May 29, 2019

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Natural Gas Dips To Start The Week As Heatwave Peaks While Oil Rises For A Second Straight Session In Lackluster Rally; Gas Demand To Hold Steady Today as Lower 48 Likely To See Warmest Population-Weighted Day Of 2019--So Far

6:00 AM EDT, Wednesday, May 29, 2019
Natural gas fell to open the week, but finished well off the session's lows, closing Tuesday down 2 cents or 0.6% to $2.58/MMBTU. The dip came as the ongoing heatwave climaxes and amidst increasing confidence in the near- and longer-term computer models that June temperatures will be consistently below-average. The Figure to the right plots the trend in the 14-day gas-weighted degree day (GWDD) outlook over the past week, as forecast by the GFS ENS and ECMWF ENS models. Over the past 2 days, both models have trended towards fewer GWDDs--by way of a cooler temperature outlook--even as normal GWDDs are steadily increasing. While both models have trended towards fewer GWDDs, the GFS ENS, which had consistently been the warmer of the two, has trended cooler faster, converging towards the ECMWF solution. This has resulted in a rise in natural gas storage projections and I am now projecting triple digit builds through at least the week ending June 14, which would mean 6 straight and 7 for the season. By June 14, the storage deficit versus the 5-year average could be under -240 BCF and the year-over-year surplus could be approaching +175 BCF. It is for this reason, that my sentiment is unchanged. I expect continued tightly rangebound trading with a slight bearish bias and a downside price target of $2.50/MMBTU. Below this level, I expect economics and fuel switching will start to take hold with supply/demand balance tightening. For now, I remain cautiously short with a moderate-sized position.

Meanwhile, WTI oil prices finished higher for a second straight day on Tuesday following last week's Thursday collapse, but the bounce so far has been rather uninspiring. WTI gained 51 cents or 0.9% to settle at $59.14/barrel, now up around 2.5% from Thursday's 2019-low of $57.91/barrel. Brent oil finished flat at $70.11/barrel. Investors remain skittish as fears over a global demand slowdown, whispers that a continuation of OPEC production cut following the upcoming June meeting are no longer a sure thing, and building US inventories persist. As I've discussed previously, I feel that oil has overextended to the downside, a thesis supported by my Fair Price model which, based on current inventories, is around 3% undervalued from a Fair Price of $61.02/barrel. I feel that the recent rise in inventories has somewhat masked an underlying tightness in the market thanks to interruptions in the Houston Shipping Channel, a bounce in imports, and blunted refinery demand. I expect all three of these will sort themselves out in the next few weeks and would not be surprised to see a series of much larger-than-expected draws. Investors will have to wait a little longer than usual to see if this is that week in which that trend begins as the EIA's weekly Petroleum Status Report will be delayed until Thursday due to the Memorial Day Holiday. I remain long WTI via short DWT with a modestly-sized position, but will look to relatively aggressively add to this position should prices drop under $57.50/barrel. At this time, I believe the biggest downside risk in oil is a sell-off in equities due to the historically high correlation between the S&P 500 and WTI over the past 6 weeks.

Natural gas demand will hold nearly flat today as the underlying weather pattern remains entrenched, but slowly begins to modify. It will be another hot day across the Southeast, though the largest anomalies will transfer from the Deep South towards the Mid-Atlantic. Areas of Georgia, South Carolina and Florida that had reached the triple digits may only reach the low-to-mid 90s while Raleigh, NC could approach 100F while Washington, DC and Baltimore, MD could reach the low-to-mid 90s, all 15F-20F hotter than normal. At the risk of being redundant, the impact of this heat will be countered by another unseasonably chilly day across the Desert Southwest and Rockies. Denver, CO won't break 60F while Las Vegas, NV and Phoenix, Az--two cities whose average highs are approaching 100F--will only reach the mid-to-upper 80s, 10F-15F colder-than-normal. However, these temperatures will be 5F-10F warmer than those on Tuesday as the region very slowly begins to warm. Overall, today's forecast mean population-weighted mean nationwide temperature will warm by 0.7F from Tuesday thanks to the heat building across the major population centers of the Mid-Atlantic, reaching 72.2F. This is 3.1F warmer-than-normal and a new 2019-high. However, Total Degree Days (TDDs) will hold flat at 10.3 TDDs, a modest 2.5 TDDs greater than normal and the 7th most for May 29 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.

Based on today's temperature outlook and early-cycle pipeline data, I am projecting a +14 BCF/day daily natural gas storage injection, less than 1 BCF larger than Tuesday and around 0.5 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will reach 1926 BCF while the storage deficit versus the 5-year average inches higher to -270 BCF. The year-over-year surplus, meanwhile, will rise by around 1 BCF to top +150 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.