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March 27, 2018

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Natural Gas Dips In Low-Volatility Environment While Oil Rebounds On Tightening Supply/Demand Balance; EIA Forecast To Announce A Bullish Crude Oil Inventory Build In Today's Status Report; Gas Demand To Fall Sharply Today As Warmth Overspreads The Central US; Oil & Natural Gas Portfolio Hits New 2019 High


6:00 AM EDT, Wednesday, March 27, 2019
Natural gas continued its steady pullback on Tuesday as investors continue to respond to the prospect of sustained April warmth and very bearish year-over-year comparisons. After an up-and-down morning, the front-month April 2019 contract settled down 0.5% at $2.74/MMBTU. The April contract will expire at the close of trading today and will be replaced as the front-month contract by the May 2019 contract--currently held by natural gas ETFs--which settled Tuesday at $2.75/MMBTU, a mere 1 cent contango. My sentiment towards natural gas near-term is unchanged. After a quick shot of unseasonably chilly air the first few days of the month, the month of April continues to look very mild, a stark contrast to 2018 and I am projecting that, should the most bearish outlook verify, the storage deficit versus the 5-year average could be slashed in half and a year-over-year deficit could flip to a surplus. My downside price target is around $2.65/MMBTU, below which I feel the commodity quickly becomes an attractive long-term buy as fuel-switching tightens the market. But that is a story for another day. Whatever natural gas does, I don't expect it will be in a hurry to get it done. Daily volatility continues to languish, averaging just +/-0.98% per day over the past 10 days, 0.1% per day lower than last year's already soft volatility, as shown in the Figure to the right. This makes moving in an out of trades easier, but will reduce the prospect of quick profits. However, it will also reduce the rate of leverage-induced decay for those holding the 3X leveraged ETFs UGAZ and DGAZ, allowing these to be held for a longer period of time safely.


Meanwhile, crude oil staged a swift recovery after two lackluster days as investors placed demand concerns on the back burner and focused instead on aggressive moves by OPEC+ to tighten global supplies. WTI rallied $1.12 or 1.9% to settle at $59.94/barrel while Brent rose 76 cents to $67.97/barrel. I continue to feel that WTI is undervalued an am targeting a 2019 upside price target of $65/barrel.


Despite the pullback in natural gas, my Oil & Natural Gas Portfolio took advantage of the rally in oil prices to gain +0.4% on Tuesday to push the Portfolio to new 2019 highs. The fund is up +10.4% through the first 58 trading days of the year or +45.1% annualized. I made a single trade on the day, selling half of my 10% position, realizing a +12% profit. While the sale, at $67.75/share, was well shy of my $75/share price target, I am becoming increasingly concerned about the rapid decline in Asian natural gas prices as well as elevated European stocks, which reduces profit margin selling US gas on the spot market. While the company operates mostly on fixed contracts, it does have some exposure to the open market. I will probably plan to hold onto the remaining 5.1% of this position until my price target is reached. Otherwise, I have no interest in closing my oil long via short DWT under $65/barrel WTI and won't close out my natural gas long under $2.80/MMBTU, preferring to let leverage-induced decay go to work on the small position and to add on a break under $2.65/MMBTU. Click HERE for more on my current oil and natural gas holdings.


The EIA will release its weekly Petroleum Status Report this morning for the week of March 16-22. Yesterday afternoon, the American Petroleum Institute (API) announced that it was forecasting a +1.9 MMbbl crude oil storage build. While many investors were anticipating another storage withdrawal, such a build would actually be a solid 3.4 MMbbl bullish versus the 5-year average +5.3 MMbbl injection. Withdrawals during the heart of the refinery maintenance season are exceptionally rare, with only 5 in the last 35 years for the March 16-22 period. Should a +1.9 MMbbl build verify, inventories would rise to 441 MMbbl, but the storage deficit versus the 5-year average would rise to -8.5 MMbbl. Additionally, the API announced that it was also forecasting bullish refined product draws, including a -3.5 MMbbl gasoline draw (5-year average: -3.4 MMbbls) and a -4.3 MMbbl distillates draw (5-year average: -0.8 MMbbls). Thus, the Institute is forecasting that Total Petroleum Inventories (crude oil + gasoline + distillates) fell by -5.8 MMbbls, a significant -7.0 MMbbls bullish versus the 5-year average, suggested an ongoing tight market. If investors make the mistake to interpret a small build in inventories in a vacuum, ignoring its relation to the 5-year average or in addition to refined products, I will look to add to my long position on any dip in price.


Check back after 10:30 AM EDT for the EIA's official storage numbers on my Crude Oil Inventories Page HERE.


After below-average temperatures overspread the Eastern Seaboard yesterday driving a sharp increase in natural gas demand, they will retreat just as fast today as a large area of unseasonably mild readings moves into the Heartland. Highs today in Minneapolis, MN could reach 60F while Des Moines rises into the upper 60s, both nearly 15F warmer than normal. Further south, Omaha and Denver will both reach the mid-70s while El Paso tops out in the sizzling upper 80s, all nearly 20F warmer-than-normal. Across the East, temperatures will be considerably cooler, but will moderate from Tuesday's widespread chill. Washington, DC and Philadelphia will both climb back to within 5F of normal with highs in the upper 50s while New York City will approach 50F, 5F cooler-than-average. Boston will continue to struggle, only reaching the low 40s, around 8F colder-than-normal. Overall, thanks to the building Heartland warmth, today's forecast mean population-weighted nationwide temperature will warm 0.6F from Tuesday but will stay -0.6F colder-than-normal at 51.6F, thanks to the chill hanging tough across the East. Total Degree Days (TDDs) will fall to 13.7 TDDs, right at historical normals and the 17th most for March 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 that natural gas inventories will be flat today with a less than +1 BCF/day daily storage injection, 3 BCF bearish versus the 5-year average -3 BCF/day withdrawal. LNG feedgas demand will rise to by a slight 0.1 BCF/day from Tuesday to 3.85 BCF/day today according to pipeline data, still well below last week's record-setting 5.6 BCF/day. Projected Realtime Inventories will hold at 1108 BCF while the storage deficit by tonight will narrow to -533 BCF and the year-over-year deficit will slump to -258 BCF. Click HERE for more on today's projected daily storage build and Realtime natural gas inventories.