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March 26, 2019

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Natural Gas Recovers From Early-Session Losses--But Could Still Face Downward Pressure As April Continues To Look Mild; Oil Pulls Back Amidst Concerns Of Global Slowdown, But Remains Undervalued; Natural Gas Inventories Projected To Bottom Today At The 7th Lowest All-Time, But More Than 100 BCF Higher Than February Projections


6:00 AM EDT, Tuesday, March 26, 2019
Natural gas recovered from early-session losses to finish nearly flat on the day at $2.76/MMBTU. The commodity had initially fallen as low as $2.73/MMBTU in overnight electronic trading amidst fears that mild April temperatures will cut sharply into the large storage deficit and begin to relieve concerns of any sort of storage crunch next winter. However, the combination of dip-buying and short-term models that trended colder for late March and the first few days of April helped support the sector. Despite the slightly more favorable near-term outlook, I remain concerned about the sustainability of any rally heading into April and would not be surprised to see natural gas pull back should some of the more bearish outlooks shift from the longer-term outlooks into the short-term time frame over the next week or two. While I flipped from net short to net long natural gas last week, I will be keeping this trade on a short leash with a low threshold to flip back to short on a move above $2.80/MMBTU. As shown in the Figure to the right, current natural gas prices are essentially flat year-over-year, up a mere +0.6%. And with last April's temperatures the coldest in the last decade, allowing storage withdrawals to persist throughout the month, this year will be facing very bearish year-over-year comparisons that could boost bearish sentiment, even as year-over-year inventories are down around -275 BCF.


Meanwhile, WTI oil fell for a second straight day, dropping 22 cents or 0.4% to settle at $58.82/barrel, as concerns about the global demand outlook weighed on sentiment. On the other hand, Brent oil actually rose, climbing 18 cents to $67.21/barrel. Thanks to a tight US supply/demand balance, I remain very bullish on oil and am targeting WTI $65/barrel. My Oil & Natural Gas Portfolio closed nearly flat on the day yesterday, falling a negligible -0.07% to reduce year-to-date gains to +9.9% or +43.1% annualized. I made no trades on Monday. My next trade will likely either be to short natural gas on a move above $2.80/MMBTU or to add to my oil long trade via short DWT should WTI fall below $57.50-$58.50/barrel. Click HERE for more on my current oil and natural gas holdings.


Yesterday afternoon, the twice-weekly gold standard long-term computer model, the 44-day ECMWF-EPS, released its Monday run. The model continues to predict a largely seasonal April with at-or-above average temperatures across the Northeast and Great Lakes and at-or-below average readings across the Desert Southwest, Rockies, and Texas. While, given the time of year, this would be mildly bearish for natural gas supply/demand balance given record production levels, it is considerably less bearish than its long-term stablemate CFSv2 model, which is calling for an exceptionally bearish pattern of consistently above-average readings across the Midwest, Great Lakes, and Northeast--suppressing any late-season heating demand across the northern tier--and below-average readings across the Desert Southwest, suppressing any early-season cooling demand across one of the only regions that can consistently see it in early April. The Figure to the right plots the departure-from-average forecast gas-weighted degree days (GWDDs) for the next 44 days based on my Hybrid Model, which integrates output from both the CFSv2 and ECMWF-EPS, weighted by historical performance, as well as data from the near-term GFS ENS and ECMWF ENS. As this Figure shows, after a final shot of cold air in the March 31-April 3 timeframe, this model is expecting a prolonged period of below-average GWDDs lasting through much of April. And should the CFSv2 outlook verify, expect these bearish anomalies to be even larger.


Based on the results of this Hybrid Model, I am projecting that natural gas inventories will rise by around +420 BCF over the next 6 weeks, nearly twice the 5-year average +265 BCF, to just under 1530 BCF. As a result, the projected storage deficit versus the 5-year average will contract by nearly 200 BCF from -550 BCF presently to around -380 BCF by the end of the first week of May, as shown in the Figure to the right. However, should the more bearish outlook verify--favoring the CFSv2 solution--inventories could be nearly 100 BCF higher at around 1625 BCF by May 8, suppressing the storage deficit versus the 5-year average under -300 BCF for the first time in over a year and for year-over-year inventories to be nearly flat. This could easily facilitate selling pressure that would take the commodity below the February lows to near $2.50/MMBTU. Click HERE for more on the near- and long-term temperature outlook on my Advanced Modeling Page.


Natural gas demand will jump today as cooler temperatures transiently overspread the eastern third of the nation. Highs along the I-95 corridor will be 5F-10F colder than normal. Washington, DC and Philadelphia will only reach the lower 50s, New York City the upper 40s, and Boston near 40F. Some of the largest anomalies will be centered on the Mid-Atlantic with Norfolk, VA struggling out of the upper 40s, nearly 15F colder than normal. Elsewhere east of the Rockies, temperatures will be seasonally cool and generally within 5F of normal with 60s and 70s across Texas, Oklahoma and Kansas to 30s and low 40s across the Dakotas. On the other hand, it will be a unseasonably mild day across the Intermountain West with Billings, MT reaching the upper 60s and Denver nearly 70F, each 15F-20F warmer-than-normal. Nonetheless, the chill across the major population centers of the East will be the primary driver for natural gas demand today. Overall, the forecast mean population-weighted nationwide temperature will cool -3.3F to 51.1F, 0.8F cooler-than-normal. Total Degree Days (TDDs) will rise to 15.1 TDDs, 1.0 TDDs greater than normal and the 15th most for March 26 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 gas demand will rise by roughly 4 BCF from Monday leading to a -3 BCF/day daily natural gas storage withdrawal, right at the 5-year average. Blunting the impact of the cooler temperatures will be LNG feedgas demand which remains suppressed at 3.7 BCF/day for today, down 0.2 BCF/day from Monday and up just 0.6 BCF/day from 2018 as flows to Sabine Pass will be at just 53% of capacity today. Click HERE for more on today's LNG feedgas demand. By tonight, projected Realtime gas inventories will fall to near 1105 BCF, which could very well be a bottom for 2019 with storage injections expected for the remaining 3 days of the storage week. However, it will be a close thing and we could see a double bottom set up as a shot of colder air at the beginning of next week could bring inventories back down to the 1105 BCF to 1110 BCF range. It would be the lowest season-ending level since 2014's 824 BC and the 7th lowest all time, but would be considerably higher than some late-February and early-March projections that took storage levels under 1000 BCF. The storage deficit versus the 5-year average will hold near -538 BCF while the year-over-year deficit will inch lower by 1 BCF to near -263 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories.