January 31, 2019

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EIA Projected To Announce Modestly Bullish -188 BCF Natural Gas Storage Withdrawal In Today's Report, But Investors Still Taking Their Marching Orders From The Computer Models; Realtime Storage Projected To Fall Under 2000 BCF Today As The Polar Vortex Rages On; Crude Oil Soars After Inventories Rise Less Than Expected & Imports Plunge

6:00 AM EDT, Thursday, January 31, 2019
Natural gas prices resumed their march lower on Wednesday as investors continued to dismiss the impact of ongoing and future bouts of arctic air in lieu of a near-term warm-up. In its first day of trading as the Front Month Contract, the March 2019 contract settled down 5 cents or 1.7% to close at $2.85/MMBTU. It was the lowest close since September 17. There was no major change in the forecast for the next several weeks to drive Wednesday's losses. The ongoing arctic outbreak is just as bitter as expected. It will be replaced by a ridge of high pressure and a southerly flow by this weekend, leading to the same dramatic warm-up as expected. And beginning by February 8, models continue to expect a return to consistently colder-than-normal temperatures across the Central US extending towards the Eastern Seaboard, as expected. As the Figure to the right shows, the 14-day gas-weighted degree day (GWDD) outlook as forecast by the GFS and ECMWF has continued to decline. However, this has not necessarily been due to a warming trend. Rather, the current 14-day period no longer includes Wednesday's record-setting contribution to GWDDs and, beginning with the 12Z model runs today, will not include Thursday's nearly impressive contribution. This gives this illusion of warming rather an actual run-over-run decline in the 14-day period. If anything, individual days trended slightly colder last night. Click HERE for more on the near-term computer model outlook on my Advanced Models Page.

My sentiment towards natural gas remains unchanged. The commodity is still looking for a catalyst, bullish or bearish. The current record-setting arctic outbreak will result in the natural gas storage deficit versus the 5-year average topping -450 BCF and greatly increases the chances that inventories finish the withdrawal season at under 1500 BCF and maybe even a year-over-year deficit closer to 1200 BCF. However, with the pending warm-up and subsequent cooldown, I am now expecting the deficit to hold roughly flat for the next month, blunting any bullish momentum. Additionally, LNG growth remains stalled as exports out of Corpus Christi remain at 0 BCF and Sabine Pass is operating at well-below capacity. On the other hand, domestic production has also stalled out at under 87 BCF/day, due to a combination of freeze-offs and decreased pipeline capacity, blunting one of the biggest bearish arguments. With supplies sufficient to easily make it through the winter and natural gas investors at baseline being an inherently bearish bunch, the commodity has continued to slowly fade as it looks for a new catalyst to generate sharper, more confident moves. I feel that the commodity will have difficulty dropping under $2.75/MMBTU, which acted as a price floor for much of last year when inventories were higher and the supply/demand balance was loosening much faster than it is presently. I am maintaining my upside price target of $3.15/MMBTU, which I expect will require the storage deficit versus the 5-year average to top -500 BCF, which itself requires that the February cooldown verify, and lengthen in duration..

Meanwhile, in its weekly Petroleum Status Report, the EIA announced Wednesday morning that crude oil inventories rose by just +0.9 MMbbls. While normally a build is a build, it was considerably smaller than Tuesday's American Petroleum Institute (API) forecast of a +2.1 MMbbl build and quite bullish versus the 5-year average +7.4 MMbbls. The bullish build was driven entirely by a sharp 1.1 MMbbl/day week-over-week drop in imports, which tumbled to just 7.08 MMbbls/day, the lowest since March 16, 2018, as shown in the Figure to the right. This cut weekly supplies by nearly 8 MMbbls. As bullish as this trend was, it was countered by drops in refinery and export demand. Refinery inputs slid by 590,000 barrels/day to 16.46 MMbbls/day, reducing yearly gains to just +450,000 MMbbls/day. Exports dipped by a slight 10,000 barrels/day but broke through the key 2 MMbbl/day threshold to 1.94 MMbbls/day, up a negligible 180,000 barrels/day from 2018. Production held flat at an all-time high of 11.9 MMbbls/day, up 1.98 MMbbls/day year-over-year. With the build, crude oil inventories rose to 445.9 MMbbls, but the storage surplus versus the 5-year average fell sharply to +30.6 MMbbls. Inventories are +27.5 MMbbls higher year-over-year.

Overall, this was a very bullish report--but only if the decline in imports is the beginning of a trend because, otherwise, the market remains quite loose with soft exports and refinery demand. Fortunately for the bulls, this seems to be the case. As the Figure to the right shows, the largest weekly drop in imports came from Saudi Arabia which tumbled by 528,000 barrels/day week-over to just 442,000, the lowest since October, 2017. The Kingdom has pledged repeatedly to sharply cut imports to the US as part of its strategy to rebalance markets so, while the losses from Canada may recover (although that country, too, has pledged to cut production), we may finally be seeing the impact of OPEC's influence on global supply.

As a result of the smaller-than-expected build and ongoing concern over the situation in Venezuela, WTI rose 92 cents or 1.7% to close at $54.23/barrel, the highest close since November 21. Brent tacked on 33 cents or 0.5%, rising to $61.65/barrel as the Brent-WTI spread continues to drift lower, now under $8/barrel. If we see more of these reports, oil has room to rise and could certainly top $55/barrel soon. However, should the Venezuela situation stabilize and Saudi Imports bounce back next week, the commodity remains due for a pullback. While I'd be nervous aggressively shorting into what appears to be significantly improving sentiment, if I was short--which I am--I would not yet abandon all hope. Should Maduro be ousted (peacefully), I would not be surprised to see oil promptly sell-off. Given the improved optics of US supply/demand balance, however, I am raising my downside price target of a pullback to $52/barrel. Longer term, I remain bullish on the sector and am targeting $60/barrel WTI in 2019.

My Oil & Natural Gas Portfolio finished nearly flat on Wednesday as losses from natural gas long and oil short trades were countered by profits from my equities holdings. The Portfolio finished the day down -0.1% as 2019 year-to-date gains held nearly steady at +6.8% or +85% annualized. I made a single trade on Wednesday. I put some cash to work, adding Kinder Morgan to my equity portfolio. Not only does the company own the largest domestic natural gas pipeline network and is involved in the crucial 2.1 BCF/day Permian Highway Pipeline, the company also owns the Elba Island LNG plant in Georgia which should begin exporting in 1Q 2019. The company also issues an attractive 4.5% dividend. The company is at 52-week highs and has strong momentum. My starting position size is a robust 7.8% and my 2019 price target is 22%. My oil long position stands at a small 2.3% via short UWT, my smallest position. Should WTI pull back to $52/barrel, I will likely close this trade off and look to move long. My net long natural gas position is now my largest directional holding, worth 12.0% of my holdings with a 14.8% short DGAZ position partially offset by a 2.8% UGAZ short. This is the upper limit of my risk tolerance and, should natural gas continue to fall, I will either cover some DGAZ or short additional UGAZ to reduce directional exposure under 10%. My upside price target is now $3.15/MMBTU. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for January 19-25 this morning at 10:30 AM EDT. I am projecting a total -188 BCF storage withdrawal, a modest 38 BCF bullish versus the 5-year average and 62 BCF larger than last year's disappointing -126 BCF withdrawal. As the Figure to the right shows, it will be the second largest withdrawal for the January 19-25 period in the last 5 years, behind only 2014's -243 BCF draw. The bullish draw was driven by a combination of cooler temperatures last week, averaging 40.3F versus 41.0F the week before, and a slowdown in domestic production as reported by the EIA with output declining 0.9 BCF/day, driven by a pipeline explosion and possible freezeoffs. Should a -188 BCF withdrawal verify, natural gas inventories would fall to 2182 BCF while the storage deficit versus the 5-year average would be back on the rise after a multi-month slump, climbing to -343 BCF. And after only a single week, the year-over-year storage surplus will revert back to a -30 BCF deficit. There is some increased uncertainty associated with the projection due to the impact of the Martin Luther King day holiday on temperature-independent demand, and this projection has already been trimmed by a total of 7 BCF over the past 5 days after finalized pipeline numbers were integrated into the model. Click HERE for more on this week's projected draw.

Investors have long since priced in the impact of last and this week's cold--and then promptly priced in the impact of the pending warm-up, resulting in the sell-off over the past week. For this reason, I expect that, once again, investors will be more focused on changes in the near- and long-term computer models and today's withdrawal not significantly impact natural gas prices unless it is really good or, more likely, really disappointing. Investors are looking for excuses to sell, not buy, right now and I feel that it would take a massive number--a -198 BCF withdrawal or larger--to make them rethink that attitude and take March 2019 back above $2.95/MMBTU near-term. On the other hand, I feel that a reported withdrawal of -184 BCF or smaller would be sufficiently disappointing that, combined with any warm-up in the models, would facilitate a move to new lows, perhaps as low as $2.80/MMBTU. A reported draw between -184 BCF and -198 BCF would be neutral versus expectations with prices equally likely to rally or pullback.

Check back at 10:30 AM EDT for the official EIA storage withdrawal on my Current Natural Gas Inventories Page HERE. Also, I now have weekly natural gas supply and demand statistics on my Natural Gas Supply & Demand Page HERE that should be updated between 3 pm and 4 pm EDT.

Natural gas demand will dip slightly today as we enter the very early stages of warming up from this historic arctic blast. That won't be happening this morning as Chicago flirts with its all-time record low of -27F and Illinois with its all-time low of -37F. Minneapolis will once again near -30F. All of these readings are -35F-40F colder-than-normal, epic cold even in a part of the country that is used to it. However, by this afternoon, temperatures will rise by 5F-10F day-over-day with Minneapolis reaching -5F, Chicago near 0F, and nearly 10F, still 20F-25F colder-than-normal. However, much of this "warm-up" will be countered by further cooling across the East. Boston, New York City, and Philadelphia will struggle to reach 20F today--all 20F colder-than-normal--while Richmond and Norfolk in Virginia fail to break freezing, 15F-20F below-average. All told, the forecast mean population-weighted nationwide temperature for today will actually inch slightly colder to 29.3F, down 0.2F from Wednesday and a massive 10.6F colder-than-normal. However, due to the pattern of the coldest temperatures, forecast Total Degree Days will also dip slightly to 35.3 TDDs, still a massive 9.0 TDDs greater than normal and, for a second straight day, the single most for January 31 in the last 38 years. Click HERE for more on today's temperature and degree day outlook.

Based on today's forecast and early-cycle pipeline data, I am projecting a -47 BCF/day daily natural gas withdrawal, 1 BCF smaller than Wednesday but still a massive 25 BCF bullish versus the 5-year average. By early this morning, I project that natural gas inventories will fall through 2000 BCF, almost exactly 2 months after it broke under 3000 BCF on November 30 and 6 days ahead of last year's pace. It will be the fastest pace since inventories fell under 2000 BCF on January 27, 2014. By this evening, projected inventories will be near 1963 BCF. The storage deficit versus the 5-year average will climb to -432 BCF while the year-over-year deficit will near -150 BCF. Click HERE for more on today's daily storage withdrawal and Realtime natural gas inventories. Demand losses will accelerate tomorrow and I am projecting just a -27 BCF/day daily draw to wrap up the week, a mere 6 BCF bullish versus the 5-year average. For the full week I am projecting a -247 BCF storage withdrawal, the second largest every record for January 26-February 1 and 97 BCF bullish versus the 5-year average. I will have much more on this week's projected weekly withdrawal in Friday's commentary, but click HERE for more on my weekly storage page.