January 29, 2019

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Natural Gas Falls Under $3.00/MMBTU To Winter Low As Investors Look Past Historic Arctic Outbreak Towards Rapid Warm-Up; Long-Term Models Still Calling For Cold February, But Evolving Set-Up Could Blunt Impact On Population Centers; Arctic Air Plunges Southward Sending Gas Demand Soaring Today As Inventories Near 2000 BCF

6:00 AM EDT, Tuesday, January 29, 2019
Natural gas was routed Monday with February 2018 prices tumbling 8.4% to settle at $2.91/MMBTU. It was the lowest settlement for the front-month since September 19 and brought losses over the past 5 trading sessions to a massive 21%. Of note, the February 2019 contract will expire at the close of trading today and will be replaced by the March 2019 contract--which settled at $2.87/MMBTU, a dramatically reduced 4 cent backwardation--as the Front-Month contract beginning Wednesday. Monday's pullback, as discussed in yesterday's commentary, was driven by a significant warming trend for the 6-14 day temperature outlook over the weekend by both the GFS and ECMWF models. Previously, these models, and others, had suggested that this week's historic arctic intrusion could persist or be followed by near-term reinforcing shots, but the weekend's model runs suggested instead that a ridge of high pressure would rapidly replace the dip in the jet stream that is allowing cold air to funnel south from the Canadian tundra. By the weekend, this will allow temperatures to moderate by upwards of 80 degrees in just 5 days, squashing natural gas heating demand and prompting what amounted to panic selling. Yesterday, there were no significant changes to this forecast in the near-term models. Monday evening, however, the latest run of the gold standard long-term model, the 44-day ECMWF-EPS, was released. While this model reinforced the sentiments of its long-range stablemate CFSv2 that the upcoming warm-up will be short-lived, it depicted a rather different set-up that could have implications on who gets how cold and for how long. The CFSv2--and previous runs of the ECMWF-EPS--show redevelopment of troughing across the eastern half of the Lower 48 by mid-February which would allow much colder temperatures to return to this densely-populated region, resulting in rising natural gas demand. However, Monday's run of the ECMWF-EPS maintains some weak ridging over Atlantic Canada, shunting the dip in the jet stream and the heart of the cooldown further west across the Rockies and Great Plains, maintaining more seasonal temperatures across the East. As the Figure to the right shows, my 44-day Hybrid Model, which integrates near-term GFS and ECMWF ENS and long-term ECMWF-EPS and CFSv2 data, is still forecasting daily gas-weighted degree days (GWDDs) that are at or above their long-term normals for nearly the entire 5-week period after February 8. However, as the Figure immediately below it shows, thanks to the warming near-term outlook and yesterday's shift in the ECMWF-EPS model, forecast 44-day TOTAL GWDDs, while consistently above-average, have been steadily trending lower over the past several days. Click HERE for more on the near- and long-term temperature outlook on my Advanced Models Page HERE.

What does this mean for natural gas prices? Unfortunately, it further reduces the chances that the commodity will be able to make a push for prices above $3.50/MMBTU this winter, the odds of which are now very low barring a record-cold late February and March. If this forecast were to come to fruition back in November or December, natural gas would be much more amenable to rallying given the much longer duration of winter remaining. However, as the calendar now prepares to turn to February, even while inventories remain well below their 5-year averages, there is virtually no chance of a supply shortage with only 2 months remaining in the withdrawal season. It is this combination of factors that has greased the wheels for the sell-off we have seen in the past week--despite the headline-grabbing arctic outbreak currently upon the Lower 48. It seems difficult to wrap one's head around the fact that the Midwest could be seeing one of the all-time great arctic outbreaks, yet natural gas is at wintertime lows. But it is important to remember that investors are forward-looking and care much more about the subsequent warm-up than the initial cooldown. This all being said, I do not feel that this is the time to short natural gas. The time for that foresight would have been last week or, better yet, the week before that. The commodity is now at the lower range of its (very wide) winter trading range and is undervalued by 26% according to my Fair Price Model, an undervaluation which approaches 30% by late this week at the height of the cold and remains above 20% for the remainder of the winter into the Spring. This is a particularly challenging trading environment as I do not feel there is a bearish catalyst sufficient to drive natural gas prices much lower than their already suppressed level but at the same time the bulls don't have a sustainable catalyst on their side either with the impact of a long-awaited February cooldown now showing signs of being blunted somewhat. I feel that risk/reward at these levels favors either the sidelines or a small long position. Should February and March trend colder, I still feel natural gas tops $3.00/MMBTU, which is my near-term price outlook for the commodity. While natural gas may just continue to bleed lower near-term thanks to traders abandoning their positions and overall sour sentiment, I feel the magnitude of a move in either direction still favors the upside given the chance of a February/March cooldown. Overall, however, my sentiment towards natural gas based on the latest trends is much weaker than it was this time last week.

Meanwhile, crude oil prices finally broke lower on Monday as concern over rising US inventories and rig counts outweighed geopolitical concerns in OPEC member Venezuela. WTI prices closed down $1.70 or 3.2% to settle at $51.99/barrel while Brent was off 2.8% to $59.93/barrel. It was the lowest close for WTI since January 14. The commodity finished off its lows after news came out late in the session that the US treasury had levied sanctions on PdVSA, Venezuela's oil firm, amidst an ongoing attack on the legitimacy of Maduro's government, which has recently found itself in sociopolitical turmoil. However, it remains to be seen whether there will be any material impact of the sanctions on exports themselves as the country can continue to export to the US provided that the current government does not receive funds from sales. While prices could find some support from this situation, I still feel that the path of least resistance is lower and that WTI prices can test $50/barrel should the conflict find some resolution.

My Oil And Natural Gas Portfolio slumped 1.1% on Monday to reduce year-to-date gains to +6.5%, or +88% annualized. As expected, the Portfolio took heavy losses from a large natural gas long position that is now worth a net 11.7% of my holdings with a short 14.5% DGAZ short position partially offset by a 2.8% short UGAZ position. However, these losses were mitigated both by my modest oil short trade via short UWT and by my LNG long position, worth a robust 10.8% of my holdings, that finished up +2.8% on Monday to push unrealized gains in the holding to +8.0%. I made a single trade on the session, taking profits on a portion of my UWT short. When WTI was approaching $51.50/barrel, I covered a 3% stake in the trade, reducing exposure from 5% to 2% and realizing an +11% profit. I will plan to hold onto the remainder until the commodity reaches my target of $50/barrel or fundamentals evolve. Regarding my natural gas holdings, I am reluctant to abandon the so-far disappointing long trade as the commodity is undervalued and has reached the bottom of its near-term trading range. However, my exposure to the trade is approaching the upper limits of my tolerable risk which is in the 12%-15% range. Should the commodity continue to drop and exposure rise, I will consider trimming my net long position either via shorting more UGAZ or covering a portion of my DGAZ position. Target exposure is under 10% of my holdings. Unless forced to do otherwise, I plan to continue holding my UGAZ and DGAZ short pair trade as this capitalizes on leverage-induced decay which should remain robust in this high-volatility environment, given enough time. Click HERE for more on my current Oil & Natural Gas Holdings.

Natural gas demand will soar today as a record-setting arctic intrusion gets underway across the Plains and Midwest. Temperatures will fall throughout the day in Minneapolis, reaching the -10s by the afternoon with wind chills dropping into the -40s. Chicago and Des Moines will struggle to reach 0F. These readings are a brutal 30F-40F colder than normal--not even factoring in the wind chill. This is dangerous cold, the likes of which has not been seen in this area since the mid-90s or mid-80s. Further east, rain quickly changed to snow overnight as an arctic cold front passed through the Deep South with areas from Jackson, MS to Montgomery, Al to the Atlanta suburbs all picking up 1-3 inches. Highs across this region today will struggle to climb out of the 30s, 20F colder than normal. Along the Eastern Seaboard, temperatures will generally be seasonable for one more day with highs in the low 40s from Washington, DC to Philadelphia, upper 30s in New York City, and low 30s in Boston, all 0F-5F colder than normal. Thanks to the plunging temperatures across the Plains, today's forecast mean population-weighted nationwide temperature will tumble by 5.1F from Monday to 35.2F today, 4.6F colder-than-normal. Total Degree Days will rise to 29.7 TDDs, 4.0 TDDs greater than normal and the 7th most for January 29 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day data.

Based on this forecast and early-cycle pipeline data, I am projecting a -37 BCF/day daily natural gas storage withdrawal today, 11 BCF larger than yesterday's draw and 16 BCF bullish versus the 5-year average. By tonight, inventories will finish the day near 2055 BCF while the storage deficit versus the 5-year average tops -385 BCF. The year-over-year deficit will jump 20 BCF to -90 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories. Look for daily withdrawals to approach -50 BCF/day tomorrow as the coldwave climaxes, sending inventories very close to 2000 BCF and the storage deficit back above -400 BCF.