December 5, 2017

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Natural Gas Falls Under $3.00/MMBTU Despite Upcoming Arctic Blast On Long-Term Bearish Bet; Storage Deficit Versus The 5-Year Average To Bottom Today Before Demand Surges On Wednesday; Murphy's Law In Action: Late-December Forecast Uncertainty Increases, Supporting Monday's Sell-Off & Continued Volatility

6:00 AM EDT, Tuesday, December 5, 2017
After rising nearly 2% Sunday evening, natural gas quickly sold off Monday, falling 8 cents or 2.5% to settle at $2.99/MMBTU as fears of record production and a 3-week forecast that has steadily trended less bitterly cold over the past 48 hours weighed on sentiment. The pullback was broad and the next 11 futures contracts through November 2018 all closed below $3.00/MMBTU for the second time in the last two weeks.

Monday's sell-off was not based on impending weak demand. On the contrary, demand bottomed over the weekend and, while the outlook has moderated somewhat compared to some exceptionally cold forecasts from last week, temperatures over the next two weeks or more will be consistently colder than average and the storage deficit versus the 5-year average could easily reach triple digits again before the end of 2017. Rather, the sell-off is likely a long-term bet by investors that once winter ends, a very bearish supply/demand imbalance will establish itself capable of lasting through the remainder of 2018 and driving inventories back to a very large storage surplus. On the one hand, punishing natural gas to such a steep undervaluation based on long-term speculation could lead to at least a temporary price spike should we see repeated bouts of arctic air that persist longer than expected, especially if the last two weeks of December finish colder than some models are suggesting. On the other hand, if natural gas is selling off when the near-term forecast is as favorable as it is...what is going to happen when the inevitable January Thaw occurs? Investors seem to be operating under the terms of Murphy's Law: If the forecast isn't set in stone, the most likely outcome is the one that is the most bearish.

Crude oil, meanwhile, retreated a more modest 89 cents or 1.5% to settle at $57.47/barrel, its first decline in 3 days. Brent oil fell a steeper $1.28 to $62.45/barrel, driving the Brent-WTI spread down to $4.98/barrel. Should the spread drop below $4.00/barrel, US exports could begin to see downward pressure, loosening supply/demand balance. The EIA will release its weekly Petroleum Status Report for the week of November 25-December 1 tomorrow morning at 10:30 AM EDT, detailing the latest crude oil and refined product inventories as well as supply and demand data. The 5-year average for the week is a -2.9 MMbbl storage drawdown. The American Petroleum Institute (API) will release its own forecast for the report after the market close. Click HERE for more on crude oil inventories.

As a reminder, submissions for Week 5 of my Natural Gas Storage Contest close today at 5pm EDT. Entrants will be submitting their projection for the natural gas storage week of November 25-December 1 that ended last Friday and the closing price of natural gas (January 2018 front month contract) this Thursday, the day the EIA releases its official report for that storage week. The contest now has over 100 participants competing for $400 in prizes. Click HERE to read contest rules, see the latest rankings and to submit your picks.

Natural gas demand will begin its long-anticipated rebound today as a potent arctic cold front races rapidly eastward. The cold front is not difficult to pick out on departure-from-average high temperature map to the right stretching from Dallas to Indianapolis to Detroit with readings more than 15F warmer than average ahead of it and at or below behind it. In the southerly flow ahead of the front, Washington, Philadelphia, and New York City will all approach 60F, while inland Pittsburgh, Buffalo, and Columbus, Oh will all reach the low 50s. Such temperatures are 10F-15F warmer than normal. In the cold, northwest flow behind the front, Minneapolis will only reach the mid-20s, Chicago and Des Moines the mid-30s, and Kansas City the mid-40s, all 20F-30F cooler day-over-day and 0F-5F below average. Overall, the forecast mean population-weighted nationwide temperature for today will tumble 2.7F day-over-day to 51.4F, still a very mild 7.4F warmer than normal, thanks to continued warmth along the Eastern Seaboard. Total Degree Days will rise to 14.3 TDDs, still 7.8 TDDs fewer than average and the 5th fewest for the date in the last 37 years dating back to 1981. Click HERE fore more on today's temperature and degree day outlook.

Based on this forecast and early-cycle pipeline data, I am projecting a -3 BCF/day daily natural gas storage injection, nearly 4 BCF larger than yesterday's ugly +1 BCF/day injection, but still 8 BCF bearish versus the 5-year average. By the end of the day today, the natural gas storage deficit versus the 5-year average could drop as low as -9 BCF, down 120 BCF from its mid-week peak 2 weeks ago. It will, however represent a near-term bottom as demand will likely climb above-average on Wednesday, and stay there. Click HERE for more on today's projected daily draw and intraday inventories.

Once the arctic airmass arrives and entrenches itself across the Midwest, Great Lakes, Mid-Atlantic, and Northeast, it won't be in a hurry to leave. While the cold air will arrive too late in the week to drive a bullish storage withdrawal for December 2-8, it will turn what could have been an historically bearish draw to a projected -64 BCF withdrawal that is "only" 14 BCF bearish versus the 5-year average. Thereafter, most models suggest that a steep dip in the jetstream will persist across the Ohio Valley and East Coast for the next 10-14 days, as shown in the Figure to the right. This pattern should allow repeated reinforcing shots of arctic air across the densely-populated East for at least the next 2 weeks. Located here are some of the primary natural gas demand centers and should serve to drive gas demand well above average throughout this period. While a ridge will develop across the Rockies and West, population-weighted nationwide temperatures will likely remain well below-average. Click HERE for more on temperature forecasts through mid-December. As a result, I am projecting bullish withdrawals of -163 BCF for December 9-15 (38 BCF bullish) and -157 BCF for December 16-22 (46 BCF bullish). Should these projections verify, the storage deficit versus the 5-year average could climb all the way back to near the recent peak at -117 BCF. Click HERE for more on natural gas storage projections for the next 4 weeks.

It is once we reach the December 20-24 time frame that forecast uncertainty increases considerably, uncertainty which likely contributed to Monday's sell-off. Some models are suggesting that the ridge across the West will slide east and become increasingly dominant while the Eastern trough will weaken and retreat north. This could allow milder air to once again build across the Plains for the final 2 weeks of December, as suggested by the CFSv2 extended range temperature outlook, as shown in the two maps to the right, for December 18-24 and December 25-January 1. Should this forecast verify, the natural gas storage deficit could once again contract sharply, as it has these past few weeks. Click HERE for more on the extended temperature outlook. It is this uncertainty that is likely contributing to the ongoing weakness in natural gas, despite above-average demand for the next few weeks. Again, it is all about Murphy's Law.Natural gas demand will soar the remainder of the week as the aforementioned arctic cold front rapidly slices southeastward. By Tuesday, the front will stretch from Houston to Cincinnati to Detroit and by Wednesday it will clear the East Coast. The cold will then amplify to wrap up the week with the forecast mean population-weighted nationwide temperature falling to around 42.3F by Thursday, down more than 11F from Monday. By late in the week, there is increasing evidence among the computer models that the first true Nor'Easter of the season could bring a swath of wet snow from Washington, DC all the way to Boston, although this forecast continues to evolve.

As a result of the surge of cold air, natural gas daily withdrawals will climb to around -4 BCF/day on Tuesday before spiking to -15 BCF/day on Wednesday and peaking over -20 BCF on Thursday and Friday, double the 5-year average. Projected daily natural gas storage withdrawals for December 2-8 are shown in the Figure to the right. However, thanks to the unseasonably mild start to the week, I am still projecting a net bearish weekly storage withdrawal. For the week of December 2-8, I am projecting a preliminary -66 BCF withdrawal which, while the largest of the 2017-2017 season so far, would still be 12 BCF bearish versus the 5-year average and a whopping 66 BCF bearish versus last year's -132 BCF draw. A -66 BCF withdrawal would be the third largest in the last 5-years behind that -132 BCF withdrawal in 2016 and 2013's -139 BCF draw. Longer term, a -66 BCF doesn't hold up as well and would be the 7th most bearish withdrawal in the 23 years since 1994, during which time withdrawals have been as low a -182 BCF in 2005. This remains a preliminary projection and will be revised over the next week as finalized temperature and pipeline data is integrated into my model. The EIA will release its official Storage Report for this week on Thursday, December 14. Click HERE for full details on my projection.

Longer term, the models remain supportive for further intrusions of arctic air through mid-December. However, over the weekend, the mid-term temperature outlook has trended milder and there is an increasing divergence between the warmer GFS model and the ECMWF model, which is still calling for a colder outlook. And with the temperature-independent supply/demand balance loosening, natural gas could come back under pressure, even as the commodity remains comfortably undervalued long term according to my Fair Price Model. Click HERE for more on the long-term temperature outlook. Regardless of how the final forecast for the next few weeks shakes out, one thing is for certain. Thanks to a tight market and a stretch of cold weather this time last year, the year-over-year storage deficit is likely to contract dramatically over the next 4 storage weeks, even if the ECMWF forecast wins out over the GFS. At this time, I am projecting that the year-over-year deficit will fall by around 220 BCF, which would take it all the way down to -115 BCF, the smallest in over a year.