September 6, 2018

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Natural Gas Extends Slump Ahead Of Today's Projected Neutral-To-Bullish +63 BCF EIA-Reported Storage Injection; Gordon-Fueled Oil Pullback Continues With Neutral Inventory Drawdown Expected Today; Gas Demand To Slump Today As Fall-Like Temperatures Build Across The Heartland Even As Northeast Heat Continues One More Day

6:00 AM EDT, Thursday, September 6, 2018
An early-morning natural gas rally was quickly snuffed out as the commodity quickly faded and finished the day down 3 cents or 1% at $2.80/MMBTU, a new 1-month low. There was no new breaking news to explain the pullback, but rather investors continued to price in the impact of surging natural gas production--which will likely top 83 BCF/day this week, up more than 10 BCF/day year-over-year--and near-term bearish weather as the remnants of Tropical Storm Gordon and a Autumn-like cold front are poised to bring much cooler temperatures to the major population centers of the Northeast through the weekend. The commodity is rapidly approaching my near-term price target of $2.75/MMBTU. While I can't say natural gas won't experience a near-term bounce should the EIA report a smaller-than-expected storage injection today or in response to above-average temperatures expected beginning the middle of next week, I expect the commodity will struggle to build any sort of sustainable momentum near-term. While a surge in LNG feedgas capacity in the beginning of 2019 was expected to re-balance supply and demand, with the rate at which production is growing, it now appears that the expected 4-6 BCF/day of additional capacity may not be enough, hence the continued selling pressure.

Meanwhile, ahead of today's delayed EIA Petroleum Status Report, WTI oil fell $1.15 or 1.7% to settle at a 1-week low of $68.72/barrel. The pullback was prompted by news that Tropical Storm Gordon passed just east of significant Gulf of Mexico oil infrastructure and was unlikely to significantly impact Gulf refinery operations. More than anything, however, Tuesday's Gordon-related bump was an excuse for swing-traders to take profits following the recent run-up, which was largely driven by overseas news, particularly falling output from Iran ahead of renewed sanctions. I feel that the pullback is healthy following the vigorous August rally, and am maintaining a $75/barrel 2018 price target on WTI. Of note, Brent oil fell a lesser 90 cents or 1.2% on Thursday to settle at $77.27/barrel, driving the Brent-WTI spread to 8.55/barrel, a 6-week high, prompting me to make good on my plan discussed in Wednesday's commentary to initiate a Brent-WTI arbitrage trade. More on that below.

Driven by losses in the oil sector, my Oil & Natural Gas Portfolio fell 0.1% on Wednesday, reducing 2018 year-to-date gains to +18.4%, or +27.1% annualized. With the widening of the Brent-WTI spread yesterday, I initiated a Brent-WTI arbitrage trade as previously discussed, selling short an 18% position in the 1x Brent ETF BNO and shorting another 6% position in the 3X WTI ETF DWT to equally offset the BNO stake. Regardless of whichever direction the broad oil markets trade, this trade will be profitable should the Brent-WTI spread--which is at the very top of its 4-year range, but below the 2018 high of nearly $11.40/barrel--contract. My BNO short is now my largest position at 18.0% while my DWT short trade stands at 13.5%, of which 6% is offsetting the BNO short and the remaining 7.5% or so is a directional long bet on WTI with a price target of $75/barrel. My natural gas short trade, meanwhile, continues to perform well with my 17.3% UGAZ short now up +21.2% from my basis, partially offset by a 13.8% stake in DGAZ which itself is still up +4.5%, thanks to the principle of leverage-induced decay. My downside price target remains at $2.75/MMBTU, at which point I will likely take profits on a successful short trade and flip to a swing long trade to take advantage of a bounce. Should natural gas rally back above $2.90/MMBTU or so before I take profits on the short trade, I will likely add to the short stake. Click HERE for more on my current Oil & Natural Gas holdings.

The EIA will release its weekly Natural Gas Storage Report for August 25-31 this morning at 10:30 AM EDT. I am projecting a +63 BCF storage injection. Such a build would be 2 BCF bullish versus the 5-year average +65 BCF. As the Figure to the right shows, such a build would be the third largest in the past 5 years, behind only +82 BCF and +86 BCF injections in 2014 and 2015. Temperatures on the week were warm at 77.9F, up 1.5F week-over-week and 3F warmer-than-normal. Natural gas demand peaked mid-week with daily injections falling to near +6 BCF while builds peaked at +11 BCF to bookend the week. Despite mean population-weighted temperatures this week up more than 4F compared to last year's 73.7F, my projected injection is actually 1 BCF larger than last year's build for the same week, highlighting the bearish impact of a loosening market as discussed above. In order just to break even, it takes a consistently favorable temperature pattern and any shortfall will result in a contraction of both deficits versus 2017 and the 5-year average. Should a +63 BCF injection verify, natural gas inventories would rise to 2568 BCF while the storage deficit versus the 5-year average would inch higher to -590 BCF. Click HERE for more on this week's projected injection.

Despite my generally bearish near-term sentiment, I do feel that natural gas could experience a short-term bounce should the EIA report a smaller-than-expected injection today. I feel that it would take a build under +60 BCF to be considered unquestionably bullish and drive prices back above $2.85/MMBTU, presenting another short-sale opportunity. On the other hand, an injection of +66 BCF or larger would be indicative of a loosening market and would add further fuel to the bearish influences driving the current pullback and could result in prices reaching my downside target of $2.75/MMBTU. A reported injection between +60 BCF and +66 BCF would be neutral with prices equally likely to rally or pullback, with a small bias given to the bulls.

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.

It will be a busy day for the EIA today as the agency will also release its weekly Petroleum Status Report, also for August 25-31, at 11:00 AM today, delayed a day because of the Labor Day Holiday. After the close of trading yesterday, the American Petroleum Institute (API) announced that it was forecasting a -1.2 MMbbl inventory drawdown, which would be nearly neutral versus the 5-year average -1.6 MMbbl draw. As the Figure to the right shows, such a draw would be the third largest draw in the last 5 years, behind only -7.3 MMbbl and -1.8 MMbbl draws in 2016 and 2013, respectively. A -1.2 MMbbl draw would be slightly bearish in my opinion as it would halt some of the momentum built up over the past 2 weeks, which have seen bullish draws of -5.8 MMbbls and -2.6 MMbbls. Should it verify, natural gas inventories would fall to 404.6 MMbbls while the storage deficit versus the 5-year average would hold nearly steady right at the 5-year average with a -0.7 MMbbls deficit. However, with the Brent-WTI spread holding at over $7/barrel all of last week, I would not be surprised to see a larger-than-expected EIA-reported withdrawal should exports come in somewhat stronger than anticipated. Barring a significant divergence from expectations, I don't feel that today's report will be an actionable one and I am likely to maintain my $75/barrel WTI price. Check back at 11:00 AM EDT on my Crude Oil Inventory Page HERE for the latest EIA storage numbers.

Natural gas demand will continue to decline today as a large area of below-average temperatures across the Central US expands and begins to shift eastward. The core of the cool temperatures will be located across a Kansas-to-Missouri-to-Illinois corridor, as shown in the Figure to the right, where highs will only be in the upper 60s to lower 70s including Chicago whose forecast high of near 70F will be 10F below-average. Further north, frost advisories and freeze warnings are up for northern Minnesota where inland lows could drop to near 30F. And across the state of Texas--the largest natural-gas consuming state during the summer months--highs will largely be stuck in the 80s, 5F below-average across most of the state. This cooldown will be partially offset by another day of blistering heat across the Northeast with readings in the low-to-mid 90s across the entire I-95 corridor from Washington, DC to Baltimore where heat advisories are in effect, 10F-20F above-average. However, unlike earlier in the week, strong powerburn across this area won't be able to fully compensate for weak demand and record production elsewhere. Overall, the forecast mean population-weighted nationwide temperature today will fall 1.0F day-over-day to 77.1F which is still 3.7F warmer-than-normal. Total Degree Days today will fall to 12.5 TDDs, still 2.2 TDDs greater than normal and the 8th most for September 6 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook. Nevertheless, despite the still warmer-than-normal temperature forecast today, I expect the impact of record production to weight heavily on today's supply/demand balance. Based on early-cycle pipeline data, I expect natural gas demand to fall around 1.5 BCF today with a +11 BCF/day storage injection expected, right at the 5-year average. By this evening, I project that Realtime natural gas inventories will top 2625 BCF while the storage deficit versus the 5-year average would dip to -592 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. Gas demand will continue to fall on Friday with a +14 BCF/day storage injection expected, 3 BCF bearish versus the 5-year average. Nonetheless, thanks to consistent heat across the densely-populated Northeast throughout the week, I am still projecting a +72 BCF weekly storage injection, 2 BCF bullish versus the 5-year average and the third smallest build for the September 1-6 period in the last 5 years. I will have more on this week's projected injection in tomorrow's Commentary, but in the meantime, click HERE for more.