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September 3, 2019

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Natural Gas Finds Support As September Temperature Outlook Trends Warmer--But Is The Rally Sustainable? Crude Oil Undervalued But Under Pressure As Global Recession Fears Persist; Hurricane Dorian Looks To Avoid Direct Strike On Florida, But Some Natural Gas Demand Suppression Still Likely As The Storm Grazes The Carolinas


6:00 AM EDT, Tuesday, September 3, 2019
Ahead of the 3 day weekend, natural gas dipped on Friday, falling 1 cent or 0.5% to settle at $2.29/MMBTU. Nonetheless, on the week, the commodity was up a strong 6.5% and booked a 2.3% gain for the month of August. While the market was closed on Monday for Labor Day, natural gas rose in electronic trading, gaining another 1% to top $2.30/MMBTU. The commodity is finding support in a near-term temperature outlook for September that has trended steadily warmer over the past several days. As the Figure to the right shows, as normal 14-day accumulated Gas-Weighted Degree Days (GWDDs) trend lower as we approach the shoulder season, both the 14-day outlooks by the GFS ENS and ECWMF ENS have bucked history and trended higher. Both outlooks are now comfortably above the long-term average. As it stands right now, September looks to start off on an unseasonably warm note, especially across the Southern Tier, a favorable set-up for late-summer gas demand that will squeeze cooling degree days out of some of the largest September demand centers. With domestic production holding at 92 BCF/day near record-highs, such anomalies are only likely to suppress weekly storage injections down to near the 5-year averages rather than outright bullish builds. However, with natural gas prices down over 20% versus 2018 and undervalued by 13% versus my calculated Fair Price, this is sufficient for long-sidelined bulls to start buying. And with only 27% of open contracts held long according to the latest CFTC data--less than half the 52-week average--the short trade remains overcrowded and subject to squeezing. At this time, I am maintaining my $2.40/MMBTU upside price target. But as readers may recall, I flipped from net long to net short the middle of last week when prices topped $2.30/MMBTU on a swing trade via partially offsetting short UGAZ and DGAZ positions, anticipating a loosening of the supply/demand imbalance as powerburn fades as well as near-term losses associated with Hurricane Dorian. With Dorian now expected to merely graze the Southeast and a hot September looking to support cooling demand through at least mid-month, this decision is looking rather unfortunate at the moment. Nonetheless, I would still not be surprised to see prices pull back to $2.20/MMBTU should the September forecast trend cooler--or the October forecast, when heating demand begins to overtake cooling demand, trend warmer. For this reason, I will maintain my current positioning, with a plan to quickly exit the net short position under $2.20/MMBTU and flip back to long.


Meanwhile, crude oil fell sharply on Friday as new tariffs between the US and China were set to take effect over the weekend and Russia indicated that it may be backing away from agreed-upon production cuts. WTI slid $1.61 or 2.8% to settle at $55.10/barrel while Brent slumped $1.24 to $59.25/barrel. On the week, WTI managed a 1.7% gain thanks to a huge -10 MMbbl EIA-reported inventory drawdown, but was still down 5.9% on the month. On Friday, Baker Hughes reported that the oil rig count continued its year-long steady decline, falling another 12 rigs to 742. In the past two weeks alone, the rig count is down a steep 28. For 2019, the rig count is down a steep 143 rigs from 885 rigs. And as the Figure to the right suggests, this drop appears to have accelerated in recent weeks. According to my Fair Price Model, oil remains steeply undervalued by nearly 13% versus a Fair Price of $62.89/barrel. And with the Futures market in backwardation and inventories projected to fall towards 400 MMbbls in the coming weeks, this undervaluation tops 15% by the end of 2019, which may end up being conservative. At this time, I am maintaining a $65/barrel 2019 price target on WTI. On Friday's intra-day dip under $55/barrel, I added to my oil long position via short DWT, boosting my long position to 11.7%, my largest directional long position. With oil still susceptible to sell-offs due to global equity market volatility despite strong underlying fundamentals, I have no immediate plans to add to this position presently.


The EIA will release its weekly Natural Gas Storage Report for August 24-30 this Thursday at 10:30 AM EDT. For the week, I am projecting a +81 BCF natural gas storage injection. Thanks to persistently below-average temperatures across the Central US throughout the week, such a build would be a modestly bearish 15 BCF larger than the 5-year average and 17 BCF larger than last year's injection. As the Figure to the right shows, it would be the second largest injection for the week in the last 38 years, behind only 2015's +89 BCF injection. It would be more than double 2016's tiny +42 BCF injection. The bearish build was driven by persistently cool temperatures across the Central US throughout the week. This suppressed cooling demand with Powerburn averaging just 36.4 BCF/day on the week, up 1.0 BCF/day year-over-year. But with domestic production up nearly 7 BCF/day year-over-year, this small yearly gain in powreburn is insufficient, even with LNG feedgas demand recording a new weekly high. Should a +81 BCF injection verify, natural gas inventories would rise to 2938 BCF while the storage deficit versus the 5-year average would contract to -85 BCF and the year-over-year surplus would rise to +380 BCF. Click HERE for more on last week's projected injection.


Over the long weekend, daily natural gas storage injections held just above the 5-year average thanks to continued below-average temperatures across the northern half of the nation. Daily injections of +12 BCF/day on Saturday and Sunday dropped to +11 BCF/day Monday, still slightly bearish versus the 5-year average +10 BCF/day. Demand will inch higher today as late-summer warmth dominates the Eastern Seaboard--even as Hurricane Dorian lurks just offshore--South Central US, and West Coast. Highs today could reach 90F as far north as Atlanta, Charlotte and Raleigh, around 5F above-average, while New York City and Philadelphia will be just above-average in the low-to-mid 80s. Further West, Nashville will also top 90F while mid-to-upper 90s will be widespread across Texas and Oklahoma City, boosting late season cooling demand. Below-average readings will be restricted largely to the far northern Plains with parts of North Dakota and Minnesota stuck in the low 60s, up to 15F cooler than normal. Bismarck, ND will struggle to reach 70F, around 8F cooler-than-normal, while Minneapolis will reach the upper 70s, near its seasonal norms. After blasting the Bahamas over the weekend and menacing the Eastern Seaboard, it now appears the Hurricane Dorian will merely graze the coastline. While weakened from its record-setting 185 mph winds from Sunday, the mid-range Category 3 storm has expanded size and, by passing 60-80 miles offshore first the Florida coast line and then Georgia and the Carolinas by late-week, the system will still bring heavy rain and gusty winds. However, fears of catastrophic damage and widespread power outages that could suppress natural gas powerburn demand now appear unwarranted. Overall, today's forecast mean population-weighted mean nationwide temperature will rise by 1.0F to 77.1F, a steep 3.0F hotter than normal. Total Degree Days (TDDs) will rise to 11.0 TDDs, 1.7 TDDs greater than normal and the 6th most for September 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 +10 BCF/day daily natural gas storage injection, 1 BCF smaller than Sunday's injection and right at the 5-year average. Powerburn demand will likely reach 37 BCF/day or 38 BCF/day today, up at least 3 BCF/day from 2018. LNG feedgas demand will hold nearly steady at 6.1 BCF/day today, up a robust 3.2 BCF/day from 2018. Flows to Sabine Pass will fall to 2.7 BCF/day while flows to Cameron will bounce back to 0.45 BCF/day after dipping to just 0.15 BCF/day yesterday, although both of these are subject to revision in later cycles. By tonight, look for Realtime natural gas inventories to be nearing 2982 BCF, just 2 days away from breeching 3000 BCF. The storage deficit versus the 5-year average will hold at -81 BCF while the year-over-year surplus will likewise hold flat at +385 BCF. Click HERE for more on today's projected storage injection and Realtime natural gas inventories.


For the remainder of the week, daily natural gas storage injections look to remain at or below the 5-year average. The exception looks to be Thursday when Hurricane Dorian will likely most directly impact the US, passing over or just offshore of eastern North Carolina. Nonetheless, the combination of power outages and rain-cooled temperatures across the Southeast extending up into the Mid-Atlantic could boost that day's daily build to +12 BCF/day, as shown in the Figure to the right. Overall, for the full week of August 31-September 6, I am projecting a preliminary +77 BCF natural gas storage injection, a slight 4 BCF bearish versus the 5-year average and 9 BCF larger than last year's injection. Should such an injection verify, natural gas inventories would rise to 3015 BCF--within 250 BCF of 2018's peak EOS total--while the storage deficit versus the 5-year average would hold nearly steady at -81 BCF. It would be the third largest injection for the week in the last 5 years, behind only +84 BCF and +92 BCF injections in 2017 and 2014, respectively. The EIA will release its official storage numbers for the week on Thursday, September 12 at 10:30 AM EDT. Click HERE for more on this week's projected injection.