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September 30, 2019

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Desperate Natural Gas Bulls Increasingly Dependent On Bailout From Mother Nature As Production Reaches New Highs & Powerburn Sees A Seasonal Fade; Natural Gas Short Trade Increasingly Overcrowded As Buyers Flee & Bears Reload, But Don't Bet On A Short Squeeze Just Yet; Record Southern Heat & Northern Chill To Drive Near-Average Storage Injection Today


6:00 AM EDT, Monday, September 30, 2019
Weighed down by a third straight larger-than-expected EIA-reported storage injection--and a triple digit build to boot--and an October outlook that continues to look warmer-than-normal, natural gas steadily pulled back last week. The commodity fell 4 cents or 1.6% on Friday to settle at $2.40/MMBTU, down 5.9% on the week. Natural gas has now given up nearly 50% of its gains from the August and early September rally. With the commodity trading at $3.01/MMBTU this time last year, natural gas is now down a steep 20.1% year-over-year. With a bearish near-term temperature outlook, a long-standing storage deficit versus the 5-year average that is poised to flip to a surplus for the first time in near 2 years, a loosening supply/demand imbalance, and natural gas production that is back to setting all-time records, it would seem that there isn't much hope for the bulls here. On the one hand, the commodity is now undervalued by 7.5% versus a Calculated Fair Price of $2.60/MMBTU according to my Fair Price Model. But with the storage deficit versus the 5-year average expected to flip to a surplus versus the 5-year average just in time for the heating season, the commodity quickly becomes overvalued with a Fair Price falling to near $2.40/MMBTU even as wintertime Futures price top $2.70/MMBTU. This will make it extremely difficult for natural gas bulls to support a sustainable rally in this environment and I would not be surprised to see more selling near-term with natural gas prices perhaps even falling under $2.30/MMBTU.


This being said, it is worth noting that as we move towards the onset of the withdrawal season, the focus of investors begins to change. During the summer, traders care more about the underlying fundamentals, namely the supply/demand imbalance, itself driven by elements such as production, powerburn demand, imports, exports, etc--which, on the whole, are quite bearish as discussed above. During the winter, however, the focus shifts much more to the near-term temperature outlook due to the larger weather-driven swings in demand. Prices can still spike even in a bearish fundamental environment if the temperature set-up is favorable. With an overcrowded short trade (more on that below) and a significant year-over-year discount, I expect natural gas will be highly susceptible to these sudden spikes with even the hint of a late October or early November arctic outbreak in the near- or even long-term models. Such spikes will be wildcards, not supported by fundamentals and would require Mother Nature to led a considerable hand. At this time, I feel that natural gas could continue to see steady bleeding as short-sellers milk the trade for all its worth, resulting in prices drifting lower through early October thanks to the bearish fundamental picture. But, due to the large year-over-year decline, I feel that the magnitude of upside potential outweighs the magnitude of downside risk. It is for this reason that I have not abandoned my natural gas long trade and am maintaining a $2.60/MMBTU upside price target. I would not be an aggressive buyer here, but those already in the trade with a longer-term timeframe and the conviction to hold through near-term selling will likely be rewarded. For the trader looking to enter a new position, I feel that the best place right now is the sidelines. Should the commodity fall under $2.30/MMBTU, it would be reasonable to begin buying and should the commodity top $2.50/MMBTU, I would consider adding a short position.


Meanwhile, selling pressure continued in the crude oil sector as the commodity saw another weekly decline that effectively wiped out the surge in prices two weeks ago following the attacks in Saudi Arabia. WTI fell 50 cents or 0.9% on Friday to settle at $55.91/barrel, recovering some of its early-session losses when prices briefly dipped under $55/barrel. Brent fell 83 cents to $61.91/barrel. On the week, WTI finished with a 3.8% weekly loss while Brent was down a comparable 3.7%. The losses were multifactorial, driven by a combination of rising US inventories and the potential for a thawing of the long-standing Saudi-Houthi rebel conflict that could bring some stability to the Middle East geopolitical hotbed. On the other hand, Baker Hughes reports that oil E&Ps continue to curtail drilling. The company announced that the rig count fell by 6 last week to 713 rigs, a sixth straight drop and the lowest that the rig count has been since April 2017. Since the start of the year, the oil rig count is down a steep 172 rigs or -19%. Longer term, this is likely to limit further gains in domestic production, which already seems to be plateauing around 12.5 MMbbls/day. All told, I remain quite bullish on the oil sector despite the selling and feel that prices are steeply undervalued at current levels. According to my Fair Price Model, the commodity is trading at a 12% discount versus a Fair Price of $63.54/MMBTU. With a record-breaking October and November expected for exports, I expect inventories to continue falling through the end of the year, likely dropping to near 375 MMbbls by the end of 2019. As a result, my Fair Price rises to near $68/barrel by mid-winter, an undervaluation approaching 20%. Due to the apparent subsiding of tensions in the Middle East, I am revising my WTI upside price target to $65/barrel from $70/barrel, still more than 16% worth of upside. Compared to natural gas, I feel that WTI represents a much stronger long opportunity at this time.


On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly data detailing natural gas money manager long and short positions through Tuesday, September 24. The Commission announced that the short-covering that had overtaken the sector for the previous 6 weeks has ceased. Open short positions rose by 1,679 contracts to 208,135 but are still well below the 52-week high of 367,343 positions from back in early August. Additionally, selling resumed with long holdings falling 14,190 contracts to just 133,314 positions, just above the 52-week low of 124,694. As a result, the Bullish Sentiment--the percentage of positions held long--fell by 3% week-over-week to 39%. This is still 12% above the 52-week low, but is an excessive 31% lower than 2018 and 22% below the 52-week average. Additionally, this data is up to date only through last Tuesday and with an additional 3 days of selling not yet accounted for, it seems likely that the Sentiment is now closer to 35%. Clearly, the natural gas long trade is not a popular one right now. This overwhelming dominance of the bears will limit the bulls' capacity to kickstart a rally. Even last month's nearly 30% spike was driven not by buying--open longs are within 10,000 contracts of 52-week lows--but by short covering. These same smart shorts now seem to have started reloading their positions. Long-term, the short trade is extremely overcrowded. Should the fundamentals change--or, more likely, Mother Nature lend a hand in the form of an early-season arctic outbreak--this one-sidedness could trigger a rapid short squeeze as the short covering swamps the sector, similar to what was seen earlier this month or, more spectacularly, last November. Click HERE for more on the latest CFTC-reported natural as long and short positions.


The EIA will release its weekly Natural Gas Storage Report for September 21-27 this Thursday at 10:30 AM EDT. Following 3 straight larger-than-expected storage injections, natural gas traders will likely be on edge heading into this report. At this time, I am projecting a +103 BCF storage injection. Such a build would be 20 BCF bearish versus the 5-year average and 12 BCF larger than last year's +91 BCF injection. Not only would it be the second largest injection in the last 5-years behind only 2014's +110 BCF build, a +103 BCF build would also be the second largest injection all-time for the week dating back to 1994. Should it verify, natural gas inventories would rise to 3308 BCF while the storage deficit versus the 5-year average would slide to just -27 BCF. Inventories would finish the week +456 BCF compared to last year. Click HERE for more on my projection for this week.


Over the weekend, natural gas demand rebounded slightly as unseasonably warm temperatures across the Deep South and Eastern Seaboard drove late-season cooling demand and a record-setting September blizzard across the northern Rockies boosted early-season heating demand across an albeit sparsely populated area. Daily storage injections fell from +15 BCF/day to wrap up last week to +14 BCF/day and +13 BCF/day on Saturday and Sunday, respectively, very close to the 5-year average +13 BCF/day build. Demand will hold largely steady today as the same underlying pattern remains in place. The largest anomalies today will be found across the Deep South, Ohio Valley and western Great Lakes. Minneapolis, MN could reach 85F today, a massive 20F warmer-than-normal while St Louis, MO, Louisville, KY, and Nashville, TN could all top 90F, 15F hotter-than-average. Across the Southeast, most areas will see 90F heat with Atlanta, GA potentially reaching 95F, 15F-20F above-average. On the flip side of the coin, exceptionally chilly temperatures will continue across the Rockies and West in the wake of the weekend's big storm. Billings, MT will only reach the lower 40s, 25F cooler-than-normal, while Boise, ID and Salt Lake City, UT will only see the upper 50s, 10F-15F below-average. Across the West Coast, Portland, OR is under a frost advisory this morning for lows in the mid-30s while Sacramento, CA and Fresno, CA will only climb into the upper 60s to near 70F, 10F-15F below-average. The chill across the Rockies and Pacific Northwest will likely spur early-season heating demand, but the cooldown across California and the Southwest will likely suppress late-season cooling demand. Overall, today's forecast mean population-weighted nationwide temperature will cool -0.4F from Sunday but will still be a very impressive 5.0F above-average. Total Degree Days will hold steady at 9.7 TDDs, 2.6 TDDs greater than normal and the 4th most for September 30 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 +13 BC/day daily natural gas storage injection, unchanged from Sunday and just under 1 BCF/day bearish versus the 5-year average. By tonight, look for Realtime natural gas inventories to reach 3345 BCF--already 100 BCF larger than last year's November end-of-season peak--while the storage deficit versus the 5-year average continues its relentless trend towards flipping to a surplus, inching down to -24 BCF. The year-over-year surplus will climb by 1 BCF to +457 BCF or +16%. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.


For the remainder of the week, natural gas demand will hold roughly stable with daily injections between +13 BCF/day and +14 BCF/day. Unseasonably hot temperatures will shift eastward across the Southeast and Ohio Valley and will overspread the Eastern Seaboard on Wednesday, before being squeezed Southeastward as much cooler temperatures expand across the northern tier. For this time of year, such a hot-across-the-South-and-cold-across-the-north is about as favorable as the temperature outlook can get, boosting cooling demand in areas where temperatures can still get hot enough to support it and cold enough in areas where early-season chill can actually result in residents turning on the heater. However, even with this consistently favorable pattern, I am still projecting a bearish +91 BCF natural gas storage injection for the week, 3 BCF larger than the 5-year average. This shows the impact of record domestic production--which topped 94 BCF/day over the weekend for the first time ever--and seasonally fading powerburn demand (even with intense southern heat). Such an injection would be the 3rd largest in the last 5 years behind only 2014's +104 BCF injection and 2015's +97 BCF injection. Should a +92 BCF build verify, natural gas inventories would rise to 3400 BCF while the storage deficit versus the 5-year average would inch lower to -24 BCF. Of note, on the dedicated weekly storage pages, I am now including the trend in my twice daily projections so that you can see if the projection has been rising or falling. As the Figure to the right shows, this week was initially projected to be a +95-100 BCF injection before dropping as low as +80 BCF as the temperature outlook trended more favorable. The projection then jumped again as the supply/demand imbalance loosened as domestic production jumped to record highs. Click HERE for more on this week's projection--including the new trend data--or click here for links to individual storage pages for each of the next 4 weeks.