January 28, 2019

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Natural Gas Poised To Drop Sharply Today As Near-Term Models Trend Warmer Over The Weekend; Dangerous, Record-Setting Arctic Blast Still Likely This Week, But Impacts To Be Short-Lived With 80-Degree One-Week Warm-Ups Possible; Long-Term Outlook Still Favors Cold Back-Half Of February; Crude Oil Poised For A Near-Term Pullback

6:00 AM EDT, Monday, January 28, 2019
Natural gas staged a late-session rally on Friday afternoon to finish the day up 2.6% to $3.18/MMBTU, cutting weekly losses to 8.7%. Friday's rally was due to a sharp cooling trend in the 12Z ECMWF model run that prolonged this week's arctic outbreak across the Plains. However, these gains will be short-lived as natural gas is poised to sell off at the open this morning after both the ECMWF and GFS short-term models trended sharply warmer over the weekend, as shown in the Figure to the right. Not only did they shrink the coverage of the pending arctic blast to the northern Plains, Midwest, and interior Northeast, but they also now favor a much more rapid pattern shift by the first week of February favoring above-average temperatures across the eastern two-thirds of the nation, suppressing natural gas demand. As a result, natural gas prices gapped down sharply on the resumption of electronic trading Sunday evening with the most-active March 2019 contract sliding 7% to $2.85/MMBTU. Should the market open at or below this level this morning, it would be the lowest intra-session price for the most active contract since September 17. This sell-off comes despite an increasingly potent signal among both the long term ECMWF-EPS and CFSv2 models or a rapid return to sustained, below-average temperatures beginning late in the second week of February. Now, there is no doubt that the bulls--including yours truly--guessed wrong with the direction the models were going to trend over the weekend, and will pay the price at this morning's open. However, based on Sunday evening prices, natural gas is now steeply undervalued by 26.5% versus its Fair Price of $3.90/MMBTU which rises to over 28% based on the expected rise in the Fair Price over the next month. For this reason, I feel that for those who have smartly been on the sidelines or short, this is a relatively low-risk long entrypoint for those traders with a long-term timeframe. And despite the recent successes of the short trade, I feel that, even should the models trend warmer, the risk/reward of the trade under $2.90/MMBTU is no longer favorable and this is an excellent opportunity to take what are likely to be sizable profits.

Meanwhile, oil prices continued to defy faltering domestic fundamentals and rose for a second straight session on Friday as political unrest in Venezuela raised investor concerns about that nation's oil exports and global supply. WTI oil finished with a 56 cent or 1.1% gain to settle at $53.69/barrel while Brent rose 55 cents to $61.64/barrel. WTI was nearly flat on the week, falling just -0.7%. The late week rally came despite the EIA announcing Thursday that US inventories rose by a massive +8.0 MMbbls, more than twice the 5-year average, to push storage to a two month high and the storage surplus versus the 5-year average to a new 52-week high. Additionally, Baker Hughes reported that active oil rigs rose by 10 last week, blunting the previous week's very bullish 21-rig decline and suggesting that decline may have been something of an anomaly rather than a developing trend. While geopolitical turmoil can certainly vault the price of oil higher short-term, it rarely leads to sustainable gains. Unless US supply/demand fundamentals see a sudden tightening, I feel that the commodity is overdue for a pullback. WTI prices are up a massive 17% year-to-date in 2019 and I feel that a pullback to under $50/barrel is warranted pending a decrease in domestic imports, a rise in exports or an unexpected decrease in production.

My Oil & Natural Gas Portfolio took advantage of the rally in natural gas prices on Friday to finish the session up +0.7%, helping to halve weekly losses to -0.7%. The Portfolio is up +7.7% year-to-date through the first 17 trading days of 2019 and, despite being caught on the wrong side of the natural gas move lower is within about 0.75% of new 2019 highs. I made just one trade last week, a Friday afternoon short sale of UWT to boost my short WTI oil position to a modest 5.3% of my holdings as the commodity approached $54/barrel. As discussed above, I continue to feel that oil has been overly resilient in the face of softening domestic fundamentals and am targeting a near-term pullback to $50/barrel. Should WTI trade above $55/barrel, I will be prepared to boost this position further to 7.5% of the Portfolio. My most volatile position--and greatest liability--right now is my net long natural gas position. Current exposure stands at 8.8% with a 12.2% DGAZ short partially offset by a 3.4% UGAZ short. Undoubtedly, this trade is going to be a big loser this morning. However, at this time, I am not prepared to abandon the trade. If anything, I like the elevated volatility that this morning's 7% gap down promises as it will accelerate leverage-induced decay which this trade is structured to capitalize upon. That being said, with net exposure likely to top 10% with today's move lower, I have no plans to add to this position and, again will probably let leverage-induced decay work its magic. Given the near-term warm-up I will be reducing my March 2019 price target to $3.10/MMBTU. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for January 19-25 this Thursday at 10:30 AM EDT. At this time, I am projecting a total -190 BCF storage withdrawal, a modest 40 BCF bullish versus the 5-year average and 64 BCF larger than last year's disappointing -126 BCF withdrawal. As the Figure to the right shows, it will be the second largest withdrawal for the January 19-25 period in the last 5 years, behind only 2014's -243 BCF draw. The bullish draw was driven by a combination of cooler temperatures last week, averaging 40.3F versus 41.0F the week before, and a slowdown in domestic production as reported by the EIA with output declining 0.9 BCF/day, driven by a pipeline explosion and possible freezeoffs. Should a -190 BCF withdrawal verify, natural gas inventories would fall to 2180 BCF while the storage deficit versus the 5-year average would be back on the rise after a multi-month slump, climbing to -345 BCF. And after only a single week, the year-over-year storage surplus will revert back to a -31 BCF deficit. There is some increased uncertainty associated with the projection due to the impact of the Martin Luther King day holiday on temperature-independent demand, and this projection has already been trimmed by 5 BCF over the weekend with further changes possible as finalized pipeline numbers are integrated into the model. Click HERE for more on this week's projected draw.

Over the weekend, natural gas demand steadily declined as temperatures moderated along the Eastern Seaboard and Great Lakes ahead of this week's exceptional arctic outbreak. I project that daily storage withdrawals fell to -33 BCF/day and -27 BCF/day on Saturday and Sunday, respectively, still bullish versus the 5-year average of -21 BCF/day. Natural gas demand will likely reach an intra-week low today before soaring by midweek as the long-awaited piece of the Polar Vortex plunges southward. An unusually potent Alberta Clipper will pull out of the Northern Plains today after dumping 6 inches of snow from Minneapolis to Milwaukee to Chicago. Ahead of this system, highs will be 10F-15F warmer-than-normal across the Ohio Valley and Deep South with Louisville, KY reaching the mid-50s, Nashville, TN the low 60s, and Jackson, MS the upper 60s. Additionally, Chicago will reach the mid-30s by mid-morning today--10F warmer-than-normal--before a northwest wind kicks in sending temperatures tumbling into the teens by this afternoon. Behind the associated arctic cold front, however, highs will be well-below average with Minneapolis struggling to reach 10F, Des Moines the mid-teens, and Omaha the low 20s, all 10F-15F colder-than-normal. Overall, today's forecast mean population-weighted nationwide temperature will warm 0.5F day-over-day to 40.3F today, less than 0.4F warmer-than-normal. Forecast Total Degree Days will slip to 23.8 TDDs, still the 17th most for January 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 -25 BCF/day daily natural gas storage withdrawal, 2 BCF smaller than Sunday's draw and still 4 BCF bullish versus the 5-year average -21 BCF/day draw. By late this afternoon, I project that natural gas inventories will break through 2100 BCF and will finish the day near 2095 BCF. The storage deficit versus the 5-year average will rise to around -367 BCF while the year-over-year deficit will rise by 10 BCF to -70 BCF. Click HERE or more on today's temperature and degree day outlook.

For the remainder of the week, natural gas demand will rapidly increase beginning Tuesday as one of the strongest arctic outbreaks in the past 20 years across the Plains spreads Southward. By Wednesday morning, a whopping 55 million people--roughly 1/6th the Lower 48 population--will be below 0F, mostly across the Northern Plains and Great Lakes. Wind Chills in Grand Forks, Minneapolis, and Madison could fall into the -50s while Chicago's actual air temperature could potentially challenge its all-time record low of -27F. This is a serious and dangerous situation for those areas affected. As a result, I am projecting that the daily natural gas storage withdrawal for Wednesday will peak near -50 BCF/day, more than twice the 5-year average and not higher only because of the relatively localized nature of the arctic outbreak. While demand will begin to dip on Thursday and especially Friday, I expect daily storage withdrawals to be larger than the 5-year average throughout the week. As a result, for the storage week of January 26-February 1 that ends this Friday, I am projecting a preliminary -251 BCF natural gas storage withdrawal, 101 BCF bullish versus the 5-year average and a massive 135 BCF larger than last year's draw. Should it verify, natural gas inventories would fall below 2000 BCF on Thursday morning and would finish the week near 1930 BCF while the storage deficit versus the 5-year average would soar to -445 BCF. As the Figure to the right shows, a -251 BCF draw would be the second largest withdrawal all-time for the January 26-February 1 period, behind only 2014's -256 BCF draw and even this could be in jeopardy if temperatures end up just slightly colder than expected. Click HERE for more on this week's projected withdrawal.

As intense as this arctic outbreak will be, it will exit stage right almost as soon as it arrives. By this coming Saturday, daily natural gas storage withdrawals are likely to drop below the 5-year average, down an incredible 30 BCF in just two days as a southerly flow returns to the Midwest allowing mild temperatures to surge north. Based on the latest model trends, demand will likely continue to fall at least into early next week with daily withdrawals looking to bottom out on Monday, February 1, as shown in the Figure to the right, at an exceptionally bearish -7 BCF/day. Chicago could push 60F, an 85 degree warm-up in less than a week. Remarkable. As a result, I expect a reversion to a bearish storage withdrawal for the first full week of February close to -120 BCF, or around 50 BCF bearish versus the 5-year average. Thereafter, there are some signs in the models that the set-up could still favor intermittent bouts of arctic air through February 15, but it is during the second half of the month that there has been a much stronger, and more consistent signal among long-term models of a prolonged return to colder-than-normal temperatures particularly across the eastern half of the nation. While this forecast is still highly uncertain, should it verify, the natural gas storage deficit versus the 5-year average could still top -500 BCF before the end of the withdrawal season as inventories fall under 1200 BCF. Click HERE for more on the near-term natural gas storage outlook and HERE for more on the latest near- and long-term computer model trends on my Advanced Modeling Page.