April 5, 2019

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Natural Gas Falls To A 2-Week Low After EIA Reports Larger-Than-Expected Storage Injection While Brent Oil (Briefly) Tops $70/Barrel; Natural Gas Supply/Demand Balance Loosens As Record Production & Soft LNG Demand Weigh; Daily Storage Injections Set To Soar This Weekend As Unseasonable Warmth Gets Pumped Northwards

6:00 AM EDT, Friday, April 5, 2019
In the first natural gas storage injection of 2019, the EIA announced in its Thursday Report that inventories rose by +23 BCF for the week of March 23-29. This was 6 BCF larger than my projection and 46 BCF bearish versus the 5-year average -23 BCF withdrawal. It was the first storage injection for the last week of March in the last 5 years and the fifth largest all-time for the March 23-29 period. The bearishness of the build was driven by the South Central Region which saw a massive +35 BCF injection, compared to the 5-year average +5 BCF for the region. This was likely due to both seasonal temperatures that suppressed both heating and cooling demand as well as a sharp 2 BCF/day curtailment in flows to the Sabine Pass LNG export plant that decreased weekly demand in the region by over 12 BCF. The Mountain and Pacific region saw bearish injections as well. And while the Midwest and East Regions saw withdrawals of -7 BCF and -15 BCF, these, too, were bearish versus their respective 5-year averages of -15 BCF and -16 BCF. Overall, total US inventories rose to 1130 BCF while the storage deficit versus the 5-year average shrank sharply to -505 BCF, down around 60 BCF in the past 3 weeks. Inventories are -228 BCF smaller than this time last year. All 5 storage regions remain at deficits to both the 5-year average and 2018, led by the South Central Region, despite its large weekly build, at -203 BCF and -104 BCF, respectively. Click HERE for more on this weeks EIA-reported inventories.

Following the morning release of storage data, the EIA also issued its weekly supply/demand update just after the market close, covering the week of March 28-April 3. Of note, this differs from the storage week (March 23-29). For a second straight week, natural gas production rose to a new all-time high, climbing 0.3 BCF/day week-over-week to 89.7 BCF/day. In the past two weeks alone, production is up 1.4 BCF/day. Production is up a steep 9.1 BCF versus 2018. Supply growth continues to be checked somewhat by Canadian imports which held nearly flat at 4.8 BCF/day, down 1.0 BCF from a year ago. On the demand side temperature-dependent demand continued to lag 2018 thanks to unfavorable weather. Powerburn averaged 21.9 BCF/day (22.9 BCF/day in 2018), Industrial demand 21.4 BCF/day (21.5 BCF/day in 2018), and residential/commercial heating demand was 26.2 BCF/day (26.4 BCF/day in 2018). LNG feedgas remained suppressed for a second straight week at 4.1 BC/day, up a mere 0.4 BCF/day from 2018, just over two weeks since topping a record 5.4 BCF/day. Exports to Mexico held flat at 4.6 BCF/day, but are up 1.0 BCF/day from 2018 thanks to a transient dip this time last year.

After tightening nearly continuously for four months, temperature-adjusted supply/demand balance abruptly loosened last week, a reversal that I had long been anticipating, but fearing. After rising from nearly 6 BCF/day loose in December 2018 to less than 1 BCF/day loose last week, the year-over-year temperature-adjusted imbalance doubled week-over-week to -1.8 BCF/day, as shown in the Figure to the right. This means that, for any given temperature, I would expect the daily natural gas storage injection to be 1.8 BCF/day larger--or bearish--compared to the same temperature with last year's underlying fundamentals. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make accurate long-term storage and price projections. This loosening is multi-factorial, driven by the early end of the heating season that prevents the market from taking advantage of interval gains in heating capacity as well as the unfortunately timed rise in production to new records and the slump in LNG export demand. With production continuing to rise and heating demand only falling further in the weeks to come, I expect this loosening trend to continue at least until LNG demand begins to ramp up again.

Click HERE for the latest EIA-reported supply/demand numbers and temperature-adjusted imbalance data.

Overall, this was a bearish report, both on an absolute basis and versus expectations, and was a disappointing start to the injection season. The new temperature-adjusted loosening was another unwelcome facet to the report. It is therefore rather unsurprising that natural gas fell 3 cents or 1.3% to $2.64/MMBTU, its lowest close since February 20. As the Figure to the right shows, natural gas prices, after fluctuating wildly throughout the winter have more recently settled into a trading range between $2.60/MMBTU and $2.80/MMBTU. And after trading at a premium to 2018 prices for much of the period, the commodity has recently flipped to a small deficit of around 1.5%. This comes despite inventories holding at a nearly -200 BCF storage deficit compared to a year ago, highlighting investors' expectations that a loosening market will drive inventories to a year-over-year storage surplus very soon. While natural gas is oversold and undervalued at current levels, I am increasingly skeptical that the commodity is going to be able to mount a sustainable rally in this environment, even with the temperature outlook trending more favorable this week. While I am long the commodity at this time, I will be looking for an exit on any move higher and would even consider starting a short position as low as $2.75/MMBTU.

Meanwhile, crude oil was split on Thursday with WTI falling 36 cents or 0.6% to $62.10/barrel in its second straight day of losses while Brent inched higher by 9 cents to $69.40/barrel after topping $70/barrel earlier in the session. The moves come in the wake of a disappointing EIA Petroleum Status Report that showed US inventories soaring +7.2 MMbbls, albeit in weak significantly impacted by the closure of the Houston Shipping Channel. Regardless, my sentiment is unaffected. While the commodity could certainly pull back near-term as investors process the recent gains, I am maintaining my $65/barrel price target for 2019.

My Oil & Natural Gas Portfolio registered its second straight small loss on Thursday, falling -0.1% to reduce 2019 year-to-date gains to +10.2% or +39.6% annualized. I made a single trade on the day, a 2% position size short of DGAZ to push net long exposure to 8% of my holdings with partially offsetting UGAZ and DGAZ positions. As mentioned above, I am becoming less and less enamored with the long position here given the recent loosening in the sector and will look to significantly reduce exposure on any move higher. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will hold steady for a third straight day today as unseasonably mild temperatures dominate the Central US. Omaha, NE and Bismarck, ND could both approach 70F--10F-15F warmer-than-normal--while the major demand centers of Chicago and Minneapolis both near 60F, 5F-10F above-average. Further south, Nashville, Little Rock, and Oklahoma City will all near 80F today, around 10F warmer-than-normal. Blunting the bearishness of this warmth somewhat will be the unseasonable chill across the Mid-Atlantic and Northeast as yet another storm brings heavy rain to the region. Washington, DC and Philadelphia will only reach the low 50s while New York City and Boston only see the mid-to-upper 40s, all around 10F colder-than-normal. In the end the building warmth across the Plains and the rain-cooled conditions across the East will cancel eachother out. Today's forecast mean population-weighted nationwide temperature will rise by a mere 0.3F from Thursday to 56.9F, 2.3F warmer-than-normal. Total Degree Days will hold flat near 10.3 TDDs, 1.8 TDDs fewer than normal and the 9th fewest for April 5th 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 that today's daily storage injection will fall less than 1 BCF, holding steady at +8 BCF/day, 7 BCF bearish versus the 5-year average +1 BCF/day injection. Click HERE for more on today's projected storage injection and Realtime natural gas inventories. For the natural gas storage week of March 30-April 5 that ends today, I am projecting a +26 BCF injection. Such a build would be 20 BCF bearish versus the 5-year average and, as the Figure to the right shows, would be the second largest injection in the last 5 years, just behind the +29 BCF build from 2015. The bearish build was driven by exceptionally weak demand at the beginning and end of the week that easily overwhelmed the brief shot of cold air and storage withdrawals on Sunday, Monday, and Tuesday. Mean nationwide temperatures averaged a balmy 53.8F on the week, which is very close to average which is a bearish set-up this time of year. Should a +26 BCF verify, natural gas inventories would rise to 1155 BCF while the storage deficit versus the 5-year average would contract down to -484 BCF. The year-over-year deficit would slump a steep 21 BCF to -182 BCF. The EIA will release its official storage numbers for the week next Thursday, April 11, at 10:30 AM EDT. Click HERE for more on this week's projected injection.

Looking ahead to next week, a fast, moving active pattern will set-up which will allow consistently warmer-than-average temperatures to set up at least through mid-week. Mean population-weighed nationwide temperatures could top 60F. As a result, I expect natural gas demand to plunge beginning Saturday resulting in daily storage injections that could top Saturday, Sunday, Monday and Tuesday, as shown in the Figure to the right, more 6 times the 5-year average +3 BCF/day. Demand will rise sharply by the end of the week as much colder temperatures--and potentially a late-season snowstorm--overspread the Great Plains and Midwest, but the warmth looks to hang on across the East long enough to keep injections at or above-average throughout the week. For the upcoming week of April 6-12, I am projecting a preliminary +89 BCF storage injection. Such a build would be an ugly +68 BCF larger than the 5-year average and 122 BCF bearish versus last year's -34 BCF withdrawal. It would be the single largest injection on record for the April 6-12 period. Inventories would rise to 1244 BCF, the storage deficit versus the 5-year average would fall to -417 BCF, and the year-over-year deficit would collapse to just -60 BCF. I will have more on the storage week in Monday's commentary, but in the meantime, click HERE for more on next week's projected injection.