May 28, 2019

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Natural Gas Likely To Continue Rangebound Trading As Near-Term Heat Is Countered By Loose Supply/Demand Imbalance & Chilly June Outlook; Oil Has Work To Do After Disastrous Week, But Demand Likely To Pick Up Soon; Fourth Straight Triple Digit Storage Injection Expected This Week As Injections Hold Close To 5-Year Average

6:00 AM EDT, Tuesday, May 28, 2019
Natural gas finished the week on a positive note on Friday, rising 2 cents or 0.8% to $2.60/MMBTU. The move higher trimmed the week's loss to just -1.3%. The commodity has been tightly rangebound for the past month between $2.55/MMBTU and $2.65/MMBTU as prices remain at a steep 12% year-over-year discount, but a loose supply/demand imbalance and a mediocre temperature pattern has prevented any sustainable rallies. Given the historically cheap prices we are now seeing, it is unlikely that natural gas will be able to fall too much further--with $2.50/MMBTU likely as a price floor--but with June and early July looking at best neutral and more likely slightly cooler-than-normal, there is little to get excited about in the natural gas sector right now that could drive prices higher. For this reason, I continue to expect a generally rangebound trading pattern for the next 4-6 weeks with prices restricted to $2.50/MMBTU and $2.65/MMBTU.

While natural gas was yawning its way through the week, crude oil was taking a beating with a marked uptick in volatility. Thanks to the combination of a bearish +4.7 MMbbl EIA-reported inventory build and global growth concerns, prices saw a 2019-high decline of 5.7% on Thursday. The commodity bounced back on Friday to the tune of 72 cents or 1.2% to $58.63/barrel, but still finished the week with a steep 6.8% loss. Brent ended the week at $68.69/barrel, down 4.9%. Of note, the Brent-WTI spread topped $10/barrel on Friday for the first time in 2019, which should benefit US exports and suppress imports in the weeks to come. However, if refinery input demand doesn't pick up in the weeks to come, it likely won't matter and inventories will continue to build. However, now that the weather in and around the Houston Shipping Channel has improved and with gasoline stocks still below their 5-year average, I do expect demand to rise and I would not be surprised to see a series of large draws in the weeks to come. And with crude oil undervalued by over 4% based on current inventories according to my Fair Price Model, I remain cautiously bullish on the sector and feel that the commodity has been overextended to the downside. At this time, I am maintaining my $65/barrel price target for WTI, representing around 12% upside from current levels.

Natural gas finished nearly flat on Friday, gaining less than +0.1%, but, thanks to the sharp decline in oil prices and associated equities, saw a -0.7% loss on the week. The concomitant drop in natural gas prevented the loss from being even larger. Through the first 101 trading days of 2019, the Portfolio is up +12.8%, or +31.8% annualized. As the Figure to the right shows, this past week's drop was the first hiccup in what had been a slow, but steady uptrend. I made only a single trade last week, doubling my DWT short position--providing long WTI exposure--to a moderate 6.0%. Should WTI fall under $57.50/MMMBTU I will add to this position further, up to a maximum of around 10%. I will also look to add to my CHK long position, worth just 2.7% of my Portfolio, on a move under $2.00/share. Click HERE for more on my current oil and natural gas holdings.

On Monday evening the ECMWF-EPS came out with its latest 6-week temperature outlook, the gold standard among long-term models. The model continues to forecast that, after near-term gas-weighted degree days (GWDDs) hold above-average due to record-setting heat across the Southeast, a persistent area of colder-than-normal temperatures will overspread Texas extending northeastward to include Chicago, Detroit, and into the Northeast that will dominate the weather pattern for much of June. By early July, temperatures could return to near-normal as a ridge tries to establish itself across the Heartland. The stablemate long-term CFSv2 model is a bit warmer than the ECMWF, but still forecasts a below-average mid-June followed by a more potent warm-up heading into July. My Hybrid model, which takes ECMWF-ENS, GFS-ENS, ECMWF-EPS, and CFSv2 data and weights it by historical performance shows the rapid decline in GWDDs over the next week followed by a prolonged period of below-average GWDDs in June, with a late rebound possible by the first week of July. The Figure to the right plots the daily forecast departure from normal GWDD outlook for the next 6 weeks, as depicted by my Hybrid Model. Based on this forecast and the current supply/demand imbalance, I am projecting that natural gas inventories will peak near 3788 BCF this coming November, 60 BCF larger than the 5-year average and a huge 540 BCF higher than last year. Click HERE for more on the near- and long-term temperature outlook on my Advanced Models Page and HERE for more on the long-term natural gas storage outlook.

The EIA will release its weekly Natural Gas Storage Report for May 18-24 this Thursday at 10:30 AM EDT. I am projecting a +101 BCF/day, a third straight triple digit build and a slight 4 BCF bearish versus the 5-year average. As the Figure to the right shows, such a build would be the third largest in the last 5 years, behind 2015's +118 BCF and 2014's +114 BCF. A pattern consisting of hotter-than-normal readings across the Deep South and colder-than-normal readings across the northern third of the nation allowed gas demand to squeeze the maximum number of late-season heading degree days and early-season cooling degree days out of the pattern. A smaller, bullish build was only prevented by prolonged, unseasonable cold across the Desert Southwest, suppressing a major source of early-season cooling demand. Should a +101 BCF injection verify, natural gas inventories would rise to 1854 BCF while the storage deficit versus the 5-year average would inch lower to -270 BCF. Storage levels will finish the week +143 BCF higher than this time last year. Click HERE for more on last week's projected injection.

Over the long holiday weekend, natural gas demand held roughly stable with daily storage injections close to the 5-year average as blistering heat and associated cooling demand across the Southeast was countered by chilly readings across the Southwest and northern Plains and a bearish supply/demand imbalance. Charleston, SC hit 100F, Jacksonville, Fl 101F, and Macon, GA 99F, all new record daily highs. I project +15 BCF/day storage injections on Saturday and Monday and a +14 BCF injection on Saturday, right at the 5-year average +15 BCF/day. Gas demand will inch higher today as not much has changed with blistering heat again likely across major demand centers of the South. Triple digit heat is once again possible across north Florida and southern Georgia with mid-to-upper 90s likely in adjacent areas, all 10F-15F warmer-than-average which will keep air conditioning running full tilt. On the other hand, highs will only reach the mid-50s in Boston today, 15F colder-than-normal, while the rest of the I-95 corridor in the Northeast and Mid-Atlantic will be near-average. Further west, the usual cold spots this month will remain just that. Milwaukee may only reach the upper 50s while Des Moines struggles into the upper 60s and Rapid City, SD may not clear the 40s, all 10F-15F below-average. And, once again the normally scorching Desert Southwest will remain unseasonably cold, with Las Vegas and Phoenix only reaching the low 80s, around 15F colder-than-normal. Overall, today's forecast mean population-weighted nationwide mean temperature will be nearly flat from Monday, rising less than 0.1F to 71.5F, 2.6F warmer-than-normal. However, Total Degree Days (TDDs) will rise slightly more impressively to 10.1 TDDs, 2.4 TDDs greater than normal and the 5th most for May 28 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 +14 BCF/day daily natural gas storage injection for today, down less than 1 BCF from Monday and roughly 1 BCF bullish versus the 5-year average. After eclipsing 1900 BCF in the overnight hours, I project that Realtime natural gas inventories will finish the day near 1913 BCF. The storage deficit versus the 5-year average will widen slightly to -270 BCF while the year-over-year surplus will widen by 1 BCF to +149 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.

For the rest of the week, look for natural gas demand to remain roughly flat. While temperatures will steadily cool across the Southeast as the heat wave slowly abates, readings will also moderate across the Southwest and the central and northern Plains. As a result, I project daily natural gas storage injections to be remarkably stable with daily builds of either +14 BCF/day or +15 BCF, right at the 5-year average as shown in the Figure to the right. For the full week of May 25-31, I am projecting a preliminary +103 BCF weekly injection, a fourth straight triple digit build. It would be nearly neutral versus the 5-year average--just 1 BCF bearish--but would be a more substantial 10 BCF larger than last year's +93 BCF injection and would push the year-over-year surplus to +153 BCF. Click HERE for more on this week's projected injection. The EIA will release its official weekly storage injection next Thursday, June 6 at 10:30 AM EDT.