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February 5, 2019

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Bears In Control As Excessive Fear Over Southeastern Ridge Drives Natural Gas To 10-Month Low Amidst Soaring Undervaluation; Projected End-Of Season Minimum Inventories Holding At A Year-Over-Year Deficit; Bearish -9 BCF/day Daily Storage Injection Expected Today As Unseasonable Eastern Warmth Expected For 3 More Days Before Colder Air Arrives


6:00 AM EDT, Tuesday, February 5, 2019
Momentum weighed heavily on the natural gas sector on Monday as the commodity continued to belie fundamentals and trade steadily lower, falling another 7 cents or 2.6%. Monday's close of $2.66/MMBTU for the Front-Month Contract was the lowest since April 19, 2018. An ridge of high pressure across the Southeast continues to be the undoing for natural gas. Both near- and short-term models remain in good agreement that a large area of arctic air will dominate western Canada, the northern Rockies and northern Plains for the next 2-3 weeks or longer. Typically, this would be a favorable scenario for periodic arctic outbreaks across much of the Lower 48 as polar airmasses break off and slide eastward. However, these models are in equally good agreement that a ridge of high pressure across the Southeastern US will be unusually persistent, preventing this progression of colder-than-average temperatures and allowing a warm, southerly flow to persist across some of the major population and demand centers of the Eastern Seaboard through mid-February. It is this fear that is prompting natural gas to fall to 10-month lows despite a modest storage deficit and large undervaluation. However, I continue to feel that this bearish sentiment is overdone. Yes, temperatures are not as cold as they might otherwise be, but long-term models are in good agreement in keeping mean Lower-48 temperatures colder-than-normal--but perhaps not bitterly cold--through at least the first week of March. Yesterday evening, the gold-standard long-term model, the 44-day ECMWF-EPS model, reiterated this forecast, showing strong ridging across the East eventually breaking down and giving way to below-average temperatures by mid-February while a dome of arctic air remains in place over the Rockies and Plains. As a result, my Hybrid Model, which integrates near-term GFS and ECMWF ENS data and long-term ECMWF-EPS and CFSv2 data, shows above-average gas-weighted degree days beginning on February 8 and persisting through March 9, as shown in the Figure to the right. Click HERE for more on the latest near- and long-term model data on my Advanced Model Page.


As a result, I expect natural gas inventories to fall at a pace matching or exceeding the 5-year average beginning late this week and lasting for the next month of so. By the week ending February 22, the storage deficit could be back over -400 BCF and climbing towards -450 BCF by early March. Based on this hybrid model outlook and the underlying supply/demand imbalance, which I calculate to be near 1.2 BCF/day loose temperature-adjusted versus the 5-year average, I am currently projecting that natural gas inventories finish the 2018-2019 Heating Season near 1227 BCF on the week ending March 29. This would be 408 BCF bullish versus the 5-year average, 54 BCF smaller than last year's season-ending tally and, as the Figure to the right shows, the second lowest level in the last 5 years, behind only 2014's 824 BCF. It would also be the ninth lowest season-ending mark in the full 25 years of record. Click HERE for more on long-term natural gas storage projections.


Historically, inventories under 1500 BCF are not compatible with prices under $3.00/MMBTU, much less $2.75/MMBTU. According to my Natural Gas Fair Price Model, based on Realtime inventories, natural gas is undervalued by a massive 32.5% versus its calculated Fair Price of $3.95/MMBTU, based on a storage deficit of -390 BCF compared to storage/price pairs over the past 5 years. Based on my season-ending storage projection of around 1226 BCF, this Fair Price holds nearly steady at $3.97/MMBTU, an undervaluation of 34.2%. And with my calculated temperature-independent supply/demand imbalance narrowing to just 1.2 BCF/day, I expect that subsequent contraction of the storage deficit will be slow and as a result my Fair Price will be resilient near its current level, as shown in the Figure tot he right. In my opinion, investors are overreacting to the impact of the Southeastern Ridge and the less-cold-than-expected trend in the computer models over the past two weeks. I partially understand their point of view: the end of the heating season is fast approaching and, while not excessive, inventories are quite comfortable and record production could easily cut into the deficit over the Shoulder Season. However, should prices maintain current levels, the large undervaluation in natural gas prices will have long-lasting consequences. Namely, production growth will be increasingly restricted, especially if prices can fall to $2.50/MMBTU, fuel-switching will favor strong temperature-independent natural gas demand, and LNG exports, already expected to soar this year, will be given an added boost as the spread between US and worldwide prices widens. This could place natural gas in a similar situation as last year, with a large storage deficit artificially maintained into the Summer and Fall, contrary to market forces that would typically erase it were prices able to top $3.00/MMBTU or $3.25/MMBTU as my Fair Price model would predict. This could send prices towards next Fall's withdrawal season suppressed and, once again, ripe for a price spike. For these reasons, I feel that ultimately natural gas is not sustainable at these levels, near-term temperature outlook notwithstanding. Clearly, the bears have far too strong a stranglehold on the sector to even contemplate natural gas reaching its Fair Price anytime soon, but I do feel that natural gas trades above $3.00/MMBTU again before the 1st Quarter ends, most likely in response to an abrupt cooling trend in the models at some point that forces the bears to re-examine their thesis. This $3.00/MMBTU level remains my near-term price target. This is not to say that natural gas does not trade lower near-term. Bearish momentum is exceptionally strong right now and, should the forecast trend any warmer, it is certainly possible that prices could fall at low as $2.50/MMBTU, though I would be very surprised to see prices fall below this level.


Natural gas demand will inch slightly higher today, but will remain exceptionally weak as much above-average temperatures dominate the major population centers of the East. Highs today will reach 60F as far north as Washington, DC and Philadelphia with mid-50s likely in New York City and Boston, all 15F-20F warmer than normal. Further south, Raleigh, NC and Richmond, VA could top 70F, also around 20F above-average. Further west, it will be an unseasonably mild day across the Deep South and southern Plains as well with Jackson, MS and Houston both reaching 80F and Little Rock and Nashville the mid-70s, 20F-25F warmer-than-normal. However, a potent, but restricted, arctic airmass located across southern Canada and the Southern Plains will be some slight headway southward today with Minneapolis only reaching the mid-teens with light snow, Omaha the low 20s, and Des Moines the mid-20s, each 10F-15F colder day-over-day and around 10F colder-than-normal. Further north, Billings, MT and Bismarck, ND will remain in the icebox each struggling to make it to 0F, 30F colder-than-normal. Thanks to the slight advancement of arctic air, today's forecast mean population-weighted nationwide temperature will cool 1.3F from Monday to 49.9F but, thanks to the extensive warmth across the East, this is a balmy 9.3F warmer-than-normal. Total Degree Days will rise to 16.8 TDDs, still 8.2 TDDs fewer than normal and the third fewest for September 5 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 -9 BCF/day daily natural gas storage withdrawal, 3 BCF larger than Monday but still a massive 14 BCF bearish versus the 5-year average. As a result, by tonight, I project that Realtime natural gas inventories will fall to 1910 BCF by tonight while the storage deficit versus the 5-year average will continue to rapidly contract, falling to -374 BCF. Click HERE for more on today's projected storage withdrawal and Realtime natural gas inventories. After today, I project that there will be two more days of bearish demand before the unseasonable warmth across the East is finally pushed offshore and at or below-average storage withdrawals return.