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September 27, 2019

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Natural Gas Tumbles After The EIA Announces Another Larger-Than-Expected Storage Injection As Production Hits A New All-Time High & The Supply/Demand Imbalance Loosens; Projected Realtime Natural Gas Inventories Set To Top 3300 BCF Today For The First Time Since December 2017; Oil Falls But Recovers Most Of Its Early-Session Losses


6:00 AM EDT, Friday, September 27, 2019
In its weekly Natural Gas Storage Report for September 14-20, the EIA announced Thursday morning that inventories rose by +102 BCF. The injection was 13 BCF above my +89 BCF projection and a disappointing 28 BCF bearish versus the 5-year average +74 BCF build. It was the third straight week that the reported build came in above my--and most analyst--expectations. All five storage regions saw bearish builds, led by the South Central with a +24 BCF injection that was 11 BCF larger than its 5-year average. The Midwest saw the largest absolute build at +36 BCF, though this was only 4 BCF bearish versus its 5-year average. With a +31 BCF injection (5-year average: +23 BCF), the East Region's storage deficit versus the 5-year average fell to just +9 BCF and is likely within 2 weeks of flipping to a surplus, joining the Midwest Region. The Mountain Region, with a -4 BCF deficit, is also likely within a week or two of flipping to a surplus. Both the Pacific (-23 BCF) and South Central (-32 BCF) have more of a buffer but could also be at surpluses before the end of the year. Meanwhile, all five storage regions are at large year-over-year surpluses, led by the South Central and Midwest Regions at +191 BCF and +134 BCF, respectively. Overall, with the +102 BCF injection, natural gas inventories rose to 3205 BCF while the nationwide deficit versus the 5-year average contracted to -47 BCF. The year-over-year surplus ballooned by 51 BCF to +444 BCF, a new 2019 high. Click HERE for more on the latest EIA-reported natural gas inventories.


After releasing its morning storage numbers, the EIA followed up in the afternoon with its natural gas supply/demand data for September 19-25 (different than the storage week, which covered September 14-20). On the supply side, after faltering the previous 3 weeks, domestic production soared by +0.9 BCF/day week-over-week to a new all-time high of 93.1 BCF/day, up 6.3 BCF/day year-over-year. The jump in production is likely at least partially due to the long-awaited Gulf Coast Express Pipeline, which transports gas from the bloated and restricted Permian Basin in West Texas to Gulf Coast markets, coming into full service with its 2.3 BCF/day capacity late in the period. At least partially related to this, the EIA reported that exports to Mexico rose 0.3 BCF/day to 5.3 BCF/day, a new all-time high. Additionally, flows to the new Freeport LNG plant have recently climbed to 0.5 BCF/day, potentially due to this jump in Gulf capacity. Blunting the rise in production somewhat, Canadian imports fell 0.3 BCF/day week-over-week to 4.3 BCF/day, down 0.5 BCF/day from 2018. On the demand side, Powerburn demand fell to 33.2 BCF/day, a disappointing 3.4 BCF/day lower than 2018, despite temperatures that have been consistently above-average across the major cooling centers of the Deep South.


Total Supply averaged 97.5 BCF/day for the period, up 5.8 BCF/day from 2018 while Total Demand averaged 81.3 BCF/day, up just 0.2 BCF/day from last year. This suggests that the temperature-dependent supply/demand imbalance was an ugly -5.6 BCF/day loose versus 2018. However, while the EIA-reported injection was certainly disappointing, this imbalance exaggerates just how grim the supply/demand picture is, since the same week last year was so exceptionally hot any direct comparison is going to be tough. When removing weather as a variable, I calculate that the temperature-independent natural gas supply/demand imbalance only loosened to a more modest -0.6 BCF/day loose versus 2018. This means that for any given temperature, I would expect the daily storage injection to be 0.6 BCF larger than last year with the same temperature pattern. This has important implications for projecting long-term storage. While not as extreme as the -5.6 BCF/day temperature-dependent number, a -0.6 BCF/day looseness day-in-and-day out will over time weigh on inventories and will make it very difficult to maintain a storage deficit versus the 5-year average through the end of the injection season without considerable assistance from Mother Nature. As the Figure to the right shows, the supply/demand imbalance tightened considerably from the Spring when the imbalance topped -4 BCF/day, thanks to record LNG exports and strong Powerburn due to steeply discounted natural gas prices. But with production again taking off to new highs and powerburn demand declining as an influence late in the summer, the temperature-independent imbalance has stabilized and appears poised to begin loosening up again over the next several weeks. Click HERE for more on the latest natural gas supply/demand data.


Thanks to the string of larger-than-expected natural gas storage injections and the loosening supply/demand balance, I have been steadily revising my end-of-season natural gas inventory outlook higher. At this time, I am projecting that storage levels could reach near 3790 BCF during the second week of November. This is 60 BCF bearish versus the 5-year average and a massive 545 BCF higher year-over-year. As the Figure to the right shows, it would be very close to 2017's peak, the third highest level in the last 5 years, behind only 2015's and 2016's 4009 BCF and 4047 BCF, respectively. This projection has steadily trended higher over the past several weeks and now represents a new 2019 high. And for what its worth, very early indications suggest that inventories could bottom near 1800 BCF in March 2020, nearly 700 BCF higher than spring 2019. Click HERE for more on my current long-term natural gas storage projections.


Unsurprisingly, following the bearish and larger-than-expected storage injection, natural gas prices tumbled. The Front Month October 2019 contract finished down 7 cents or 3% to close at $2.43/MMBTU and expired at the end of the session. It will be replaced by the November 2019 contract which closed at $2.44/MMBTU. Prices are now down 19% from a year ago, when the commodity was trading at $3.01/MMBTU. After becoming briefly overvalued during its nearly 30% early-September rally, natural gas has again flipped back to modest undervaluation, even with the larger-than-expected injection and loosening supply/demand imbalance. According to my Fair Price model, the commodity is trading at a 6% undervaluation versus its Fair Price of $2.60/MMBTU. And after rising to a nearly 5% overvaluation, the commodity has retreated to within 1% of its 8-month average Fair Price. As the Figure to the right shows, I am still projecting that natural gas will again become overvalued during the winter months as I expect inventories will flip to a storage surplus versus the 5-year average, before again becoming undervalued by the Spring as Futures prices retreat. Nonetheless, with prices so cheap historically heading into the heating season, I feel that the commodity is vulnerable to sudden spikes should the temperature models hint at any short of arctic air. For this reason, I feel that upside potential outweighs downside risk at these levels, though the commodity could certainly trade lower near-term, especially should the October verify as warmer-than-normal and injections continue to come in above expectations. I feel that prices will remain largely rangebound, pivoting around $2.50/MMBTU, though with a larger-than-normal range, from $2.25/MMBTU to $2.75/MMBTU. At this time, I remain long the sector and am targeting an upside price target of $2.60/MMBTU, though getting there will likely require some help from Mother Nature.


WTI crude oil finished lower on Wednesday, but finished well off the lows after the Pentagon announced that it was deploying defense batteries and personnel to Saudi Arabia, again boosting the geopolitical risk premium, even as Saudi output approaches pre-attack levels. WTI dipped just 8 cents or 0.1% to settle at $56.41/barrel, after trading intraday as low as $56.41/barrel while Brent actually scraped out a 35 cent gain to close at $62.74/barrel. Despite the recent sell-off, I remain bullish on the sector. According to my Fair Price model, the commodity is undervalued by 12% based on current inventories with a Fair Price of $63.54/barrel and by 16% averaged over the next 8 months with a Fair Price of $65.75/barrel.


Natural gas demand will inch slightly lower today as warmer-than-average temperatures across much of the eastern two-thirds of the nation won't be enough to counter recent gains in production. Highs will be more than 10F hotter-than-normal in Atlanta, GA which will reach into the lower 90s, as well as in Charlotte, NC and Kansas City, MO, which will both reach the upper 80s. Highs across the major cities of the Northeast will be seasonally warm with the Washington, DC-Philadelphia-New York City corridor reaching the mid-to-upper 70s, around 5F warmer-than-normal and very borderline for squeezing out some late season cooling demand. On the other hand, temperatures will be much below-average across the northern Rockies and Great Plains, setting the stage for what could be a record-setting early-season snowstorm this weekend. Billings, MT will only reach the low 50s today, 15F cooler-than-normal. Winter Storm Watches and Warnings are up for much of western Montana, which could see upwards of 3 feet of wet snow. Overall, today's forecast population-weighted mean nationwide temperature will fall by -1.0F from Thursday to 71.0F, still 4.3F warmer-than-normal. Total Degree Days (TDDs) will fall to 8.2 TDDs, 1.2 TDDs greater than normal and the 12th most for September 27 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 +15 BCF, less than 0.5 BCF/day from Thursday, and 3 BCF/day bearish versus the 5-year average. By mid-day today, I am projecting that that inventories will top 3300 BCF, a level not seen since December 24, 2017. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. For the full storage week of September 21-27 that ends today, I am projecting a +103 BCF natural gas storage injection. Such a build would be 20 BCF bearish versus the 5-year average and 12 BCF larger than last year's +91 BCF injection. Not only would it be the second largest injection in the last 5-years behind only 2014's +110 BCF build, a +103 BCF build would also be the second largest injection all-time for the week dating back to 1994, as shown in the Figure to the right. Should it verify, natural gas inventories would rise to 3308 BCF while the storage deficit versus the 5-year average would slide to just -27 BCF. Inventories would finish the week +456 BCF compared to last year. The EIA will release its official storage numbers for the week next Thursday, October 3, at 10:30 AM EDT. Click HERE for more on my projection for this week.