December 6, 2018

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Model Wars: Near- & Long-Term Computer Model Outlooks Continue To Differ Regarding Upcoming Warm-Up; EIA Projected To Announce Bullish Natural Gas Storage Withdrawal But Bearish Crude Oil Inventory Build In Today's Twin Reports; Oil Investors Eye Vienna Production Cut; Gas Demand To Fall Today Ahead Of Resurgent Arctic Air

6:00 AM EDT, Thursday, December 6, 2018
Natural gas continued its volatile trading on Tuesday. After Monday's 6% drop, the commodity rallied 12 cents or 2.7% to settle at $4.46/MMBTU. While US equities markets were closed on Wednesdays, natural gas futures remained open and picked off where they left off on Tuesday, rising 3% to over $4.60/MMBTU during the morning hours. As PM computer models trended milder, however, the commodity gave up its AM gains and settled up a mere 1 cent or 0.3% to $4.47/MMBTU. The erratic moves in the natural gas sector continue to be driven by a showdown in the near-term computer models that extends into their long-term stablemates as well. The 14-day ECMWF has been consistently colder than the GFS, as shown in the Figure to the right, though even the ECMWF trended milder Wednesday afternoon, with the 14-day total degree day trend over the past week falling below its trend line for the first time in 3 days. Overall, both models agree that there will be a marked pattern shift that, after being pushed out further and further from early- to mid-December over the past week, looks to occur in the December 11-12 timeframe. This pattern will be dominated by the replacement of the persistent trough across the Midwest and Northeast with ridging, allowing potentially sustained warmth to overspread the major demand centers of the Eastern half of the nation. However, there remains considerable disagreement between the ECMWF and the long-term ECMWF-EPS models and the GFS and CFSv2 on the course of this warm-up. The former are forecasting a shorter duration of mild temperatures with a cooler pattern returning by the fourth week of December. On the other hand, the GFS and CFSv2 are pointing towards a above-average warmth lasting at least into early January. Which model cohort verifies will make the difference between the storage deficit versus the 5-year average entering 2019 at -750 BCF or higher or a deficit that has tumbled under -600 BCF. Click HERE for more on both short-term and long-term models. It is for this reason that near-term investors continue to drive large daily and even intra-day swings in natural gas prices. Nonetheless, I continue to see downside to natural gas prices from current levels even if the ECMWF's colder solution verifies. However, if the GFS/CFSv2 outlook comes to fruition, prices could quickly tumble under $3.75/MMBTU and approach $3.50/MMBTU, especially with production continuing to surprise to the upside. At this time, I am maintaining a $4.00/MMBTU near-term price target on natural gas. My upside price ceiling is $5.00/MMBTU, but I feel that this is becoming increasingly less likely and would require a tremendous January arctic outbreak.

Meanwhile, crude oil held onto its Monday gains on Tuesday, tacking on another 0.6% to settle at $53.25/barrel. The commodity pulled back sharply to under $52.50/MMBTU in after-hours on Tuesday after the American Petroleum Institute (API) announced that it was forecasting a very bearish EIA Petroleum Status Report on Thursday. More on that below. In a low-volume session on Wednesday, the commodity initially recovered these losses and briefly traded above $54/barrel before fading in the afternoon, settling down 36 cents or 0.7% to close at $52.89/barrel. Brent lost 52 cents to $61.56/barrel. While today's EIA is forecast to be bearish (yet again), I expect that major price movements over the next 2-3 days will be driven by speculation around and reaction to a possible coordinated production cut following today's OPEC meeting in Vienna. Per the CME's OPEC watch tool as of Wednesday evening, speculators are giving a 60.4% chance of a small production cut and a <1% chance of a significant production cut, which is down from nearly 20% two weeks ago. With Canada already pledging to cut production and Donald Trump politicking for lower oil prices, it seems very unlikely that the cartel, led by Saudi Arabia, will agree to a substantial cut. Wednesday's fade was likely due in part to Donald Trump, in his most blatant tweet yet on the subject, extorting OPEC to not cut production because "the world does not want higher oil prices," which seems a bit ridiculous to say to a cartel whose members depend on higher oil prices to support their economies--unless there is some back-room strong-arming going on to back it up. Regardless, it is expected that a production cut of over 1.3 MMbbls/day will be required to rebalance markets. With prices up only around 5% following their 30% swandive to 52-week lows, investors have not yet priced in such a cut. I expect should production be cut by over 1.3 MMbbls/day, coupled with Canada's previously announced cut, WTI prices could challenge $60/barrel and Brent $70/barrel in the near-term. Without a satisfactory cut, oil will likely languish in the $40s/barrel for the foreseeable future. If I had to speculate, I would guess that OPEC will announce a small production cut in order to save face in what is clearly an imbalanced market, but, in cowing to Washington, such a production cut will be at or under 1.0 MMbbl/day.

Thanks to Wednesday's Stock Market Holiday, the EIA will pitch a double-header today, releasing both its regularly scheduled Natural Gas Storage Report at 10: 30 AM EDT and its Petroleum Status Report, one day late, at 11:00 AM. Both reports will cover the storage week of November 24-30.

Starting with the Natural Gas Storage Report, I am projecting a -62 BCF storage withdrawal. Such a draw would be a slight 4 BCF bullish versus the 5-year average and, as the Figure to the right shows, would be the third largest draw in the last 5 years, behind 2013's -150 BCF draw and 2015's -63 BCF draw. It was a volatile week for natural gas demand with exceptionally strong demand mid-week with daily draws over -15 BCF/day last Tuesday and Wednesday, book-ended by very soft demand the previous weekend with small daily builds possible and last Friday's bearish -5 BCF/day draw. Overall, the mean nationwide population-weighted nationwide temperature was nearly unchanged week-over-week at 46.4F versus 46.1F the previous week. I am projecting a slightly larger withdrawal (-62 BCF versus -59 BCF for the previous week) despite the slightly warmer readings due to the recovery of temperature-independent demand destruction associated with the Thanksgiving holiday the previous week week. Should a -62 BCF withdrawal verify, natural gas inventories would fall to 2992 BCF while the storage deficit versus the 5-year average would rise to -724 BCF. Click HERE for more on this week's projected storage withdrawal.

With the impending warm-up, there is, in my opinion, increasing downward pressure on natural gas. While investors will undoubtedly place more emphasis on computer model trends than today's storage number, I expect that a bad miss could serve as a catalyst to begin a more sustainable move lower in response to this impending warm-up. On the other hand, I am uncertain that even a large bullish surprise would be enough to drive a sustainable move to new highs. It is difficult to project on which side of the bull/bear line in the sand the EIA will land today. After reporting a much larger-than-expected -134 BCF withdrawal two weeks ago, the EIA countered with a nearly equally smaller-than-expected -59 BCF draw last week. Overall, I expect that it will take a reported withdrawal of over -70 BCF to be viewed as unequivocally bullish and to prompt at least a temporary move higher. On the other hand, a draw under -58 BCF would, while still bullish versus the 5-year average, be considered disappointing and would favor lower prices. A reported withdrawal between -58 BCF and -70 BCF would be neutral versus expectations with natural gas equally likely to rally or pullback.

Check back at 10:30 AM EDT for the official EIA storage withdrawal on my Current Natural Gas Inventories Page HERE. Also, I now have weekly natural gas supply and demand statistics on my Natural Gas Supply & Demand Page HERE that should be updated between 3 pm and 4 pm EDT.

Despite US markets being closed on Wednesday, the American Petroleum Institute (API) released its weekly crude oil inventory forecasts Tuesday after the market close as regularly scheduled for this week's EIA Petroleum Status Report. And it was a doozy, and not for good reasons. The API announced that it is expecting inventories to have risen by +5.4 MMbbls, the 11th straight week in which inventories have risen and a massive 8.6 MMbbls bearish versus the 5-year average -3.2 MMbbls. As the Figure to the right shows, such a build would be the largest for the November 24-30 period in the full 34 years for which EIA data is available, topping 1989's +5.0 MMbbls. Refined product inventories won't be compensating for the rise in crude storage either. The API is forecasting that gasoline stocks rose by +3.6 MMbbls while distillates rose by +4.3 MMbbls, both bearish against the identical +3.0 MMbbl 5-year average. This is further evidence that US oil markets remain imbalanced. The all-time record streak for weekly builds is 16 straight weeks from early 2015 during which time oil prices were mid-way through a collapse that would the commodity from over $100/barrel to $25/barrel, so this is not good company to be in. Should a +5.4 MMbbl build verify, crude oil inventories would rise to 455.9 MMbbls while the storage surplus versus the 5-year average would climb to +37.0 MMbbls. Additionally, the long-standing year-over-year deficit would flip to a +7.8 MMbbl surplus for the first time in over 2 years. In my opinion, if the EIA announces build in line with the API and OPEC does not announce an aggressive production cut, WTI prices could easily slump more than 5% in a session and be back in the $40s/barrel in a flash. Check back at 11 AM EDT on my Crude Oil Inventories Page HERE for the official EIA storage numbers.

Natural gas demand will dip slightly today as the Eastern Seaboard warms slightly while the Midwest and Plains cool back down as a reinforcing shot of arctic air moves southward from Canada. Demand, however, will remain much above-average for this time of year. Highs along the I-95 corridor will warm around 5F from Wednesday with areas from Washington, DC to New York City seasonally cool in the low-to-mid 50s, 0F-5F below-average while Boston will top out near 40F, 5F cooler than normal. Further west, however, yet another shot of arctic air will sink southward from Canada with Minneapolis struggling to 20F, Des Moines the low 20s, and even Oklahoma City and Little Rock, AR only reaching the mid-40s, all around 15F colder-than-normal. While there won't be any areas of record-setting 20F-30F below-average anomalies today, nearly the entire nation will be at or below-average, with above-average readings restricted to South Texas with Houston and San Antonio rising into the upper 60s. The forecast mean population-weighted mean nationwide temperature will inch higher by 0.3F from Wednesday to 39.8F, still 3.8F coler-than-normal. Forecast Total Degree Days will dip to 24.6 TDDs, still 2.2 TDDs greater than normal and the 14th most for December 6 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.

Based on this forecast an early-cycle pipeline data, I am projecting a -20 BC/day daily natural gas storage withdrawal, 2 BCF smaller than Wednesday but still a robust 9 BCF bullish versus the 5-year average -11 BCF/day draw. By this evening, natural gas inventories will have fallen to 2936 BCF while the storage deficit versus the 5-year average will be near -724 BCF. The year-over-year deficit will continue racing higher as well, climbing to near -720 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories. Gas demand will slip slightly again on Friday with a -18 BCF/day daily withdrawal expected as temperatures remain seasonally cool across the Northeast as an arctic cold front approaches. Thanks to the spike in gas demand during the second half of the week, I am projecting a -86 BCF weekly natural gas storage withdrawal for the week of December 1-7 that ends this Friday. Such a draw would be 7 BCF bullish versus the 5-year average and 27 BCF larger than last year's draw. It would be the third largest withdrawal for the week in the last 5 years. It could, however, be the last bullish draw for at least the next 2 weeks with temperatures finally expected to sustainably warm-up by the middle of next week. Should a -86 BCF withdrawal verify, natural gas inventories would fall to 2906 BCF while the storage deficit versus the 5-year average would climb to -730 BCF. I will have much more on this week's projected withdrawal in Friday's Commentary, but in the meantime, click HERE for more.