April 3, 2019

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Natural Gas Falls Despite Cooling April Temperature Forecast While Oil Tops New 5-Month High As Brent Approaches $70/Barrel; EIA Forecast To Announce Bearish Crude Oil Inventory Build But Bullish Refined Product Draws In Today's Status Report; Gas Demand To Fall Sharply For A Second Straight Day As East Coast Temperatures Quickly Warm

6:00 AM EDT, Wednesday, April 3, 2019
Despite computer model forecasts that trended colder across all time frames over the last 48 hours, natural gas was unable to hold onto Monday's gains, falling 0.9% to settle at $2.68/MMBTU. With the pullback, natural gas prices are back to a small discount versus year-ago levels which traded at $2.70/MMBTU. It is unclear what the driver for yesterday's move lower was as the outlook for at least the next 2 weeks has turned increasingly favorable or, rather, less unfavorable. Monday's run of the gold standard 44-day long-term ECMWF-EPS trended sharply colder, especially for mid-April through mid-May across the central and northern US, sufficiently so to squeeze a last bit of heating demand out of the season. Additionally, both the near-term ECMWF ENS and GFS ENS trended colder for their 7-14 day period. What had earlier been a prolonged period of warmth for the first half of April has now been whittled down to as few as 5 or so days from April 5th to 9th, or so. These changes are shown in my Hybrid Model--which integrates all of these models as well as the long-term CFSv2 model--in the Figure to the right. After a short period of below-average gas-weighted degree days (GWDDs) over the next week, degree days could be above-average throughout much of the upcoming 6-week period, particularly during the April 10-17 period. However, because the mid-to-late April anomalies are small and even moderate deviations still mean mild temperatures this time of year and the market is still loose thanks to record production, daily storage injections will still likely climb consistently above the 5-year average. Nonetheless, the magnitude of these bearish anomalies has decreased considerably over the last two days. At this time, I am projecting natural gas inventories 6 weeks from now to be near 1620 BCF, 400 BCF below the 5-year average. This represents a contraction of around 120 BCF from current levels, but the deficit has increased by around 50 BCF from weekend projections. Given these trends, why then did natural gas fall on Tuesday? I suspect investors remain concerned about record production. The EIA announced last week that output spiked to a new all-time high of 89.3 BCF/day after months of no growth, raising concerns that we may be seeing a new wave of supply coming online, especially if pipeline capacity out of the Permian Basin comes onboard earlier than anticipated. However, these are longer term concerns. Given the recent evolution of the 6-week forecast, I feel that upside potential is beginning to once again outweigh downside risk, though I am certainly not ready to bet the farm on this. I feel that prices under $2.70/MMBTU represent a decent buying opportunity, though under $2.65/MMBTU would be better. My upside price target is only $2.80/MMBTU as I feel that seasonality and record production will continue to weigh on sentiment. Click HERE for more on the near- and long-term outlook on my Advanced Modeling Page.

While natural gas languishes in a tug-of-war between tepid bulls and bears, the former have been the clear winner in 2019 for oil as prices rose to a new 5-month high yesterday. WTI rose 99 cents or 1.6% to settle at $62.58/barrel, its 3rd straight day of gains, while Brent rose a lesser 36 cents to $69.37/barrel. The commodity continues to be driven higher by a bullish combination of aggressive moves by OPEC and, to an extent, Russia, to cut global supply, chaos in Venezuela that has involuntarily cut its output, and a steadily falling US rig count that has not yet responded to higher prices. According to my Fair Price Model, oil is trading at a mere 2.9% below its Fair Price of $64.66/barrel based on current inventories which, coupled with the nearly unabated rally over the past several months, could prompt a near-term pullback, especially if US inventories start to disappoint or OPEC moves to relax its production curbs. Regardless, at this time, I am maintaining a $65/barrel 2019 price target on WTI which, based on current trends, could turn out to be conservative.

My Oil & Natural Gas Portfolio took advantage of gains in oil and shrugged off the pullback in natural gas to rise to a new 2019 high yesterday. The Portfolio finished up +0.2% at session highs, driving 2019 year-to-date gains to +11.1% through the first 63 trading days of 2019, or +44.4% annualized. Once again, I made no trades yesterday--because I didn't need to. My long oil position stands at 6.3% via short DWT and is up +31.8% from my basis. Despite the possibility of a near-term pullback, I have no intention of trimming this position below my $65/barrel WTI price target. I would not consider adding to it unless WTI falls below $60/barrel. My natural gas net long position stands at 5.3% of my holdings with a 9.4% DGAZ short partially offset by a 4.1% UGAZ short. Should the commodity fall under $2.65/MMBTU, I will likely add to this position, boosting total exposure to around 7.5% of my holdings, though I will do so cautiously and with a close eye on the temperature outlook. My upside price target at this time is $2.80/MMBTU at which point I will probably flip to net short. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Petroleum Status Report this morning that covers the week of March 23-29 that ended last Friday detailing crude oil, distillate, and gasoline inventories as well as supply/demand data. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting a +3.0 MMbbl crude oil inventory build. In contrast to the bullishness of the past 3 reports, this would be 2.7 MMbbls bearish versus the 5-year average +0.3 MMbbl build. On the other hand, the API is also forecasting that gasoline stocks fell -2.6 MMbbls, more than double the 5-year average -1.2 MMbbl draw, while distillates fell -1.9 MMbbls versus the 5-year average +0.9 MMbbl build. As a result, Total Petroleum Inventories (crude oil + gasoline + distillates) fell by -1.5 MMbbl, slightly bullish versus the 5-year average -1.3 MMbbl. However, because investors seem to care about crude oil inventories more than refined products, I feel that this report is overall rather neutral. The week's supply and demand data will be impacted by the closure of Houston's Ship Channel as authorities continue working to clean up the previous week's fire at the International Terminal's facility. Regardless, I will be closely eyeing imports--particularly from Saudi Arabia and Venezuela--as these have been one of the major driving forces of the recent move higher. I will also be closely monitoring exports as the Brent-WTI spread has contracted down to $6.79/barrel, down more than 30% from the winter highs above $10/barrel, which is less favorable for exporters. Overall, I feel that should the EIA announce a build of over +2.0 MMbbls, oil will pull back, though I view this as a possible buying opportunity for the aggressive trader as large draws are still likely in the weeks to come.

Natural gas demand will fall sharply for a second straight day today as the early-week shot of unseasonably chilly temperatures have largely been expunged. Temperatures today will climb back above-average across the densely-populated I-95 corridor with Washington, DC and Philadelphia both reaching the upper 60s and New York City and Boston the mid-60s, 10F-15F warmer than normal. And just one day after recording measurable April snowfall for only the sixth time in its history, Charlotte, NC will top 70F today, 5F warmer-than-normal. Further west into the Tennessee Valley, temperatures will be mild with Atlanta, Nashville, and Little Rock all reaching the low 70s, around 5F warmer than normal. Below-average readings will be restricted to parts of southeast Texas with Houston only reaching 70F today and the northern Plains with Omaha stuck in the lower 50s. Overall, however, today's forecast mean population-weighted mean nationwide temperature today will warm 3.6F from Tuesday to 54.8F today, 0.7F warmer-than-normal. Total Degree Days (TDDs) will fall to 10.7 TDDs today, 1.6 TDDs fewer than normal an the 14th fewest for April 3 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 withdrawal for today, 7 BCF larger than yesterday's flat inventories and 6 BCF bearish versus the 5-year average. Demand will have fall around 14 BCF over the past two days alone as temperatures have rapidly moderated. By tonight, projected Realtime inventories will be near 1122 BCF while the storage deficit versus the 5-year average will contract to -517 BCF. The bearishness of the build will be fueled by lagging LNG feedgas demand. Flows today will be just 3.66 MMbbls, as Sabine Pass Trains 1 and 2 remain shut down for maintenance, even as feedgas to Corpus Christi reaches a new high above 0.85 MMbbls/day. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories.