November 6, 2017

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Natural Gas Inventories Likely To Peak For The Season Today Near 3805 BCF On East Coast Warmth; Bullish Withdrawals Then Expected Through The Weekend Before Milder Mid-November May Lead To Weaker Demand; Oil & Natural Gas Portfolio Closes At 2017 High--Subscribe For Access Now & Help Support The Site

6:00 AM EDT, Monday, November 6, 2017
Oil and natural gas both rallied sharply on Friday as the energy sector finished the week on a high note. Natural gas rose 5 cents or 1.7% to close at $2.98/MMBTU as a cooling trend in late-morning computer model runs offered the prospect of a spike in heating demand. And after a disastrous past few weeks, Friday's rebound was enough to steady the ship and the commodity scratched out a 0.7% weekly gain. Nonetheless, the commodity continues to face headwinds--despite a sharp 13% undervaluation according to my Fair Price Model--as record production and the threat of a mild November and December will likely continue to weigh. However, these concerns may temporarily take a backseat early this week as much colder temperatures later will drive bullish daily withdrawals and, potentially, the first weekly withdrawal of the season.

While natural gas has battled its share of demons recently, the oil sector just can't be kept down and continues its steady march higher. Crude oil recovered from early-session weakness Friday morning and hit the afterburners in the afternoon as the commodity rose $1.10 or 2% to settle at $55.64/barrel, its highest close since July 2, 2015. It was also the fourth straight weekly gain for oil. Brent oil rose an even stronger $1.45 to settle at $62.07/barrel, boosting the Brent-WTI spread to $6.43/barrel, a boon to US exports. The oil sector continues to be driven by strong domestic demand, record exports due to the wide Brent-WTI spread, and commitments by OPEC and allies to restore world-wide supply/demand balance. Oil also received a shot in the arm Friday afternoon when Baker Hughes reported the oil drilling rig count dropped by 8 last week, the largest drop since May 2016 and the fourth decline in the last 5 weeks. This is somewhat surprising given recent gains in oil price that would seem to incentivize drillers.

Thanks to sector-wide strength, my Oil & Natural Gas Portfolio climbed a strong +1.9% on Friday to push gains since May 1 to a new high, up +24.6%. In the last 30 days alone, the portfolio is up 5.8%. The Figure to the right plots daily portfolio since May 1, highlighting the steady growth in the fund. On that topic, thank you to all who have subscribed to the site over the pas t5 months, with the current tally up to 78 subscribers. I greatly appreciate your support. For current subscribers, I have updated the site password for November and you should have received an email with the new password. If you are unable to log in, please email me at CelsiusEnergyFM@gmail.com.

As I've stated before, it is my goal to keep all of the data and projections on CelsiusEnergy freely available. Given the site costs and time requirement to update and manage the site, the only way that I am able to do this is through your support via subscribing. My goal by the end of the year is to exceed 100 subscribers. As a reminder, if you pledge $25/month or more, you gain password-protected access to my portfolio holdings, trades, and twice-weekly investing commentaries that focus on price analysis and trading strategy, compared to the publicly available Daily Commentaries which focus more on supply/demand fundamentals. If you have found the site to be useful over the past year, I ask you to consider pledging your support, even if it is only for a month. And because your pledges aren't charged until the first day of the month, if you sign up now, you essentially get an entire month free. I have big plans for this site and am excited to continue battling the markets alongside you. For more on signing up, please click HERE or the link at the top of the homepage. And for subscribers, please see today's Investing Commentary, along with my current holdings HERE.

On Thursday following the EIA's weekly Natural Gas Storage Report, the Administration also released its weekly natural gas supply & demand data for the week of October 21-27. Headlining the report was data showing that domestic natural gas production jumped a whopping 0.9 BCF/day week-over-week to 74.9 BCF/day, up 4.3 BCF/day from the same week in 2016. Canadian imports (down 0.3 BCF/day year-over-year) and LNG exports (up 2.7 BCF/day year-over-year) helped to blunt the impact of this supply growth, but temperature-independent natural gas supply/demand balance is still 1.1 BCF/day loose year-over-year, as shown in the Figure to the chart. This is in contrast to last Spring and even much of the summer when temperature-independent supply/demand balance was sufficiently tight year-over-year such that even mediocre temperatures could result in a bullish storage injection or withdrawal. Those times appear to be over and where natural gas inventories end up at the end of the winter will depend largely on the temperature pattern. Unlike the past nine months or so, a prolonged period of mild weather could be disastrous for inventories and quickly erase the current storage deficit--an expectation for which seems to be driving the substantial undervaluation in natural gas versus my calculated Fair Price--while a sustained cold snap could help maintain this deficit and support the commodity long term. Without trying to hammer down the details of the temperature forecast, I expect the net result regardless of how warm or cold the winter is will be an increase in natural gas volatility as investors react--and overreact--to model run to model run variation. While such an environment is a boon for for my tradding strategy, it is less good for one's mental well-being. Click HERE for more on natural gas supply/demand fundamentals.

Given this expected heavy emphasis on the weather, let's talk about it a little bit.

Natural gas demand was suppressed over the weekend as unseasonably mild temperatures dominated the Eastern Seaboard with highs in the 60s as far north as Detroit, New York City, and Boston with 70s and even 80s across much of the Southeast and Ohio Valley, 10F-20F warmer than normal. Much colder temperatures with highs only in the 20s and 30s could be found across the northern Plains from Montana, the Dakotas and Minnesota, but the airmass remained bottled up across the north, blocked from moving south. That will begin to change today as a cold front knifes southeastward. Chicago will only reach the mid-40s today--10F colder than normal--while Detroit, St Louis, and Pittsburgh will all cool to near seasonable levels. The heart of the cold will continue to be found across the north with Billings, Mt and Bismarck, Nd only rising to around 20F, 25F-30F colder than normal. The East Coast will see one more day of exceptionally mild conditions with Washington, Philadelphia, New York City, and Boston all likely to approach 70F, nearly 20F warmer than normal. Overall, the forecast mean population-weighted nationwide temperature will drop around 1.6F day-over-day to 59.8F today, still 5.8F warmer than normal thanks to the East Coast warmth. Based on this outlook and early-cycle pipeline data, natural gas demand will rise today with a projected +3 BCF/day daily storage injection, still around 1 BCF larger than the 5-year average +2 BCF/day build. Natural gas inventories will likely be peaking for the 2017 injection season very close to 3803 BCF today with consistent withdrawals set to occur for the remainder of the week. A peak inventory level of 3803 BCF would be nearly 250 BCF smaller than last year's record 4047 BCF peak. Click HERE for more on today's projected daily build and intraday natural gas inventories. Natural gas demand will sharply rise mid-week as a quick shot of modified arctic air makes it all the way the East Coast driving daily storage withdrawals of up to -5 BCF/day late in the week. For the full week of November 4-10, I am now projecting a -1 BCF storage withdrawal, the first of the season, a modest 14 BCF bullish versus the 5-year average but an impressive 34 BCF smaller than last year's +33 BCF injection. Overall, this injection has trended increasingly bullish over the weekend as the near-term temperature outlook has cooled. Coupled with my +16 BCF projection for October 28-November 3 for this Thursday's EIA report--38 BCF bullish versus 2016--the year-over-year storage deficit is poised to jump nearly 60 BCF over the next 2 EIA reports to around -240 BCF, the largest deficit since August 25. The EIA will release its report for this week on Thursday, November 16 at 10:30 AM EDT. Click HERE for full details on my weekly storage page.

Looking at the remainder of 2017, long-range computer models continue to advertise the potential for much milder-than-average conditions for December. As the Figure to the right shows, this particular forecast is forecasting a more than 2C (~4F) warmer-than-average anomaly across much of the Southeast, Mid-Atlantic, Ohio Valley and New England with modestly warmer than average conditions across nearly the entire eastern 2/3rds of the nation. Should such a forecast verify, it would likely put a considerable damper on early-season natural gas heating demand.

On the one hand, this mild outlook is problematic in that it could result in a bearish 1-2 bunch with loose temperature independent supply/demand balance driven by record production (even with the addition of Cove Point LNG exports by this time) and loose temperature-dependent supply/demand balance, driven by mild temperatures and weak demand. While this outlook is highly subject to revision given the ultra-long term nature of the forecast, it is worth noting that the outlook has remained consistent for the past two weeks or so. To put a positive spin on things, it is likely that investors have already priced this forecast into natural gas, driving the substantial undervaluation of natural gas discussed earlier in this article. Any cooldown in this forecast is likely to lead to a rapid upward revision of current prices. Additionally, the January-February-March period continues to look colder than November and December so I expect at some point investors to look past the milder November-December period and begin focusing on the second half of the winter. Nonetheless, given the possibility of above-average temperatures in the setting of record production, natural gas is likely to remain a dangerous, highly volatile trade this winter with a wide trading range that is not for the faint of heart. Click HERE for more on the extended temperature outlook.

Finally, to those who have not yet entered, Week 1 of my Natural Gas Storage Contest closes this Tuesday at 5 pm EDT. The early-submission bonus multiple has dropped to 1.5x, although potential error in your storage and pricing picks is likely smaller. Cash prizes to the winners: $250 for first, $100 for second, and $50 for third. Entry is free. Click HERE to enter. Of note, only one entry per person per week is allowed. Your final entry--and its associated bonus multiple--will be the only one counted, unless you email me with an alternative request. Week 2 submissions will open Thursday at 12pm EDT with rankings for week 1 being released later that evening.