August 7, 2017

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Natural Gas Demand Falls Over The Weekend As Unseasonably Cool Pattern Dominates The US; Bearish +8 BCF/Day Daily Storage Injection Today As Demand Bottoms Out; Preliminary Modestly Bullish +40 BCF Weekly Storage Build Projected For Thursday's EIA Report For July 28-August 5; New Alternative Energy Page Coming Soon

6:00 AM EDT, Monday, August 7, 2017
A quick note: you may have noticed that my Alternative Energy Page has reverted to "Under Construction" status over the weekend. I am now in the final stages of revamping this element of the site. The previous pages were glitch-ridden and overly cluttered with many unnecessary and confusing charts and tables. The new version of the page will be more streamlined and the models I use to generate intraday and daily data will be based on a much larger data set that will provide accurate, nationwide estimates for wind, hydroelectric, and solar generation. Expect this new page to come online later this week or early next week.

Natural gas continued its week-long slump on Friday, sliding another 3 cents or 0.9% to settle at $2.77/MMBTU. On the week, the commodity lost 5.7%, its 3rd weekly loss in a row and is now at its lowest since February 27. Natural gas investors continue to sell the commodity amidst forecasts calling for an unseasonably chilly first 3+ weeks of August that will likely bring weekly natural gas storage injections back towards their 5-year averages after a prolonged period of well-below average injections this summer. Nonetheless, as I have repeatedly written, natural gas remains at a steep undervaluation versus its 5-year average according to my Fair Price Model. Based on current inventories alone, this undervaluation stands at 14.2% with a Fair Price of $3.24/MMBTU versus a current Futures Price of $2.78/MMBTU. Based on 8-month storage projections, the long-term average undervaluation grows to 15%, even with the typical wintertime bump in prices. Nonetheless, due to fears about weakening near-term demand as well as concern over rising production as several new pipeline projections come online over the next 2-3 months, investors are largely ignoring natural gas storage at this time. Still, I continue to feel upside potential outweighs downside risk at these.

Crude oil completed a volatile week on Friday with a 55 cent or 1.1% gain to settle at $49.58/barrel after employment data showed that the US economy added 209,000 new jobs during the month of July. For the week, the commodity was nearly flat, down 0.3%. Investors may have been rather disappointed with Wednesday's Petroleum Report which showed a -1.5 MMbbls crude oil inventory drawdown, just below the 5-year average of -2.4 MMbbl, but well-shy of recent draws which have exceeded -5 MMbbls/week. On the other hand, the domestic rig count continues to show signs of topping with the oil count losing one rig and falling to 765 active rigs, according to data from Baker Hughes. The count has been stuck in the 760s throughout the month of July and now into August. Overall, I feel neutral towards oil at these levels and would like to see a stronger pullback before adding a long position.

It was a trying week for my Oil & Natural Gas Portfolio due a weakness across the energy sector. The portfolio dropped each day of week and finished the week down -4.5%, reducing gains since May 1 to +7.7%. I made three trades on the week, with an emphasis on consolidation and risk management. Despite the forgettable week, I remain confident in my holdings and have no plans at this time to abandon my current strategy. For subscribers, see today's new Investing Commentary on my Portfolio Page HERE for more on my trading plan for the upcoming week. Click HERE for more on subscribing and supporting the site.

On Thursday, the EIA released its weekly Natural Gas Storage Report for July 22-28 and announced that natural gas inventories rose by +20 BCF, 2 BCF smaller than my +22 BCF projection and 24 BCF smaller than the 5-year average +44 BCF. Total storage levels rose to 3010 BCF while the storage surplus versus the 5-year average declined to +87 BCF or +3%, a new 5-month low. Through the first 18-weeks of the storage injection season, natural gas inventories have climbed by +961 BCF, more than 300 BCF less than the 5-year average +1269 BCF and the 3rd fewest in the last 22 years for the July 22-28 year period. For more on the storage report and seasonal injection data, please see my Current Inventories Page HERE. In its weekly natural gas supply & demand update, the EIA reported that natural gas production gained 0.2 BCF/day week-over-week to reach a new 2017-high at 72.2 BCF, up 1.3 BCF/day year-over-year. However, thanks to weak Canadian imports that, at 6.0 BCF/day, trail 2016 levels by 1.5 BCF and continued LNG export strength, temperature-independent supply/demand balance tightened for a third consecutive week to 1.8 BCF/day tight year-over-year, as shown in the Figure to the right. See more on my Natural Gas Supply & Demand Page HERE. Overall, I consider the report to be a bullish one, coming in well below the 5-year average with year-over-year temperature-independent market tightness persisting, even if the steady climb in natural gas production sends up some early red flags.

For a detailed discussion and analysis of the storage report, please see My Latest Article On Seeking Alpha HERE.

The EIA will release its weekly natural gas storage report for the week of July 29-August 4 this Thursday at 10:30 AM EDT. I am projecting a preliminary +40 BCF injection, which would be a modestly bullish 13 BCF smaller than the 5-year average but well-below last year's +24 BCF build. As the Figure to the right shows, it would in fact be the third smallest injection for the week in the last 5 years, behind 2016 and 2012 (+23 BCF). It would also be the 10th smallest injection in the last 23 years, which have ranged from an exceptional -12 BCF draw during the Heatwave of 2006 to an ugly +87 BCF in 2013. The projected bullish injection was driven primarily by ongoing market tightness as temperatures during the week averaged just 76.9F on a population-weighted basis, 0.5 BCF cooler than average. Thanks to the cooldown, natural gas powerburn averaged just 34.0 BCF/day, down 3 BCF week-over-week. Should the projection verify, natural gas inventories would rise to +3050 BCF while the storage surplus versus the 5-year average would continue its steady decline, dropping to +73 BCF or just +2%, the lowest since February 3, a new 6-month low. On the other hand, the year-over-year deficit will narrow as well, falling to -263 BCF or -8%, the lowest since March 10. While unspectacular, this report shows the effect a tight supply/demand balance can have on inventories, even with mediocre temperatures and should get the job done narrowing inventories closer and closer to the 5-year average. See more on this week's projection on my Weekly Storage Page HERE. This remains a preliminary projection and will be revised further over the next 48 hours as finalized pipeline and temperature data is integrated into my storage model.

Over the weekend, natural gas demand dropped as the record-setting heatwave finally relinquished its hold on the West Coast. High temperatures were in the 70s across much of the nation's Heartland from northern Oklahoma to the Canadian border eastward into the Great Lakes and the Northeast, 10F-15F cooler than normal for most areas. The only areas to escape the chill were the Pacific Northwest, Texas, and the extreme Southeast where highs were near average to as much as 10F above-average. As a result, daily natural gas storage injections fell to near the 5-year average at +7 BCF/day. Demand will likely bottom out today as Texas and the I-95 corridor gets in on the September-in-August action. Highs today from Washington, DC to Boston, MA will only be in the low 70s, 10F-15F cooler-than-average across these major demand centers. Likewise, Texas, the state with the highest natural gas demand during the summer months, will see highs in the upper 80s across the northern part of the state and low 90s across the South, 5F-10F below average. The remainder of the nation will remain well-below average again with highs 5F-15F cooler-than-normal across most areas east of the Rockies. The only areas seeing summer-like temperatures will be the Pacific Northwest with Portland, Or reaching the low 90s and Seattle, Wa the upper 80s, 10F above-average. Overall, the forecast mean population-weighted temperature will cool another 0.7F day-over-day to 74.6F today, 2.7F cooler-than-average. Total Degree Days will slide to 10.0 TDDs, 3.9 TDDs fewer than normal and the 8th fewest for August 7 in the last 37 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 +8 BCF/day daily natural gas storage injection, 1 BCF bearish versus the 5-year average. Click HERE for more on today's daily storage projection and intraday inventories.

For the remainder of the week, natural gas demand will slowly rebound as temperatures warm along the Eastern Seaboard but remain unseasonably cool across the nation's mid-section. By Thursday and Friday, high temperatures along the I-95 corridor will once again climb into the mid-80s while the West Coast remains hot with 80s and 90s persisting to near the Washington-Canada border. Friday looks to be the warmest day of the week with the forecast mean population-weighted temperature warming to 77.8F, around 0.5F warmer than normal. As a result, daily natural gas storage injections could fall as low as +4 BCF/day, 3 BCF bullish versus the 5-year average +7 BCF/day. The Figure to the right shows projected daily storage injections for the current storage week. Overall, for the week of August 5-11, I am projection a slightly bullish +45 BCF natural gas storage injection, which would be 6 BCF smaller than the 5-year average. It would be the third smallest storage injection for the period, once again behind 2012 (+25 BCF) and 2016 (+23 BCF). More impressively, it would be the 6th smallest in the full 23 year history of EIA storage data, which have been as high as +83 BCF. Once again, the slight bullishness of this week's injection can be attributed entirely to a tight supply/demand balance as during most years a temperature pattern such as this would likely result in a +60 BCF to +70 BCF injection. Should a +45 BCF injection verify, natural gas inventories would rise to 3095 BCF while the storage surplus versus the 5-year average would all to +67 BCF, yet another new 6-month low. The year-over-year deficit would continue its recent contraction, falling to -242 BCF. Click HERE for more on this week's projection on my weekly storage page.