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March 25, 2019

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Natural Gas Falls To 1-Month Lows As Late March & April Outlook Trends Warmer While Oil Succumbs To Equities Sell-Off; Slumping LNG Feedgas Joins Forces With Warming Temperatures To Flip Upcoming Week From A Storage Withdrawal To The First Projected Injection Of 2019


6:00 AM EDT, Monday, March 25, 2019
In a sharp reversal, natural gas flipped what would have been a weekly gain into a loss on Friday as the commodity moved steadily lower throughout the session before settling down 2.4% at $2.75/MMBTU. It was the lowest close for the front-month contract since February 22. The loss sent the commodity to a 1.5% weekly loss, its second straight. The pullback was likely driven by the fast-approaching end of the storage withdrawal season and the onset of the anemic shoulder season. The long-term CFSv2 model--and, to an extent, its stablemate ECWMF-EPS--continue to support a mild April and early May. It had therefore fallen to the short term models, the ECMWF and GFS ENS, to support the commodity near-term. And while both have consistently called for a generally cool end to the month, particularly across the Northeast and Great Lakes, each also trended steadily milder late in the week, a trend that continued through the weekend. The Figure to the right plots the trend in 14-day forecast total gas-weighted degree days (GWDDs) as forecast by the GFS and ECMWF ENS models over the past week. By Sunday evening, both models were indicating 14-day total degree days that were barely above normal. Coupled with forecast consistently above-average temperatures expected during April, I project that the storage deficit versus the 5-year average could contract from its current -550 BCF to just -370 BCF by the end of the first week in May. Or, should the most bearish outlook of the different models that make up my projection algorithm verify, the deficit could fall as low as -285 BCF, nearly halving the current deficit in just 6 weeks. It is this bearishness that drove Friday's pullback and contributed to prices opening Sunday evening electronic trade down another 1% to $2.73/MMBTU. Near-term, I would not be surprised to see prices fall further due to the temperature forecast but I expect downside risk to be relatively limited to very low starting inventories and a tightening market. I would be surprised to see prices drop under $2.65/MMBTU. Below this level--and even at current levels for the aggressive trader--I feel that natural gas represents a good long term buy. Click HERE for more on the near- and long-term temperature outlook including tonight's run of the 44-day ECMWF-EPS model.


Meanwhile, crude oil prices slid on Friday with WTI falling 94 cents or 1.6% to close at $59.04/barrel as the Dow Jones fell over 450 points on the session. Nonetheless, the new front-month contract still finished the week up 0.4% thanks primarily to a record-setting EIA-reported -9.6 MMbbl crude oil storage drawdown in Wednesday's Status Report. Additionally, despite the daily loss, oil found some support on Friday after Baker Hughes announced that the oil rig count dropped for a 5th straight week, falling 9 to 824 rigs. This is the lowest since April 20, 2019 and dropped the year-over-year gain in drilling activity to a mere 20 rigs. The rig count is now down 64 rigs from its November 16 888 rig peak, as shown in the Figure to the right, suggesting a potential decline in US production growth. Due to a very tight US supply/demand balance and this drop in the rig count suggesting a future dip or at least plateau in output, I remain bullish on the oil sector and am maintaining a 2019 price target of $65/barrel for WTI, as directed by my Fair Price Model. For the dip buyers out there, I feel that a drop under $57.50/barrel represents a reasonable at which to initiate a long or add to a position.


My Oil & Natural Gas Portfolio finished the week on a disappointing note, falling -0.6% to reduce its weekly gain to +0.5%. 2019 year-to-date gains stand at +10.0% through the first 56 trading days, or +45% annualized. On Friday, I made the aggressive decision to flip from net short to net long natural gas. I covered an 8% position in UGAZ, realizing a +20% profit. As a result, my portfolio is now net long a 4.2% position with an 8.7% short DGAZ stake providing long exposure partially offset by a residual 4.5% short UGAZ position. As discussed previously, the purpose of these offsetting positions, rather than simply buying UGAZ or shorting a smaller position in DGAZ, is to boost short 3x natural gas exposure (currently a modest 13.9% of my holdings) so as to benefit from leverage-induced decay over time without overexposing the portfolio in a single direction. With a relatively bearish near-term outlook, it may very well turn out that I was premature on my reversion from net short to long. I therefore kept net exposure to a minimum and will continue adding to this position via shorting DGAZ on the way down at 5 cent intervals such that should natural gas somehow fall to $2.50/MMBTU I will be net 15% long the commodity. My WTI oil long via short DWT stands at a modest 6.2% of my holdings and is up +20.6% from my basis. Should WTI fall under $57.50/barrel, I will add to this position such that should the commodity reach $55/barrel, total exposure will be 10%. My upside price target remains at $55/barrel. Click HERE for more on my current oil and natural gas holdings.


The EIA will release its weekly Natural Gas Storage Report for March 16-22 this Thursday at 10:30 AM EDT. At this time, I am projecting a second straight bearish storage withdrawal, potentially the last of the season, at -39 BCF storage withdrawal, a slight 2 BCF smaller than the 5-year average -41 BCF but a more substantial 27 BCF bearish versus last year's -66 BCF withdrawal. The bearishness of the projection was driven by a late-week collapse in demand as unseasonably mild temperatures overspread much of the eastern third of the nation. As the Figure to the right shows, this would be the 3rd weakest draw in the last 5 years, behind only a +3 BCF injection in 2015 and a -8 BCF draw the following year. Should such a draw verify, natural gas inventories would fall to 1104 BCF while the storage deficit versus the 5-year average would contract to -554 BCF. And should this end up being the final draw of the season, the 1104 BCF level would end up being the second smallest nadir in the last 5 years behind only 2014's 824 BCF and the 7th lowest all-time. Click HERE for more on this week's projected withdrawal.


Over the weekend, natural gas demand fell as temperatures warmed across the Central US and Northeast. I project that a near-average -3 BCF/day withdrawal on Saturday gave way to a bearish +1 BCF/day daily injection on Sunday. Gas demand will inch slightly higher today as temperatures temporarily cool across the Great Lakes and northern Midwest. After reaching 60F on Saturday, Minneapolis won't clear the low 40s today, around 5F colder-than-normal. St Louis and Kansas City in Missouri will both struggle to 50F, while Columbus, OH and Indianapolis, IN will be stuck in the upper 40s, all around 10F colder-than-normal. Across the major population centers of the Northeast, temperatures will be seasonal and generally within 2F-3F of normal. Washington, DC and Philadelphia will both reach the upper 50s, New York City near 50F, and Boston in the upper 40s. Overall, the forecast mean population-weighted nationwide temperature will actually warm a slight 0.9F from Sunday to 54.4F, 2.8 F warmer than normal. Total Degree Days will inch slightly higher to 12.8 TDDs, 1.5 TDDs fewer than normal and the 16th fewest TDDs 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 that storage levels will hold nearly flat with a daily withdrawal of less than -1 BCF/day today, 3 BCF bearish versus the 5-year average -3 BCF/day draw. Projected Realtime natural gas inventories will hold near 1104 BCF while the storage deficit versus the 5-year average will contract down to -544 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories. Natural gas demand will jump on Tuesday as a fast-moving shot of cold air overspreads the Northeast driving a -5 BCF/day daily withdrawal. However, this airmass will quickly be expunged and will be replaced by a broad area of above-average readings across most of the nation by the end of the week, driving a pair of +5 BCF/day builds on Thursday and Friday to wrap up the week. As a result, I am now projecting a +3 BCF weekly injection--the first of the 2019 season--for March 23-29, 25 BCF bearish versus the 5-year average, 36 BCF bearish versus last year's draw and the single weakest draw in the last 5 years. Click HERE for more on this week's projected injection.


In other news, less than week after reaching all-time highs, LNG demand dropped sharply on Friday and has remained suppressed ever since. Feedgas demand reached 5.6 BCF/day on Tuesday, March 19, up over 2 BCF/day year-over-year. On Friday, however, feedgas slumped by nearly 2 BCF/day to just 3.8 BCF/day and has remained under 4 BCF/day since. The drop has been due to falling demand at Sabine Pass, which has held steady at 2.4 BCF/day, less than 60% of current capacity and down around 0.7 BCF/day year-over-year. It is not immediately clear what caused the drop, but the area has been plagued by fog recently and this could certainly be restricting ship traffic to the facility. The Sabine Pass drop has been countered slightly by Corpus Christi, which saw its feedgas demand swell to new record highs of 0.8 BCF/day over the weekend. At this time, I am projecting weekly demand to be just 27.4 BCF, down a steep 8.4 BCF from the previous week but still up a slight 4.6 BCF from the previous year. It is partially because of this drop that my projection for the current storage week of March 23-29 has flipped from a withdrawal to an injection, as discussed above. Click HERE for more on the latest LNG demand data, update nightly.