November 6, 2018

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Natural Gas Surges 9% As Impending Arctic Outbreak Punishes The Bears; But First, Gas Demand Likely To Bottom For The Next 5 Months Today With Double-Digit Daily Build Expected On Unseasonable Eastern Warmth; So Next Week Will Be Bitterly Cold--But What Then? Will Fall 2018 Be Shades Of 2014 Or 2013?

6:00 AM EDT, Tuesday, November 6, 2018
Natural gas surged on Monday after weekend computer models settled on a markedly colder near-term temperature outlook, rising a massive 8.6% to settle at $3.57/MMBTU. It was the highest close since January 29, 2018 when prices peaked at $3.63/MMBTU and was the second highest close since December 2016. It was also the tenth largest daily gain in the last 5 years as the Figure to the right shows. Since bottoming at $2.77/MMBTU on September 14, the commodity is up a massive 28.8% as investors have finally priced in the impact of inventories that are heading into the withdrawal season at decade-lows. The primary driver for Monday's rally was a marked and consistent cooling trend amongst both the American GFS and European ECMWF computer models over the weekend with a rarified polar vortex possible this weekend into next week across the major population centers of the Midwest, Southeast, and Eastern Seaboard. This could drive a record storage withdrawal for the second full week of November, sending the storage deficit versus the 5-year average to as high as -670 BCF. The natural gas sector also found support on the news that feedgas flows to Cheniere Energy's new Corpus Christi LNG export plant had climbed over 0.1 BCF/day as the facility nears commercial operations and that Enbridge had placed into service its 2.6 BCF/day Valley Crossing Pipeline that could boost exports to Mexico dramatically. At the same time, however, investors remain glued to the near-term computer model outlook and there remain indications in longer term models that mid- and late-November could be considerably milder than the first half of the month, which could certainly prompt some selling and profit-taking from current stratospheric levels. In my opinion, prices over $3.50/MMBTU are sustainable only so long as the temperature outlook remains favorable. Despite headline-grabbing articles about the admittedly impressive arctic blast, it is important note that I am still projecting 3 out of the next 4 weekly storage injections or withdrawals to be framed around one very bullish draw for November 10-16. Once the temperature outlook moderates, I expect to see a swift onset of selling and profit-taking and am setting a downside target of $3.25/MMBTU, with the caveat the prices could continue overshooting to the upside in the immediate term depending on computer model trends.

WTI Crude oil, meanwhile, open up nearly 2% but was unable to hold its gains, settling down 4 cents or 0.1% to $63.10/barrel. Brent managed to finish with a small gain, up 34 cents to $73.17/barrel. The fade was driven by news that the US would grant waivers to renewed sanctions on Iran to 8 countries, including to two of the nation's largest customers, India and China. At this time, I continue to feel that the latest sell-off in oil prices is overdone. The EIA will release its weekly Petroleum Status Report on Wednesday, which I anticipate will show a tightening of supply/demand balance as exports rise and imports remain soft, which could potentially support a soft landing as prices try to find a bottom. I am maintaining a $70/barrel WTI price target.

After a poor showing last week, my Oil & Natural Gas Portfolio got off to a fast start this week, rallying +1.5% on Monday, after touching intraday highs up over +2%. 2018 year-to-date gains now stand at +16.7% or +19.5% annualized. Unsurprisingly, the rally was driven by strength in natural gas with my 6% net long 3x leveraged position surging higher by over 20% at the open. As I had discussed in Monday's Commentary, I took advantage of prices over $3.50/MMBTU to take profits of over +41% on my long trade by covering a 5% stake in short DGAZ and to actually flip to net short. With an exceptionally bullish near-term temperature outlook and inventories already tight at 4-year lows, this was a challenging decision to make. On the one hand, do I believe that natural gas prices could rally higher? Certainly. But do I believe that natural gas prices will be lower on December 1 than today? Yes. Once prices broke $3.50/MMBTU, I felt that downside risk began to outweight upside potential. While natural gas could continue higher in the immediate near-term as computer continue to gain a handle on the upcoming arctic blast, the most recent guidance does support a mid-to-late November warm-up, which would likely result in a pullback. However, should the intensity or duration of the arctic intrusion increase, this trade could very well end up being premature which is why my short position remains small at this time. My short UGAZ position stands at 13.4% of my holdings and is partially offset by a 7.2% DGAZ short, meaning that my net short trade is 6.2% of my portfolio. As discussed previously, I employ a strategy of shorting partially offsetting positions in the 3x leveraged natural gas ETFs to take advantage of leverage-induced decay--enhanced in a volatile trading environment such as this--without overexposing myself in either direction. For investors unable or unwilling to short the 3X leveraged ETFs, shorting 3x the value of the safer UNG or just buying DGAZ (understanding that over time this position will underperform due to leverage-induced decay) are valid options as well. At this time, should natural gas top $3.70/MMBTU and then $4.00/MMBTU, I would likely add to my net short position, targeting a total net exposure of 15%. My downside price target is $3.25/MMBTU. An "addition" to my net short position would likely come via taking further profits on DGAZ, increasing unopposed short UGAZ exposure, rather than shorting more UGAZ, so as to build my cash position back above 35%. Regarding my oil positions, my net long WTI trade via short DWT stands at 7% with the remaining 7.5% of my DWT position going towards offsetting my short BNO position as part of a Brent-WTI arbitrage trade that will be profitable should the Brent-WTI spread narrow. At this time, I have no plans to add to either position and am targeting WTI $72/barrel and a Brent-WTI spread of $5/barrel. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will fall today to what could be the lowest level for the next 5+ months as unseasonably mild temperatures dominate the major population centers of the Eastern Seaboard ahead of rapidly encroaching arctic air. Highs today will warm to 70F as far north as Baltimore, Md while Philadelphia, New York City and Boston will reach the lower 60s, all around 10F warmer-than-normal. Perhaps more impressive than this afternoon's highs will be overnight lows with Charlotte, Atlanta and Raleigh not falling out of the lower 60s and even Pittsburgh and Columbus, OH stuck in the lower 50s, 15F-20F warmer-than-normal, crushing early-season heating demand. However, there will be a taste of things to come across the Rockies and Northern Plains today with Billings, MT and Bismarck, ND both struggling to reach 32F and Minneapolis likely seeing its highs early this morning in the lower 40s with readings falling throughout the day as an arctic cold front passes through. Such readings will be 10F-20F below-average but could seem downright mild compared to forecasts for early next week. Nonetheless, the warmth across the major demand centers of the Eastern Seaboard will dominate for one more day today with forecast mean population-weighted nationwide temperatures rising 2.4F day-over-day to 60.6F, a blistering 6.7F warmer-than-normal. Forecast Total Degree Days will fall to just 9.5 TDDs, 3.3 TDDs fewer than normal and the 8th fewest for November 6 in the last 38 years since 1981. 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 +10 BCF/day daily natural gas storage injection, 1 BCF larger than Monday and an ugly 7 BCF bearish versus the 5-year average +3 BCF/day. By this evening, I expect Realtime natural gas inventories to be just under 3240 BCF and likely within 24 hours of peaking for the year. The storage deficit versus the 5-year average will bottom out tonight near -601 BCF. Click HERE for more on today's projected daily injection and Realtime natural gas inventories.

Following Monday's price spike, investors have likely already priced in much of the impact of next week's expected huge draw. The question then turns to what happens thereafter. Let's take a quick jog down memory lane. In Fall 2014, with inventories still struggling to recover from the brutal winter of 2013-2014, the storage withdrawal season got off to a fast start with a record-setting -162 BCF drawdown for the week ending November 21, triggering fears of a supply crunch and sending natural gas to $4.48/MMBTU. However, temperatures then moderated dramatically and inventories would not see another triple digit draw until the week ending January 2, 2015. As a result, prices crashed, tumbling 33% to $3.00/MMBTU by December 26, decimating late-to-the-party bulls, and rewarding those who shorted into the arctic blast. On the other hand, winding the calendar back another year to Fall 2013, the storage withdrawal season got also got off to a fast start with a -45 BCF draw for the week ending November 15 and then saw triple digit draws for 3 out of the next 5 weeks. As a result, prices would rise 22% over the next month from $3.60/MMBTU to $4.40/MMTBU. At this time, the extended outlook is looking more like 2014 than 2013 with the Figure to the right plotting the CFS forecast for the final week of November. With inventories roughly 350 BCF lower this year compared to that year, I would not expect a sell-off of a similar magnitude as 2014, but I do continue to feel that near-term downside risk outweighs sustained upside potential although, of course, a continued near-term spike cannot be ruled out should the models remain cold. Should the outlook evolve to mirror that of 2013, all bets will be off and prices could certainly trend higher. Stay tuned.