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October 4, 2019

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Weather Trumps Storage: Natural Gas Snaps Record Losing Streak In Unexpected Fashion; Domestic Production Reaches Another All-Time High As Permian Floodgates Open; Natural Gas Undervalued Based On Current Inventories, But Bearish Long-Term Temperature Outlook And Overvaluation Likely To Limit Significant Rally--For Now


6:00 AM EDT, Friday, October 4, 2019
In its weekly Natural Gas Storage Report for September 21-27, the EIA announced Thursday that inventories rose by +112 BCF. This was 5 BCF above my +107 BCF projection and an ugly 29 BCF bearish versus the 5-year average. It was the single largest injection on record for the September 21-27 period, topping 2014's +110 BCF build. All five storage regions saw bearish injections. On an absolute basis, the Midwest saw the largest build at +39 BCF, 7 BCF bearish versus the 5-year average. Compared to its 5-year average, the South Central Region saw the most bearish injection at +31 BCF, 13 BCF bearish versus the 5-year average, impressive given the intense heat across Texas and parts of the Deep South during the week. With the build, the South Central year-over-year topped a massive +200 BCF or +24%. All of the storage regions remain at surpluses versus 2018 of at least 8%. However, only the Midwest Region is at surplus versus the 5-year average (currently at +28 BCF or 3%). However, the storage deficits in the East and Mountain Regions are at -2 BCF and -3 BCF at one or both are likely to flip to surpluses with next week's storage injection. Click HERE for more on the latest EIA-reported


In the afternoon, the EIA released its weekly supply and demand data covering September 26-October 2 (different than the storage week of September 21-27). For a second straight week, natural gas production saw another spike, this time by 0.9 BCF/day from the previous week to 94.0 BCF/day, a new all-time high and up a massive 7.3 BCF/day from a year ago. In the past two weeks alone, production is up 1.8 BCF/day, largely due to initiation of flows on the Gulf Coast Express Pipeline that is unloading the Permian Basin. Canadian imports also picked up by 0.3 BCF/day, pushing total supply dangerous close to 100 BCF/day for the first time at 98.7 BCF/day, up +6.9 BCF/day from last year. On the demand front, Mexican exports are benefiting from the new Permian Basin capacity and rose to a new all-time record of 5.4 BCF/day, up 0.4 BCF/day year-over-year. Powerburn was flat at 33.2 BCF/day from last year, but is still up 1.8 BCF year-over-year. Even with flows to Cove Point offline for most of the week, LNG exports held near a record high at 6.3 BCF/day, more than double last year, thanks to record flows to the Freeport LNG plant, also courtesy of increased flows from the Permian Basin. Total Demand rose to 83.8 BCF/day week-over-week, up +6.9 BCF/day year-over-year. With total supply up by the same margin from 2018, the year-over-year natural gas supply/demand imbalance appears to be flat. However, temperatures last week were considerably hotter than the previous year. When temperature is removed as a variable, the temperature-adjusted year-over-year imbalance flips to 0.6 BCF/day loose versus the 5-year average, unchanged from last year. This means that for any given temperature that I would expect the daily storage injection to be 0.6 BCF/day larger than if the identical temperature set-up had occurred. This is a better reflection of the underlying fundamental health of the sector. And with production at record highs and powerburn demand to continue its seasonal decline, I expect the imbalance to loosen further in the weeks to come. Click HERE for more on the latest natural gas supply and demand data.


Unsurprisingly, immediately following the EIA's Storage Report, fell more than 1% to as low as $2.22/MMBTU. For the remainder of the day, however, something unexpected happened: natural gas rallied. Natural gas investors overlooked the disappointing EIA storage numbers and instead focused on the near-term computer models which have started coming in line with an early-season arctic intrusion next week. Aided by a massively overcrowded short trade, the commodity jumped 8 cents or 3.7% to $2.33/MMBTU, snapping a record-setting 12-session losing streak. However, even with the cooling trend in the near-term forecast, the outlook for the remainder of October into early November, marking the beginning of the withdrawal season, continues to look warmer-than-normal. At this time, after accounting for opposing influences of record production and colder temperatures, I am projecting season-ending inventories at around 3856 BCF. the fourth largest EOS all-time and within 6 BCF of the highest projection this summer. While it was certainly reasonable for the dip buyers to step in yesterday, I feel that this rally will be hard to sustain unless another bullish catalyst presents itself. Weather-driven rallies are notoriously difficult to maintain, which will likely be made all the more difficult because this upcoming cooldown still looks to be shortlived with the key late October-early November period looking warmer-than-normal. Further, while the commodity is still undervalued by 9% versus its Fair Price based on current inventories alone, natural gas is overvalued by 2.4% when Fair Prices and futures prices are averaged for the full 8 month period for which I make projections, thanks to the combination of above-average forecast temperatures and a production-driven loosening of the supply/demand imbalance. For this reason, I am not an aggressive buyer here. I would still be unsurprised to see the commodity make new lows, falling under $2.20/MMBTU before the end of the withdrawal season, should late October and November verify as warmer-than-normal and inventories top 3850 BCF.

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Natural gas demand will inch slightly lower today as much cooler temperatures expand eastward. Boston will only reach the low 60s today while New York City and Philadelphia will reach the low-to-mid 70s, each within 5F of normal. Pittsburgh will only reach the low 60s, 5F cooler-than-normal and nearly 30F colder than just 3 days ago when readings were challenging 90F. Seasonal cool temperatures will persist across the Midwest and Great Plains as well with Minneapolis only reaching the upper 50s, Kansas City and St Louis--which was pushing the mid-90s earlier in the week--only in the mid-60s, all 5F-10F cooler-than-normal. Unseasonable warmth will be squelched further to the south and east with Charlotte, Columbia, and Atlanta still seeing mid-to-upper 90s, a remarkable 15F-20F hotter-than-normal. Overall, today's forecast mean population-weighted mean nationwide temperature will cool -2.6F from Thursday to 65.9F, just 1.6F above-average, compared to the nearly 7.5F above-average earlier in the week. Total Degree Days (TDDs) will fall to 9.0 TDDs, 1.9 TDDs greater than normal and the 12th most for October 4 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 +15 BCF/day daily natural gas storage injection, around 0.3 BCF/day larger than Thursday and 2 BCF bearish versus the 5-year average. Click HERE for more on today's projected daily injection and Realtime natural gas inventories. For the storage week of September 28-October 4 that ends today, I am projecting a +105 BCF natural gas storage injection, a third straight triple digit build despite record-setting heat throughout the week. Such an injection would be 16 BCF bearish versus the 5-year average and 14 BCF larger than last year's injection. As the Figure to the right shows, it would be the single largest injection for the September 28-October 4 period in the last 5 years, just topping 2014's +104 BCF build, the second straight week that this has been the case. It would be the third largest injection all-time for the week, behind only 2011's +106 BCF build, and I wouldn't be surprised to see that number fall as well. Over the past 22 days for which I have been making projections for the week, this is the highest projection so far with projections as low as +82 BCF back on September 20--before the spike in Permian takeaway. Should a +105 BCF injection verify, natural gas inventories would rise to 3422 BCF while the long-standing storage surplus versus the 5-year average would slump to just -2 BCF on its way to flipping to a surplus on Saturday or early Sunday. The EIA will release its official storage numbers for the week next Thursday, October 10, at 10:30 AM EDT. Click HERE<./b> for more on this week's projected inventory build.


Looking ahead to next week, natural gas demand will fall as generally more seasonable temperatures overspread the major population centers, cutting both heating and cooling demand. As the Figure to the right shows, daily injections will rise from around +13 BCF/day on Saturday to as high as +18 BCF/day by Tuesday, a whopping 6 BCF/day bearish versus the 5-year average +12 BCF/day. For the full week of October 5-11, I am projecting an exceptionally bearish +119 BCF storage injection, 38 BCF bearish versus the 5-year average. It would be the largest injection in the last 5 years by a whopping 26 BCF over the +93 BCF injections from 2014 and 2015. Should it verify, natural gas inventories would reach 3541 BCF with the long-standing storage deficit versus the 5-year average flipping to a +36 BCF storage surplus. Click HERE for more on next week's projected injection.