October 6, 2017

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Natural Gas Falls Despite Bullish EIA Storage Injection While Crude Oil Rebounds From 3-Week Low; Gas Demand Rises Today As Temperatures Warm Across The South, But Won't Prevent Neutral-To-Bearish Weekly Injection; Tropical Storm Nate A Threat To Northern Gulf Coast & Its Oil/Natural Gas Infrastructure

6:00 AM EDT, Friday, October 6, 2017
In its weekly Natural Gas Storage Report for September 23-29, the EIA announced on Thursday that natural gas inventories increased by +42 BCF. This was 6 BCF smaller than my +48 BCF projection and an enormous 49 BCF bullish versus the 5-year average +91 BCF build. It was the smallest injection for the week in the last 5 years by a nearly 30 BCF margin, crushing 2016's +76 BCF injection. With the injection, natural gas inventories rose to 3508 BCF while the storage surplus flipped to a -8 BCF storage deficit for the first time since January 2017. During this interval, the surplus had climbed to as high as +395 BCF in late March 2017 and has been generally steadily contracting since.

Through the first 27 weeks of the storage injection season, a total of +1459 BCF of natural gas has been injected into storage. As the Figure to the right shows, this would be the third lowest 27-week storage injection in the past 23 years for which EIA storage data is available, behind only 2012's +1127 BCF and 2016's +1212 BCF builds. This was driven by a combination of seasonally warm temperatures throughout the summer and, at least until recently, a tight temperature-independent supply/demand balance. As a result, the storage surplus versus the 5-year average has been steadily trimmed and now sits at a small deficit.

Click HERE for more on current natural gas inventories and season-to-date storage injection data.

Overall, I consider yesterday's reported injection to be very bullish. Not only was it historically smaller than the 5-year average, but it was also well-below the analyst consensus +51 BCF, as well as my own projection. Natural gas inventories are now on course to finish the injection season at 3854 BCF in about a month, which would be robust compared to long-term observations (4th largest since 1993), but would be the lowest since 2014 as season-ending levels each of the past 2 years have exceeded 4,000 BCF. However, despite the bullishness of the week's build, natural gas actually reversed from early-session gains pre-report to settle down 2 cents or 0.6% at $2.92/MMBTU. Why the drop despite an otherwise exceptionally bullish injection? Most likely, the build had already been long priced into the price of natural gas and investors are already looking ahead to more robust injections in coming weeks. Regardless, I continue to view natural gas as undervalued and a decent longer-term long play although bears clearly have near-term control over the commodity. According to my Fair Price model, the commodity is undervalued by 14% based on current inventories alone. Even during the heart of the winter months when the January and February futures contracts are trading over $3.20/MMBTU, the commodity is still undervalued by 5% based on my current long-term projections. Crude oil, on the other hand, reversed Wednesday's surprising losses after a very positive Petroleum Status Report, gaining 81 cents or 1.6% to settle at $50.79/barrel. Brent oil rose an even larger $1.20 to $57.00/barrel. As a result, the all-important Brent-WTI spread climbed to $6.21/barrel, which should continue to support record exports from the US. My Oil & Natural Gas portfolio rose +0.6% on the day to boost gains since May 1 to a robust +18.2%, albeit daily trains were trimmed markedly in the afternoon from their +1.7% session highs. Subscribers gain access to my portfolio holdings, recent trades, and twice-weekly in-depth Investing Commentaries discussing my commodity outlook and trading strategy. If you are not yet subscribed, please click HERE to learn more and help support the site.

Natural gas demand will rise today as temperatures warm across the South to the point that we will see some late-season cooling demand. Highs will rise into the upper 80s to lower 90s from Dallas, Tx and Little Rock, Ar eastward to Jackson, Ms to south of Atlanta, all around 10F warmer than average. Even the Megalopolis from Richmond through Washington, DC to Philadelphia will reach the mid-80s, upwards of 15F warmer than normal. After approaching 30 BCF/day yesterday, I expect that powerburn demand will easily exceed that number today, more than 6 BCF/day higher year-over-year. Overall, the forecast mean population-weighted nationwide temperature today will rise another 1.5F day-over-day to 70.9F, a whopping 7.3F warmer than normal. Total Degree Days will rise to 8.2 TDDs, 1 TDD larger than normal. 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 +11 BCF/day daily storage injection, 1 BCF smaller than yesterday and 1 BCF bullish versus the 5-year average +12 BCF/day injection. Click HERE for more on today's projected daily injection and intraday natural gas inventories.

In other weather news, Tropical Storm Nate was classified Thursday morning and poses a late-weekend threat to the northern Gulf Coast. As of early Friday morning, the storm was emerging off the north coast of Nicaragua and was a minimal tropical storm. However, the storm system will spend the next 18 hours over very warm ocean waters and under low wind sheer which should favor at least steady strengthening. The storm could pass over the northern Yucatan Peninsula tonight as it tracks north-northwestward, slowing intensification before emerging into the Gulf of Mexico Saturday morning where it will have another 36 hours or so to strengthen further. There is considerable disagreement among the computer models as to the intensity forecast for Nate. The American GFS model barely even picks up the system, landfalling a weak tropical storm. On the other hand, several intensity models indicate a significant possibility for rapid intensification. The NHC splits the difference, calling for an 80 mph category 1 hurricane intensity prior to landfall, but the storm could certainly be stronger if it limits its time over land and takes advantage of its otherwise favorable environment. Unlike the intensity forecast, there is considerably more agreement among the models regarding the track forecast. The system will track briskly north-northwest before turning northward immediately prior to a landfall along the Louisiana or Mississippi coastline--potentially very close to New Orleans--early Sunday morning. The latest track forecast for Nate is shown in the Figure to the right. As a result of this threat, the NHC has issued Hurricane Watches from Morgan City, La to the Mississippi/Alabama border, including New Orleans. The biggest threat from the storm appears to be storm surge and wind which will both depend on its peak intensity. Rainfall will be locally heavy, but due to the storm's rapid movement, should be far, far less then Hurricane Harvey, although vulnerable New Orleans could certainly see significant fresh and salt-water flooding. The storm will be tracking over the heart of the oil & natural gas infrastructure of the Gulf and, as a result, 15% of oil production--0.25 MMbbls/day--and 6% of natural gas production--0.2 BCF/day--has already been shut-in ahead of the storm. However, the storm will be moving east of the largest oil refineries and thus I do not expect a repeat of the weeks long refinery shutdowns caused by Hurricane Harvey in late August. See the NHC homepage for more on Nate.

For the natural gas storage week of September 30-October 6 that ends today, I am projecting a nearly neutral +88 BCF storage injection. Such an injection would be 1 BCF bearish versus the 5-year average +87 BCF and 8 BCF larger than last year's build. It would be more than double the previous week's +42 BCF injection due to much cooler temperatures for much of the week that suppressed natural gas powerburn demand. As the Figure to the right shows, a +88 BCF injection would be the third largest injection in the past 5 years for the September 30-October 6 timeframe, ahead only of +100 BCF in 2014 and +97 BCF in 2015. It would also be the fifth most bearish injection in the last 23 years for which EIA data is available. Should a +88 BCF injection verify, natural gas inventories would climb to 3595 BCF while the storage deficit versus the 5-year average would fall to +7 BCF. The year-over-year deficit meanwhile would narrow to -153 BCF. This projection remains preliminary and will be revised further over the next 72 hours as finalized pipeline and temperature data is integrated into my model. The EIA will release its official injection number for the week on Thursday, October 12. Click HERE for more on this week's projected injection.