threat for further downside risk in the sector. I am maintaining my $2.50/MMBTU downside price target. My Oil & Natural Gas Portfolio reflects this sentiment and I remain aggressively short the commodity near-term with a 20% short UGAZ position only slightly offset by a 5.5% DGAZ stake, setting the Portfolio up net short 14.5%. Meanwhile, crude oil came down from its Monday fireworks but still finished the week sharply higher. WTI saw one of its largest all-time single-session gains to start the week, rising 15% to nearly $63/barrel following the shocking attack on Saudi Arabia's oil processing capacity. However, following claims that output would quickly be restored and after a neutral but disappointing EIA-reported inventory build, the commodity ultimately settled at $58.09/barrel, up "only" 5.9% on the week. The commodity found some support on Friday after Baker Hughes announced that active oil rigs tumbled by 14 to just 719. This is the lowest rig count since May 12, 2017. As the Figure to the right shows, the oil rig count is down a steep 166 rigs or 19% so far in 2019 alone. Investors expect that this will lead to a slowdown in domestic production growth--the primary influence that has capped WTI prices over the past 6-12 months--over the upcoming year. I remain bullish on the oil sector. According to my Fair Price Model, the commodity is undervalued by 9.4% based on current inventories alone (Fair Price: $64.14/barrel) and by an average of nearly 15% over the next 8 months (average Fair Price: $67.11/barrel). For this reason, after taking profits on Monday's run, I have already begun re-building my oil long stake via short DWT which currently stands at 6.5% of my holdings. Should WTI drop under $57.50/barrel, I will add further and again on a drop below $55/barrel, ultimately targeting net long exposure of 15%.

On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly data detailed natural gas money manager long and short positions on the NYMEX through Tuesday, September 17. Overall, the Commission announced that bullish sentiment has continued to rebound, though not as fast as one might think following a nearly 30% rally. Open shorts fell a sharp 30,356 contracts last week to 206,456, down more than 40% from the early August high of 367,343 contracts. However, open longs only rose by 6,671 contracts to 147,504, up less than 25,000 contracts from the August minimum of 124,694 and down a whopping 84,514 contracts from this time last year. The Bullish Sentiment--the percentage of open contracts held long--rose by 4% week-over-week to 42%. This is up 15% from the all-time low of 27% set back in August, but is still 20% below the 52-week average, due largely to the sluggish addition of long positions, as shown in the Figure to the right. On the one hand, this suggests that the short trade is still overcrowded and leaves room for a continued short squeeze higher. However, the fact that the rebound in the Bullish Sentiment has been driven by covering rather than buying is concerning. The weak shorts are leaving, yes, but so far there just doesn't seem to be much interest in getting long for the long-term. There hasn't been a transfer of money from bear to bull, just a (potentially temporary) exodus from the short pool. This is just another reason why I have been skeptical of the staying power of this rally and remain short. Click HERE for more on the latest CFTC-reported natural gas long and short holdings.

Over the weekend, natural gas daily injections held just above the 5-year average near +13 BCF/day, driving projected Realtime inventories above 3200 BCF on Saturday evening. This was nearly 6 weeks ahead of last year and inventories are now within 50 BCF of reaching last year's end-of-season peak, not reached until November 9. Gas demand will hold steady today as the overall temperature pattern remains entrenched. This is characterized by unseasonably mild temperatures across the Eastern Seaboard, near-normal readings across the Central US, and an early-season chill across the Rockies and West Coast. Remarkably, highs could approach 90F in both Philadelphia and the New York City suburbs, 15F hotter-than-normal, while Richmond, VA, Columbia, SC, and Atlanta, GA should all reach this mark. Chicago, Louisville, KY, and Minneapolis, MN will all see readings in the 70s, generally within 5F of normal. On the other hand, it will be another chilly day out West with Portland and Seattle only reaching the low-to-mid 60s, 5F-10F cooler-than-normal. Early-season snows will be winding down across the Rockies, but highs region wide will still be up to 10F below-average. Overall, today's forecast mean population-weighted nationwide temperature will rise less than 0.1F from Sunday to 73.7F, a huge 5.6F warmer-than-normal. Total Degree Days (TDDs) will be 9.5 TDDs, 2.5 TDDs greater-than-normal and the 6th most for September 23 in the last 38 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 a +13 BCF/day daily natural gas storage injection, less than 0.5 BCF/day larger than Sunday's build. By tonight, look for Realtime natural gas inventories to reach 3229 BCF--within 20 BCF of last year's peak--while the storage deficit versus the 5-year average inches down to -59 BCF. The year-over-year surplus will also fall by 1 BCF to +433 BCF. Click HEREfor more on today's projected injection and Realtime natural gas inventories.

For the remainder of the week, the prevailing pattern will remain in place with unseasonably mild temperatures across the East and at-or-below average readings across the Rockies and West Coast. Daily injections will rise slightly through mid-week with daily builds reaching +15 BCF/day on Tuesday and Wednesday, as shown in the Figure to the right. At this time, I am projecting that inventories will eclipse last year's end-of-season peak--set on November 9, 2018--late in the day on Wednesday when storage will top 3247 BCF. For the full storage week of September 21-27, I am projecting a preliminary +95 BCF injection, a slight 12 BCF larger than the 5-year average and 5 BCF above last year's build. The storage deficit versus the 5-year average would contract to -50 BCF while the year-over-year surplus will hold roughly unchanged at +433 BCF. Click HERE for more on this week's projected injection.