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December 3, 2018

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Natural Gas Set To Drop & Crude Oil Set To Surge In Action-Packed Monday Trade; Gas Demand To Rebound Today After Weekend Nadir, But Is Poised To Go Much Higher By Late-Week As Arctic Air Moves Back South; Computer Models Push Back The Onset Of Mid-December Warmup, But It's Still Coming And That's A Problem If You're A Bear


6:00 AM EDT, Monday, December 3, 2018
On Friday, natural gas dipped 3 cents or 0.7% to settle at $4.61/MMBTU, wrapping up another volatile week on a low-key note. On the week, the commodity gained a strong 6.9% on the week, capped by a 12% rally on Wednesday. On the month, natural gas rallied a remarkable 41%, its largest monthly gain in 9 years as an early-onset to winter drove inventories to their lowest level for the period since 2003, prompting a rapid revaluation of an underpriced commodity. Last week's rally came despite the EIA reporting a much smaller than expected -59 BCF weekly storage draw in Thursday's report and news that domestic production had risen to yet another all-time high at 88.5 BCF/day. Additionally, investors continue to fret as the short-term computer models continue to try to sort out the near-term forecast. There is good agreement and good run-to-run consistency in that there will be another arctic during the second half of this week reinforced and extended into next week followed by, at some point, a large-scale warm-up. While confidence has increased in the overall concept of this transition, the uncertainty comes regarding the timing of this pattern change. The ECMWF has been consistent in delaying the transition from December 8-10 late last week to December 11-12 over the weekend. As a result, as shown in the Figure to the right, the model has consistently been forecasting above-average Gas-Weighted Degree Days (GWDDs) for the next two weeks with a slow trend towards increased bullishness. The GFS, on the other hand, has been quite inconsistent, also prolonging out the duration of the arctic outbreak, but interspersed 1-2 runs of a much earlier transition to warming temperatures. While the overall trend over the weekend has been colder and for longer, at the same time, all of the major models that I follow--the ECMWF, GFS, ECMWF-EPS, and CFSv2--are all indicating a transition by mid-December, albeit delayed. It is likely for this reason that natural gas dropped over 3% in early electronic trading Sunday evening. I would not be surprised if this pullback doesn't hold and natural gas rallies overnight or Monday. However, I do continue to feel that even if the probability of near-term upside outweighs downside, I expect that the magnitude of downside is greater than upside and favors the shortseller. When the warm-up does arrive--assuming it lasts at least 1-2 weeks as proposed by the CFSv2, I would not be surprised to see natural gas quickly drop under $4.00/MMBTU, which is my near-term price target. With production at record levels, imports from Canada rebounding, and nuclear reactor outages and associated natural gas substitution demand fading, supply/demand balance will be very loose, and could even support some daily storage injections, as I projected we saw over the weekend. Ultimately, I see natural gas falling under $3.50/MMBTU before the end of the heating season, if not earlier. On the other hand, should the forecast continue to trend colder and the duration of any warm-up be reduced, natural gas prices could certainly rally to $5.00/MMBTU, but at this time I don't see enough bullish catalysts to drive it sustainably higher than this. Click HERE for more on the latest computer model outlooks on my Advanced Model Page.


Meanwhile, WTI oil dropped 52 cents or 1% on Friday to settle at $50.95, after once again dropping below $50/barrel intra-session. For the month of November, WTI plunged 22%, just a month after recording new 4-year highs in October. Last week, investors dealt with a tenth straight inventory build while investors played a will-they-or-won't-they game ahead of this week's OPEC meeting in Vienna that could result in a much-needed production cut to rebalance world markets (or not). However, oil is poised to surge at the open Monday morning as a temporary detente in the US-China trade war could serve as a stimulus to demand. In Sunday night electronic trade, WTI was up over 5% to $53.50/barrel while Brent was up nearly 5% to over $62/barrel. While the demand news is certainly encouraging, it will all be for naught if OPEC does not report a production cut of over 1 MMbbls/day on Friday. However, the combination of such a production cut plus the good news on the demand front could result in WTI rallying to over $60/barrel and Brent to $70/barrel before the end of the year. If there is no production cut, it's back into the $40s for WTI.


My Oil & Natural Gas Portfolio lost -0.7% on Friday, but it was a flat week for the Portfolio, rising less than +0.1%. Year-to-date gains stand at +2.1%. I made a single trade last week, a Wednesday purchase of DGAZ on the spike above $4.70/MMBTU that brought total exposure to 4.4%. Meanwhile, my net long WTI exposure via short DGAZ stands at a robust 9.0% with the remainder of the 16.3% position going towards offsetting my short BNO holding as part of a WTI-Brent arbitrage trade. My Portfolio is poised to surge on Monday at the open with natural gas falling and oil set to spike. At this time, my price target for natural gas is $4.00/MMBTU and will probably maintain my current level of exposure at least until that level. Should natural gas rally to above $5.00/MMBTU, I will plan to aggressively add to my position as I feel that the commodity is not sustainable above this level, especially with the temperature outlook for the second half of December. Additionally, I will also look to transition back to a short UGAZ rather than long DGAZ so as to stop leverage-induced losses and turn them into profits. For WTI, should prices spike above $55/barrel ahead of the OPEC meeting, I will consider trimming my position as it is overweight right now at 9% to mitigate risk should that meeting fail to deliver the goods. My favorite equity remains Cheniere Energy (LNG) at an overweight 10.5% of my holdings. The share price is being kept in check right now by higher natural gas prices which are cutting into the company's profit margins, but with Sabine Pass Train 5 and Corpus Christi Train 1 beginning operations as we speak and a warming of economic relations with China, one of the largest imports of natural gas in the world, I see the company outperforming near- and long-term. I plan to continue holding this position and would even consider adding to it up to a 15% position under $60/share. My conservative price target is $75/share, though I may raise this in the future. Click HERE for more on my current oil and natural gas holdings.


On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly report detailing Money Manager natural gas holdings on the NYMEX through Tuesday, November 27 . Both long and short natural gas positions were relatively flat as the week did include the low-volume period surrounding the Thanksgiving holiday. Open long positions fell by 5,851 contracts to 284,739 while shorts fell by a slightly steeper 6,451 contracts to 46,98. It is worth noting that this was the second week in a row that open long positions fell and are now well-below the 52-week high of 331,833. Short positions, meanwhile, reached another 52-week low. Overall, the Bullish Sentiment--the percentage of open positions held long--rose by just under 1% to 86%, which is right at the 52-week high. Additionally, the Bullish Sentiment is up a massive 34% year-over-year and nearly 20% higher than the 52-week average of 67%. This all points to a very skewed, unbalanced market with few shorts to balance out the longs. While as we saw last week, natural gas can still spike over 10% in a day, the overall risk of a short squeeze has gone down, if only because there are so few shorts to squeeze. Additionally, even with the decrease in longs over the past two weeks, the bullish side of the trade is very over-exposed. Should the mid-December warm-up become a reality and not just a forecast, many of these traders will close out of their positions en masse, potentially accelerating and exacerbating any pullbacks.


The EIA will release its weekly Natural Gas Storage Report for November 24-30 this Thursday at 10:30 AM EDT. I am projecting a preliminary -62 BCF storage withdrawal. Such a draw would be a slight 4 BCF bullish versus the 5-year average and, as the Figure to the right shows, would be the third largest draw in the last 5 years, behind 2013's -150 BCF draw and 2015's -63 BCF draw. It was a volatile week for natural gas demand with exceptionally strong demand mid-week with daily draws over -15 BCF/day last Tuesday and Wednesday, book-ended by very soft demand the previous weekend with small daily builds possible and last Friday's bearish -5 BCF/day draw. Overall, the mean nationwide population-weighted nationwide temperature was nearly unchanged week-over-week at 46.4F versus 46.1F the previous week. I am projecting a slightly larger withdrawal (-62 BCF versus -59 BCF for the previous week) despite the slightly warmer readings due to the recovery of temperature-independent demand destruction associated with the Thanksgiving holiday the previous week week. Should a -62 BCF withdrawal verify, natural gas inventories would fall to 2992 BCF while the storage deficit versus the 5-year average would rise to -724 BCF. Click HERE for more on this week's projected storage withdrawal.


Over the weekend, natural gas demand was exceptionally weak thanks to diffusely mild temperatures across most of the nation, particularly in the southerly flow along and ahead of a potent Midwest storm system. As a result, I projected a -2 BCF/day daily withdrawal on Saturday and an exceptional +1 BCF/day daily injection on Sunday, both very bearish versus the 5-year average -11 BCF/day daily withdrawal. Natural gas demand will rebound today as colder temperatures overspread the Heartland, but will remain below-average for one more day as the East stays mild. Highs along the entire Eastern Seaboard will be 10F-15F warmer than normal today, with 60s in the Carolinas in Charlotte and Raleigh and upper-50s along the Megalopolis from Washington, DC to Boston. With overnight lows region-wide only falling into the upper 40s to lower 50s, natural gas heating demand will be significantly curtailed. On the other hand, temperatures will be much colder across the Central US today. Kansas City will only reach the upper 20s, Denver near 30F, and Oklahoma City the lower 40s, all 10F-15F below-average and plenty sufficient to generate robust heating demand. Further north, highs in Chicago and Minneapolis will be more seasonal in the upper 20s and mid 30s, respectively, but this represents a 10F cooldown from Saturday. Overall, today's forecast mean population-weighted nationwide temperature will fall 4.5F thanks to much colder temperatures across the Heartland, but will remain 4.1F warmer-than-normal at 48.9F thanks to the balmy densely-populated East Coast. Total Degree Days will rise to 17.4 TDDs, but will remain 4.2 TDDs fewer than normal and the 14th fewest for December 3 in the last 38 years. Click HERE for more on today's temperature and degree outlook.


Based on this forecast and early-cycle pipeline data, I am projecting a -9 BCF/day daily natural gas storage withdrawal, a huge 11 BCF larger than Sunday's +1 BCF/day injection, but still 2 BCF smaller than the 5-year average -11 BCF/day draw. By this evening, projected Realtime natural gas inventories will be near 2981 BCF while the storage deficit versus the 5-year average will dip to -704 BCF. It will, however, not drop below -700 BCF before the next wave of arctic air hits. Click HERE for more on today's projected daily withdrawal and Realtime natural gas inventories. For the remainder of the week, the colder-than-normal readings across the Heartland today will reach the Eastern Seaboard by Tuesday and will only be reinforced by an even more potent wave of arctic air during the second half of the week. For this reason, I project that daily withdrawals will top -18 BCF/day by Tuesday and will stay at or above that level for the remainder of the week. This will be more than enough to compensate for the weekend's warmth and I am projecting a -89 BCF weekly storage withdrawal for December 1-7, 10 BCF bullish versus the 5-year average. It would also be 30 BCF bullish versus last year's anemic -59 BCF draw. Should it verify, natural gas inventories would slide to 2904 BCF while the storage deficit versus the 5-year average would reach a new 4-year high at -736 BCF. The EIA won't release its official storage numbers for this week until Thursday, December 14, but in the meantime, click HERE for more on this week's projected withdrawal.


Looking ahead, natural gas demand looks to peak around December 9-10, but will then begin to rebound sharply as a ridge of high pressures pumps warmer air across the Heartland that then expands eastward over the next week. By December 14 or 15, daily injections could fall under -5 BCF, approaching 15-20 BCF/day bearish versus the 5-year average. This could rapidly cut into the storage surplus and likely explains some of the increased temerity displayed by the bears in overnight Sunday electronic trading. While it is possible that this warm-up continues to get pushed back further, should this forecast verify, the storage deficit versus the 5-year average could fall as low as -675 BCF by the week ending December 21, a reduction by over 60 BCF in 3 weeks. Click HERE for more on the near-term natural gas storage outlook.