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August 26, 2019

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Natural Gas Due For A Bounce As Temperature Outlook Trends Warmer Over The Weekend & LNG Exports Hold At All-Time Highs, But It May Be Short-Lived; Oil Swept Up In Global Market Sell-Off, But Remains Undervalued; Gas Demand To Steadily Rise This Week, But Daily Injections Will Remain Bearish As Unseasonably Cool Temperatures Dominate The Heartland


6:00 AM EDT, Monday, August 26, 2019
Compared to global markets, natural gas got off pretty easy on Friday, dropping less than a penny or 0.3% to settle at $2.15/MMBTU. The commodity recovered from early-session losses that saw prices drop as low as $2.12/MMBTU. On the week, natural gas dropped 2.2%. Prices got a boost as LNG exports rose to an all-time high late in the week and on Thursday when the EIA reported its third straight smaller-than-expected injection suggesting a tightening market. Still, these more bullish elements couldn't overcome a near-term temperature outlook that steadily trended cooler for the late August and early September period. Throughout the summer, even as the natural gas supply/demand imbalance has tightened, investors have taken their cues more from Mother Nature than underlying fundamentals. Over the weekend, however, the outlook, as forecast by the GFS ENS and ECMWF ENS, trended back warmer with expected gas-weighted degree days (GWDDs) climbing back to near-or above-average, as shown in the Figure to the right. For this reason, I would not be surprised to see prices bounce to start the week, perhaps climbing back above $2.20/MMBTU. My upside price target remains at $2.40/MMBTU, but as long as domestic production remains above 92 BCF/day at record highs, the commodity is one September cooldown away from trading below $2.00/MMBTU. While the commodity is steeply undervalued long-term, any prospective buyer needs to understand that the trade will not be a one-way trip to higher prices and that near-term price weakness could persist.


Meanwhile, as the Dow Jones cratered down -700 points amidst the escalating US-China trade war, crude oil was caught in the cross fire and suffered the consequences. WTI slumped $1.18 or 2.1% to settle at $54.17/barrel. This flipped a small weekly gain to-date to a final weekly loss of -1.2%. Brent oil fell a more modest 58 cents to close at $59.34/barrel and actually managed a small weekly gain of 1.2%. This pushed the Brent-WTI spread back above $5.00/MMBTU, which should favor US exports longer term. While the escalation of the trade war is justifiably casting a long shadow over the oil sector, if there is a silver lining it is that the drilling rig count continues to drop. Baker Hughes reported that the rig count tumbled by 16 last week to 754. This was the largest weekly drop since April 26 and took the active count to its lowest since January 19, 2018. As the Figure to the right shows, the rig count is down a steep 115 from the same week last year. The Rig Count is down a massive 53% from its all-time high of 1601 in September 2014. With the supply/demand balance tight and inventories likely to continue falling to at or below 400 MMbbl by the end of 2019, I remain bullish on the sector and am maintaining and upside $60/barrel price target on the sector. However, with global markets likely to fall sharply to start the week after Donald Trump's Friday afterhours tariff announcement, I would not be surprised to see oil sell off to start the week, perhaps dropping under $53/barrel. At such a level, I would be a buyer.


The EIA will release its weekly Natural Gas Storage Report for the week of August 17-23 this Thursday at 10:30 AM EDT. I am projecting a +59 BCF injection for the week, a slight 2 BCF bearish versus the 5-year average but a rare 7 BCF smaller than last week's +66 BCF injection. Daily builds were mostly at or smaller than the 5-year average for much of the week as intense heat baked Texas and much of the densely-populated East Coast, before rapidly rising to finish out the week with Friday's injection climbing to +12 BCF/day, 4 BCF larger than the 5-year average as temperatures cooled. Powerburn averaged a strong 40.2 BCF/day on the week, up 3 BCF/day from 2018. LNG feedgas demand averaged 5.1 BCF/day during the week, nearly doubling during the course of the week to all-time highs as Sabine Pass and Corpus Christi both returned from maintenance and flows to Cameron hit new highs. This is up 2.1 BCF/day from 2018. Countering these gains in demand, natural gas production averaged 92.4 BCF/day, up a massive 7.4 BCF/day year-over-year. Overall, a +59 BCF injection would be the third smallest in the last 5 years, but would be far behind the twin +34 BCF injections in 2016 and 2017. Should it verify, natural gas inventories would rise to 2856 BCF while the storage deficit would contract slightly to -101 BCF. Storage would finish the week up +362 BCF year-over-year. Click HERE for more on last week's projected storage injection.


Over the weekend, natural gas demand fell as below-average temperatures dominated across the major markets east of the Mississippi with highs largely in the 70s to low 80s, even as far south as the Gulf of Mexico. Demand was propped up slightly by continued heat across Texas--the nation's largest natural gas-consuming state--with 100F temperatures statewide, approaching 110F across the western part of the state. Daily injections reached as high as +14 BCF/day on Sunday, nearly 5 BCF/day bearish versus the 5-year average. Gas demand will inch only slightly higher today as the same overall pattern remains in place. Along the Eastern Seaboard, highs will be in the mid-70s from Washington, DC through New York City and the upper 60s across New York City, each around 10F cooler-than-normal. Heading west, similar anomalies will persist with Indianapolis seeing the lower 70s and Nashville the mid 70s, 10F-15F below-average. With showery conditions, Minneapolis could only reach the upper 60s while the Black Hills of South Dakota will struggle to even break 60F. It will be a different story across Texas as the heat will continue in earnest. Dallas and San Antonio should each top 100F, 5F-10F above-average, while record-setting heat is expected across the western part of the state across the Permian Basin. Pecos, TX could reach a remarkable 115F, 20F above-average and an all-time record for the city. Overall, today's forecast mean population-weighted mean nationwide temperature will warm by 0.4F from Sunday to 73.7F, still a steep -2.1F cooler-than-normal. Total Degree Days (TDDs) will be just 9.0 TDDs, 3.4 TDDs fewer than normal and the 2nd fewest for August 25 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day data.


Based on this forecast and early-cycle pipeline data, I am projecting a +13 BCF/day daily natural gas storage injection, 0.5 BCF smaller than Sunday's build and 4 BCF bearish versus the 5-year average. After reaching a new all-time high of 6.6 BCF/day on Sunday, I project that LNG feedgas demand will fall slightly to 6.4 BCF/day today, as shown in the Figure to the right. This is still up a steep 3.5 BCF/day from 2018. Flows to Corpus Christi will remain near record highs at 1.6 BCF/day. Through the first three days of the week, LNG export demand is on pace to set a new all-time weekly high of 45.3 BCF, up 9.7 BCF from last week and a huge 26.3 BCF from a year ago. Click HERE for more on LNG exports. Meanwhile, Powerburn demand will likely recover from weekend lows, climbing to around 38 BCF/day, up 3 BCF/day from a year ago. By tonight, look for Realtime natural gas inventories to reach 2896 BCF while the storage deficit versus the 5-year average contracts to -87 BCF. The year-over-year storage surplus will climb to +373 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.


For the remainder of the week, look for unseasonably chilly conditions to persist across the Central US, but moderating temperatures across the Eastern Seaboard will lead to a small bump in demand. Nonetheless, I expect daily injections to be bearish versus the 5-year average throughout the week. As the Figure to the right shows, after peaking near +14 BCF/day on Sunday, daily natural gas storage injections could fall to +11 BCF/day by Thursday, still above the 5-year average +9 BCF/day. For the full week of August 24-30, I am projecting a +86 BCF storage injection, a huge 20 BCF bearish versus the 5-year average and 22 BCF higher than a year ago. This would take the storage deficit versus the 5-year average down to -81 BCF and the year-over-year surplus up to +384 BCF. It would be the second largest injection for the week in the last 5 years, behind only 2015's +89 BCF injection. Click HERE for more on this week's projected injection. Based on longer-term projections, I expect natural gas inventories to top 3000 BCF sometime by the middle of next week, either Wednesday September 4 or Thursday September 6. This would be more than a month ahead of last year's pace when that level wasn't reached until October 10.