January 24, 2019

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A Busy, Bearish Day For The EIA: Agency Expected To Announce +6.5 MMbbl Crude Oil Inventory Build In Delayed Petroleum Status Report And -158 BCF Natural Gas Storage Withdrawal; Gas Demand To Begin Ramping Up Today As Arctic Air Floods Into Northern Plains; With Rising Storage Deficit & Bitterly Cold Near-Term Outlook, Why Are Natural Gas Prices Falling?

6:00 AM EDT, Thursday, January 24, 2019
In its weekly Natural Gas Storage Report for January 12-18, the EIA announced Thursday morning a -163 BCF storage withdrawal, 5 BCF larger than my -158 BCF projection but still 22 BCF bearish versus the 5-year average. It was the largest withdrawal in what has so far been an anemic heart of the heating season, though that will change in a hurry with next week's report. With the draw, total inventories slid to 2370 BCF while the storage deficit versus the 5-year average contracted to -305 BCF. As expected, the long-standing year-over-year storage deficit flipped to a surplus for the first time since December 2016, at +33 BCF. Thanks to unseasonably mild temperatures, the bearishness of the report was effectively driven by the South Central Region which saw a -38 BCF draw versus its 5-year average of -60 BCF. The East Region saw a -54 BCF draw (5-year average: -47 BCF) that helped to offset small bearish draws in the Mountain and Midwest Regions. All five storage regions remain at deficits versus their respective 5 year averages, though the Midwest's has shrunk to a scant -38 BCF or -5%. However, with two shots of arctic air this week and potential record cold still on the way next week, it will contract no further and could easily balloon to the largest deficit of any region by mid-February. 3 out of the 5 storage regions are now at year-over-year surpluses, led by the South Central Region at a robust +94 BCF or +13%. The East and Midwest Regions are at +11 BCF and +39 BCF surpluses, respectively, both of which are likely to be transient. Click HERE for more on this week's EIA-reported natural gas inventories.

After the morning storage data, the EIA released its weekly supply and demand data in the afternoon, covering the week of January 17-23. Note that this differs from the storage week which covered January 12-18. Once again, the most noteworthy piece of data was the production numbers. One week after domestic production topped 88.3 BCF/day and seemed to be on its way to making new highs, output dropped 0.9 BCF/day week-over-week to 87.4 BCF/day. This drop is likely multifactorial. On Monday, an explosion on the TETCO pipeline in Ohio cut more than 1 BCF/day in transport capacity that will be offline indefinitely. Additionally, arctic air surged into the Northeast and the Marcellus Shale last weekend which may lead to some temporary freeze-offs. With more arctic air on the way, this could be an ongoing issue for the next 1-2 weeks. However, even with the drop in output, natural gas production is still up a robust 10.8 BCF/day year-over-year as 2018 production was suffering from its own freeze-offs, as shown in the Figure to the right. Elsewhere on the supply side, a -0.3 BCF/day drop in Canadian imports was offset by a 0.2 BCF/day rise in LNG imports meaning that total supply dropped 1.0 BCF/day from the record highs set just last week to 93.7 BCF/day, up 10.2 BCF/day year-over-year. Since this week's data includes the weekend's arctic outbreak across the East, it is unsurprising that temperature-dependent demand rose to new seasonal highs. Residential/Commercial demand jumped 3.6 BCF/day week over week to 50.5 BCF/day, up 6.8 BCF/day year-over-year while Industrial demand rose 0.3 BCF/day to 25.2 BCF/day, up 0.4 BCF/day. Of note, powerburn demand has underwhelmed this year and averaged 25.3 BCF/day through January 23, flat week-over-week and down 0.8 BCF/day from 2018. Click HERE for more on the latest EIA-reported supply and demand numbers.

Overall, this week's EIA-reported storage withdrawal was a decent, if unspectacular number, coming in modestly above expectations, but still bearish versus the 5-year average. It didn't show a strong signal of a tightening market and did little to shift the needle regarding bearish or bullish sentiment. As has been the case all winter, it was therefore up to Mother Nature to steer things along. And yesterday, she delivered. The February 2019 contract surged 12 cents or 4% to settle at $3.10/MMBTU before climbing another 4 cents after the 2:30 PM close of commodities trading to finish the day near $3.14/MMBTU. The most most-active March 2019 contract, held by the natural gas ETFs and slated to become the front-month contract next week, settled at $3.00/MMBTU. After a 3-day sell-off, bullish investors were finally emboldened yesterday as both the ECMWF and GFS came on board with a dangerous and perhaps record-setting arctic outbreak next week that could drive daily natural gas storage withdrawals to near -60 BCF/day on Wednesday and Thursday. Additionally, and perhaps more importantly, both models pushed back the start of the long-anticipated early-February warm-up with an additional shot of potential arctic air next weekend. This was further supported by the Thursday run of the twice-weekly 44-day ECMWF-EPS which significantly backed off the prospect of warming and increased the magnitude of a possible mid-February arctic outbreak. Integrating this data into my Hybrid Model, which also includes runs of the ECMWF ENS, GFS, and CFSv2, it is looking increasingly likely that temperatures will be colder-than-average, and gas-weighted degree days above-average, for the foreseeable future, as shown in the Figure to the right. Click HERE for more on the near-term and extended-term temperature outlook on my Advanced Model Page. Thus, there remains considerable near-term support for natural gas. Even with yesterday's rally, natural gas remains substantially undervalued according to my Fair Price model. Based on current inventories alone, the commodity is trading at an 18% undervaluation versus its Fair Price of $3.87/MMBTU. But taking into account the expected arctic air, this Fair price balloons to $4.14/MMBTU by February 15, a 27% undervaluation based on the March 2019 contract. For this reason, I feel that the natural gas rally still has room to go. However, with the end of the heating season in sight and storage levels likely to be sufficient no matter how cold it gets, I do not expect the bulls will have enough strength to drive the commodity anywhere near these Fair Prices. Given the cooling trend in the models, I am raising my price target for March 2019 natural gas to $3.40/MMBTU, representing 13% upside from current levels, though this too may be a bit optimistic should the models show any signs of warming..

It was a busy day for the EIA yesterday as the agency also released its weekly Petroleum Status Report for January 12-18, delayed one day because of the Martin Luther King Holiday. The EIA announced the crude oil inventories rose by a very bearish +7.9 MMbbls, more than double the 5-year average +3.4 MMbbl build and higher than the American Petroleum Institute's forecast +6.6 MMbbl rise. The unexpectedly large build was driven by a -0.9 MMbbl/day drop in exports to 2.0 MMbbls/day and a +0.7 MMbbl/day spike in imports to 8.2 MMbbls/day. With the build, crude oil inventories rose to 445.0 MMbbls, the highest since November 23, while the storage surplus versus the 5-year average rose to a new 52-week high of +37.1 MMbbls. The week marked the beginning of the traditional crude oil storage injection season and, with supply/demand balance averaging 2.1 MMbbls/week loose versus the 5-year average, I project that inventories could top 500 MMbbls by the last week of March unless things tighten up. Click HERE for more on current crude oil inventories.

Despite an otherwise bearish Status Report, WTI prices defied fundamentals and jumped 51 cents or 1% to settle at $53.13/barrel on Thursday as investors continued to speculate on the impact of the sanctions or the potential ouster of Venezuelan president Maduro on the nation's oil exports. Interestingly, despite the impact of such geopolitical chaos being felt more on the worldwide market than domestically, Brent oil actually fell 5 cents to $61.09/barrel. While WTI remains undervalued by 9% according to my Fair Price model as shown in the Figure to the right, the underlying loose supply/demand balance will drive the storage surplus higher in the weeks to come. This results in a steady decline in the undervaluation of the commodity such that 5 months from now it flips to a fundamental overvaluation. I still feel that a near-term pullback to near $50/barrel is justified based on current fundamentals to help support demand and stem the rise in production to help rebalance the market. However, so long as the situation in Venezuela remains unresolved, prices may remain supported and could even rally to $55/barrel. I feel that such a spike would be an ideal entrypoint for a short-term short trade. Should the rig count continue to fall, imports drop, and supply/demand balance tighten, WTI could top $60/barrel this year, which remains my long-term price target, but we have seen no evidence of this so far in 2019.

My Oil & Natural Gas Portfolio took advantage of the spike in natural gas prices to rally +0.9% on Thursday to push 2019 year-to-date gains to +7.0% or +110% annualized. UGAZ and DGAZ each move +/-7.1% rather than the predicted >12% based on the front-month's contract move as they are holding the less volatile March 2019 contracts. My net long natural gas position remains a robust 9.6% of my holdings with a 12.9% short DGAZ position providing long exposure partially offset by a 3.3% short UGAZ position. At this time, I plan to continue to hold with price target for the March 2019 contract of $3.25/MMBTU. However, I will not become over-enamored with the position. Until the computer models abruptly flipped colder, investors were hell-bent on selling and we are only one pattern change away from returning to dominant bearish sentiment. For this reason, should models show any sign of flipping warmer, I will have a low threshold to reduce long exposure. My small short oil position via short UWT suffered yesterday as oil inexplicably rallied despite a bearish Petroleum Status Report. I remain bearish near-term on the sector and, should WTI prices top $54/barrel, I will boost this position from 3.3% of my holdings to over 5% with further shorting likely if WTI tops $55/barrel. Again, this remains a near-term swing trade with a target price of $50/barrel. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will soar to wrap up the week today as unseasonably cold temperatures dominate the Plains and Upper Midwest. Minneapolis will struggle into the mid single digits today after falling to -10F overnight while Chicago will only rise to near 10F, both 20F colder-than-normal. Behind yesterday's cold front, temperatures across the Eastern Seaboard will plunge 20F-30F day over day back to more seasonal levels, although the true arctic air will be kept in check, for now. Washington, DC and Philadelphia will both reach the low 40s while New York City and Boston will top out in the mid 30s, both within 5F of normal. The anomalies will be a bit more impressive as you head inland with Pittsburgh only reaching the mid-20s and Buffalo near 20F, each around 10F colder-than-normal. Warmer-than-average temperatures will be restricted to the West Coast, which doesn't typically see much heating demand anyways, with Los Angeles reaching the mid-70s and Portland and Seattle the mid-50s, each 5F-10F warmer-than-normal. Overall, thanks to the cooldown across the East Coast, today's forecast mean population-weighted nationwide temperature will plunge 8.0F from Thursday to just 35.7F today, 3.7F colder-than-normal. Total Degree Days (TDDs) will soar to 29.3 TDDs, 3.2 TDDs greater than normal and the 8th most TDDs for January 25 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 -34 BCF/day daily natural gas storage withdrawal today, 13 BCF larger than Thursday and 13 BCF bullish versus the 5-year average -21 BCF/day draw. For the natural gas storage week of January 15-25 that ends today, I am projecting a total -195 BCF storage withdrawal, 45 BCF bullish versus the 5-year average and 69 BCF larger than last year's disappointing -126 BCF withdrawal. As the Figure to the right shows, it will be the second largest withdrawal for the January 19-25 period in the last 5 years, behind only 2014's -243 BCF draw. The bullish draw was driven by a combination of cooler temperatures this week, averaging 40.3F versus 41.0F the week before, and a slowdown in domestic production as reported by the EIA. Should a -195 BCF withdrawal verify, natural gas inventories would fall to 2173 BCF while the storage deficit versus the 5-year average would be back on the rise after a multi-month slump, climbing to -352 BCF. And after only a single week, the year-over-year storage surplus will revert back to a -38 BCF deficit. There is some increased uncertainty associated with the projection due to the impact of the Martin Luther King day holiday on temperature-independent demand so this projection may be revised in the days to come as finalized temperature and pipeline data is integrated into my model. The EIA will release its official storage numbers for the week next Thursday, January 31, at 10:30 AM EDT. Click HERE for more on this week's projected draw.

Looking ahead to next week, expect a barnburner of a weather pattern to take shape. Over the weekend, natural gas demand will slowly fall with daily storage withdrawals approaching the 5-year average by Monday as warmer-than-normal readings transiently return to the densely-populated Northeast. By Tuesday, however, a piece of the Polar Vortex will rotate south from the Hudson Bay and rapidly overspread the Northern Plains. By Wednesday and Thursday, temperatures 20F-40F colder-than-normal will be found from the Dakotas through the Ohio Valley and into the interior Northeast. Cities like Minneapolis and Chicago may not climb above zero for 48 hours or more, some of the coldest temperatures since the winter of 2013-2014, if not longer. Even across the I-95 corridor from Philadelphia to Boston, temperatures will fall into the single digits, if not below zero with negative teens possible inland. As a result, daily storage withdrawals will top -50 BCF/day on both Wednesday and Thursday, and could potentially approach -60 BCF/day, as shown in the Figure to the right. Thereafter, temperatures will moderate, though the trend yesterday was for a slower moderation that previously anticipated. Of note, while the computer models agree on a major arctic outbreak across the Plains, there is less agreement on how far east the airmass will spread, which will have important implications just how high natural gas demand gets. Overall, for the week of January 26-February 1, I am projecting a -255 BCF natural gas storage withdrawal, a massive 104 BCF bullish versus the 5-year average and 138 BCF larger than last year's draw. It would be the second largest draw for the period all time, behind only 2014's -256 BCF withdrawal. Should it verify, natural gas inventories would break through 2000 BCF to finish the week at 1919 BCF while storage deficit versus the 5-year average would jump to -456 BCF. I will have much more on next week's storage projections in Monday's commentary, but in the meantime, click HERE for more.