February 6, 2018

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Monday's 3.5% Natural Gas Decline Just A Footnote In Historic Day On Wall Street; Gas Inventories Fall To 30-Month Low Overnight As Undervaluation Grows, But Milder-Than-Average Temperatures Likely To Continue To Weigh On Sentiment

6:00 AM EDT, Tuesday, February 6, 2018
It is a rare thing indeed when natural gas can fall 3.5% in a session and still outperform the Dow Jones. In a day in which modest declines in the commodities sector took a back seat to the Black Swan event unfolding in the US equities and volatility markets, natural gas continued its ongoing sharp correction, falling 10 cents or 3.5% to $2.75/MMBTU. UNG fell 4.0% while UGAZ was off 11.6%. Since peaking at over $105/share on January 30, the 3x leveraged ETF is down 40% to $62.90/MMBTU. In addition to undoubted runoff from the rout in US markets, natural gas was also weighed down by a continued moderating temperature trend for the February 10-20 period which may be the longest consistently above-average temperature streak so far in 2018.

Crude oil couldn't escape the carnage either with WTI falling $1.30 or 2% to settle at $64.15/barrel while Brent fell 96 cents to $67.62/barrel, a 4-week low. Much of the oil pullback can be attributed to fear spreading from the US market rout, but investors also have to contend with domestic production that remains at record highs and continues to climb towards 10 MMbbls/day in the next week or two.

Avoiding the worst of the bloodbath on Wall Street, my Oil & Natural Gas Portfolio rose for a third straight day, gaining +0.6% to push gains since May 1, 2017 to +36.3%, a new 52-week high. The portfolio is up +3.9% in the past month alone and +15.3% in the last 90 days. The portfolio averages 3-5 trades per week--although recently it has been coasting with no trades in the past 6 trading sessions--and employs a hedged strategy to attempt to generate consistent returns while avoiding major pitfalls, as shown in the Figure to the right. Subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

Natural gas demand will fall slightly today as temperatures moderate across the South but an entrenched arctic airmass over the Plains and Great Lakes will keep demand above-average. Highs today from New Orleans through Atlanta into the Carolinas will be around 10F warmer-than-average with readings in the 70s in the southern portion of this region to the 60s across the North. Further north along the Eastern Seaboard readings will generally be seasonal with highs in the low 40s from Washington, DC to New York City and mid-30s in Boston, within 5F of average. It is across the Heartland where the true Canadian air has set up shop. Fresh off 4-6 inches of snow, Chicago will limp to 20F today, 12F colder than average, while Kansas City, Des Moines, and Minneapolis, will be lucky to reach 20F, 15F, and 10F, respectively, all 15F-20F colder-than-average, boosting heating demand. The West will remain locked in a winter-long unseasonably mild pattern with Salt Lake City and Boise both again rising into the 50s and Phoenix topping 80F, each around 10F warmer than normal. Overall, the mean population-weighted nationwide temperature today will hold nearly flat at 40.7F, up less than 0.1F day-over-day and right at seasonal averages. Total Degree Days will hold at 24 TDDs, 0.8 TDDs fewer than normal and the 18th most in the last 38 years. 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 -26 BCF/day daily natural gas storage withdrawal, 2 BCF fewer than yesterday but still 4 BCF bullish versus the 5-year average. As mentioned in yesterday's commentary, I project that natural gas inventories dropped below 2000 BCF right around midnight for the first time since May, 2015 and will continue drop to around 1975 BCF by the end of the day today, boosting the storage deficit versus the 5-year average to -410 BCF. Click HERE for more on today's projected daily storage withdrawal and realtime natural gas inventories.

Looking ahead, natural gas demand will remain at or above average through February 10 with daily withdrawals larger than -20 BCF/day, as shown in the Figure to the right. Thereafter, however, both the American GFS and the European ECMWF are suggesting that a consistently warmer-than-average pattern will establish itself across the lower 48, with the GFS coming in considerably warmer than the Euro. This pattern will be characterized by unseasonable warmth across the major demand centers of the Eastern Seaboard and Ohio Valley while arctic air remains bottled up over the sparsely-populated Northern Plains. As a result, natural gas demand will drop with daily withdrawals dropping into the -10 BCF/day to -20 BCF/day range. Depending on which model you believe, this pattern could remain entrenched for several weeks, with the ECMWF 46-day outlook showing consistently above-average temperatures into mid-March while the NOAA long-term CFS model shows a broad area of colder-than-average temperatures returning for the final week of February, as shown on my Long-Term Temperature Forecast Page HERE. As it has throughout the winter, natural gas will likely continue to trade with the weather. However, the closer we get to the end of the withdrawal season the more heavily periods of mild weather will weigh on the commodity. Traders are widely expecting a very loose supply/demand balance this spring and feel that natural gas needs to bank a large storage deficit this winter to prevent a rapid transition to a storage surplus by the summer. However, natural gas is now undervalued by an impressive 30% versus its Fair Value of $3.97/MMBTU based on current inventories alone. Should the temperature forecast remain consistently mild into March, natural gas can undoubtedly trade lower, perhaps threatening the $2.50/MMBTU level, but should the tail end of winter flip back to a colder outlook and US markets stabilize, this substantial undervaluation could prompt a quick rebound, perhaps back to the $3.00/MMBTU level. Additionally, the longer that natural gas holds under $3.00/MMBTU, the stronger that Powerburn demand will likely be this spring and summer as fuel switching to natural gas will remain strong. And should natural gas inventories maintain a storage deficit through the summer and investors overestimate the impact of supply, a wealth of LNG export facilities and natural gas-fueled powerplants will come online during the second half of the year, likely compensating for the rise in production and tightening the market back up, which could result in a sustainable rally later this year. But we're getting way ahead of ourselves now...In other news, after a disappointing mid-January in which demand fell to near 2017 levels, LNG feedgas demand has rebounded back to near all-time highs. This has come about due to demand to Cheniere Energy's Sabine Pass rising consistently above 3.2 BCF/day and flows returning to Dominion's Cove Point Plant after a January stoppage. However, feedgas to Cove Point is only averaging near 0.1 BCF/day since February 1 and there have been no tankers arriving at the plant, making it likely this feedgas is just part of the commissioning process with certified exports unlikely to begin until March. Total LNG feedgas on Monday will be near 3.4 BCF/day. Overall, total feedgas demand rebounded more than 7 BCF week-over-week last week and is projected to climb another 0.8 BCF this week to a new weekly record high of 23.7 BCF. Consistent year-over-year gains in LNG feedgas demand will be essential this spring if natural gas demand hopes to balance out record domestic production and will be closely watched by analysts. Sabine Pass is already operating near its 2018 capacity, but Cove Point can climb up to 0.8 BCF/day. With the Freeport and Elba Island LNG export terminals scheduled to come online by the end of 2018 +/- the Cameron LNG plant pending resolution of delays, daily exports should approach 5 BCF/day by the end of the year. Stay tuned. Click HERE for more on LNG exports.