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March 29, 2019

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Home --> Daily Commentary & Archive --> March 29, 2019 Daily Commentary


Long-Term Temperature Uncertainty Keeps Natural Gas Prices Tightly Rangebound While Oil Recovers After Donald Trump Tweet; Year-Over-Year Temperature-Adjusted Supply/Demand Imbalance Tightens, But It Won't Matter (For Now) If April Is Mild; Quick Shot Of Unseasonable Cold Likely Next Week, But It Won't Last


6:00 AM EDT, Friday, March 29, 2019
In its weekly Storage Report for the week of March 16-22, the EIA announced Thursday morning that natural gas inventories fell by -36 BCF. This was 2 BCF larger than my projection but was slightly bearish versus the 5-year average -41 BCF. Overall, it was a fairly neutral report that fell generally within expectations. With the withdrawal, natural gas inventories fell to 1107--which likely represents a weekly bottom--while the storage deficit versus the 5-year average contracted to -551 BCF or -33%. The bearishness of the draw was driven by the Pacific Region which saw a +8 BCF storage injection versus the 5-year average +1 BCF build. This cut into its nation-leading storage deficit versus the 5-year average (on a percentage basis), which fell to -97 BCF or a whopping -48%. On the other hand, the South Central Region saw a -4 BCF storage withdrawal, 5 BCF bullish versus the 5-year average. This built its nation-leading storage deficit (on an absolute basis) to -233 BCF. Both the Mountain and Midwest regions saw draws right at their respective 5-year averages while the East saw a slightly bearish draw, -20 BCF versus -23 BCF. All 5 storage regions are at deficits versus their 5-year averages of greater than -50 BCF. On the other hand, only 2 regions are at a -50 BCF or more year-over-year deficit and I expect to see the East Region (-17 BCF) and potentially the Midwest Region (-36 BCF) flip to surpluses versus 2018 in the next 4-6 weeks as temperatures are likely to be considerably milder compared to last year when nationwide storage withdrawals continued well into April.


Click HERE for more on the latest EIA-reported natural gas inventories.


Following the morning release of storage data, the EIA also issued its weekly supply/demand update just after the market close, covering the week of March 21-27. Of note, this differs from the storage week (March 16-22). After months of being tightly rangebound between 87.5 BCF/day and 89 BCF/day, domestic production finally broke out to new highs, spiking 1 BCF/day from the previous week to 89.3 BCF/day. Natural gas production is now up a massive +9.9 BCF/day year-over-year. However, it is worth noting that total supply did not reach a new high thanks to Canadian imports falling to a lackluster 4.7 BCF/day, down 2.1 BCF/day year-over-year. At 94.1 BCF/day, total supply is up 7.7 BCF/day year-over-year but is shy of the 94.7 BCF/day averaged during the week ending January 16, 2019. Nonetheless, for the bulls, it is a rather unfortunate time for production to resume its upward climb. Demand is likely to fall sharply in the next 2 weeks as warmer-than-normal temperatures overspread the major population centers of the northern tier, eliminating the impact of strong year-over-year demand growth and effectively leaving the growth in production unopposed, leading to what I expect will be a series of oversized injections. It was a disappointing week on the demand side as all elements of temperature-dependent demand were at year-over-year deficits, including powerburn (21.5 BCF/day versus 23.8 BCF/day), industrial (21.6 BCF/day versus 22.0 BCF/day), and residential/commercial demand (29.6 BCF/day versus 33.5 BCF/day). Further, LNG pipeline demand fell 1.4 BCF/day week-over-week to 4.1 BCF/day, which is consistent with daily data that I have been tracking, thanks to Sabine Pass initiating maintenance operations. LNG demand is now up only 0.9 BCF/day.


Despite the rise in production and drop in temperature-dependent demand, I project that temperature-independent supply/demand balance continues to slowly tighten. In particular, I calculate that the year-over-year temperature-adjusted imbalance contracted by another 0.2 BCF/day to average just 0.9 BCF/day loose versus 2018 last week. This means that, for any given temperature, I would expect the daily natural gas storage injection to be 0.9 BCF/day larger--or bearish--compared to the same temperature with last year's underlying fundamentals. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make accurate long-term storage and price projections. While still loose, this imbalance has tightened dramatically in recent months, from a peak of 5.5 BCF/day the week of November 16, 2018, as shown in the Figure below. This is undoubtedly a bullish long-term trend for the sector. Unfortunately, it doesn't matter how improved the underlying fundamentals are if Mother Nature is strongly against you. With consistently mild temperatures likely in April, the complete opposite of last year's unseasonably chilly month, I am still expecting the year-over-year deficit to contract and potentially even flip to a surplus by May, despite the strong underlying fundamentals.


Click HERE for the latest EIA-reported supply/demand numbers and temperature-adjusted imbalance data.


Natural gas investors responded to what was a neutral report in a neutral fashion. In its first day as the Front Month contract, May 2019 natural gas fell 1 cent or 0.3% to $2.71/MMBTU after trading tightly rangebound throughout the day with minimal response to the EIA report. My sentiment is largely unchanged. Despite the improving underlying fundamentals as discussed above, I remain near-term bearish on the sector due to the prospect of a prolonged period of unfavorable weather. While the 14-day outlook has trended slightly colder over the past 48 hours, April still looks to be near average (44-day ECMWF-EPS model) to much warmer than normal (CFSv2 model). However, there is considerable uncertainty in the longer term outlook beyond 10 days. As the Figure to the right shows, there is a nearly 150 BCF 6-week spread in projected inventories depending on whether the most bearish or most bullish outlooks verify. Should the more bullish verify, inventories would only rise to around 1525 BCF, resulting in the storage deficit only contracting by around 100 BCF to -425 BCF, whereas if the more bearish outlook verifies, inventories could soar to over 1660 BCF, resulting in a collapse in the deficit to under -300 BCF. It is likely this uncertainty that is keeping the commodity tightly rangebound and preventing a breakdown under $2.70/MMBTU. Favoring the more bearish solution, especially with production now breaking out to new highs, my projected downside price target is $2.65/MMBTU. After we get past this period of unfavorable temperatures, however, I expect that the improved fundamentals will begin to take hold and the storage deficit could begin to grow again. Thus, I remain long-term bullish on the sector--and am positioned thusly in my portfolio.


Meanwhile, crude oil fell sharply in early-session trading after Donald Trump exhorted OPEC to cut production in a tweet. In response, WTI prices fell as much as 2.5% to $58.20/MMBTU. However, yet again, the commodity could not be held down and rallied throughout the session, finishing down as mere 11 cents or 0.2% to $59.30/MMBTU. Brent fell just a cent to $68.82/barrel. With a widening domestic storage deficit versus the 5-year average, falling rig count, and aggressive moves by OPEC to cut exports, I remain bullish on WTI and am maintaining a $65/barrel 2019 price target on WTI. My Oil & Natural Gas Portfolio also recovered from early-session losses to finish flat on the day. 2019 year-to-date gains stand at +9.9% or +41.7% annualized. I made no trades on Thursday. The portfolio remains aggressively long oil and modestly long natural gas. Click HERE for more on my current oil and natural gas holdings.


Natural gas demand will fall to a fresh 2019 low today as unseasonably mild temperatures dominate the Eastern Seaboard. The largest anomalies will be across the Mid-Atlantic where Richmond, VA could approach 80F and Washington, DC will reach the mid-to-upper 70s, both 15F warmer-than-normal. Further north, temperatures will be more seasonable with Philadelphia reaching the mid-60s, New York City the lower 60s, and Boston the mid-50s, each 5F-10F warmer-than-normal. It will likewise be a seasonably warm day across the South, with Atlanta, Birmingham, and Little Rock all reaching the upper 70s and Houston and Dallas each topping 80F, 5F warmer-than-normal. Cooler-than-average readings will be largely limited to the far western Plains where a cold rain or even wet snow will keep highs from western Kansas and Nebraska into the Dakotas, Colorado, and Wyoming in the low-to-mid 40s, 10F-15F colder-than-normal across a relatively sparsely-populated region. Overall, today's forecast mean population-weighted nationwide temperature will warm 1.8F from yesterday to 56.4F, 3.7F warmer-than-normal. Today's Total Degree Days (TDDs) will fall to just 9.8 TDDs, the 6th fewest 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 +7 BCF/day daily natural gas storage injection for March 23-29, the first weekly storage injection of the season. Such a build would be 2 BCF larger than yesterday's previous 2019-high injection and 10 BCF bearish versus the 5-year average -3 BCF/day. Click HERE for more on today's daily storage injection and Realtime natural gas inventories. For the week of March 23-29, I am projecting a +11 BCF storage injection, the first of the season and 34 BCF bearish versus the 5-year average. As the Figure to the right shows, such a build would be the first for the final week of March in the last 5 years. The bearish build was driven by temperatures that were warmer-than-normal throughout the week, particularly its final 2 days. The week's mean population-weighted nationwide temperature averaged 52.4F, 2.9F warmer than the previous week and 1.8F warmer-than-normal. Should a +11 BCF storage injection verify, natural gas inventories would rise to 1118 BCF while the storage deficit versus the 5-year average would contract to -517 BCF. The year-over-year deficit would fall a steep 44 BCF to -241 BCF. The EIA will release its official storage numbers for the week next Thursday, April 4, at 10:30 AM EDT. In the meantime, click HERE for more on this week's projected storage injection.


Looking ahead to next week, after another mild day on Saturday, natural gas demand will jump on Sunday, Monday, and Tuesday, flipping injections back to withdrawals as unseasonably chilly temperatures make a short-lived appearance across the eastern two-thirds of the nation. Daily withdrawals could top -5 BCF/day on both Sunday and Monday, as shown in the Figure to the right. However, as quickly as the cold air sweeps southward, it will be expunged with injections approaching double digits by next Friday. For the week of March 30-April 5, I am projecting a preliminary +15 BCF storage injection, a slight 10 BCF bearish versus the 5-year average but 36 BCF larger than last year's 5-year low -20 BCF withdrawal. It would be the second largest injection in the last 5 years for the first week of April. Click HERE for more on next week's storage injection.