May 7, 2019

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Natural Gas Tumbles To New 3-Year Low After The EIA Reports Larger-Than-Expected Storage Injection, But Flat Production & Surging Powerburn Offer Some Hope For Beleaugured Bulls; Late-Session Rumor Mill Saves Crude Oil As Prices Jump Nearly 2% In The Final Hour Of Trading; Gas Demand To Dip Today Ahead Of Big Cooldown Next Week

6:00 AM EDT, Friday, June 7, 2019
A rough week for commodities continued on Thursday. One day removed from a disastrous crude oil inventory build, the EIA announced Thursday morning that natural gas storage rose by +119 BCF for the week of May 25-31. This was 10 BCF larger than my +109 BCF and 17 BCF bearish versus the 5-year average, the 11th straight bearish build. All 5 storage regions saw bearish injections, led by the Midwest with a +37 BCF build (5-year average +29 BCF). While all remain at storage deficits versus their respective 5-year averages, the East region is down to a -13 BCF deficit and seems likely to flip to a surplus later this month with a prolonged period of cooler-than-normal temperatures pending. Even the Central Region, long the tightest region, now has a deficit that has fallen into double digits for the first time this year at -99 BCF. 3 out of the 5 regions are at year-over-year surpluses, led by the Midwest at a huge +95 BCF (or +28%), followed by the East at +63 BCF and the South Central at +48 BCF. With all three regions likely to see below-average cooling demand for the rest of the month, I expect to see each at a triple digit surplus before July 1. With the +119 BCF injection, total natural gas inventories rose to 1986 BCF while the storage deficit versus the 5-year average contracted to -240 BCF or -11%. The year-over-year surplus climbed to +182 BCF. Overall, given both the magnitude of the build and expectations going in, this was a very disappointing Storage Report. Click HERE for more on the latest EIA-reported natural gas inventories.

Following the morning release of storage data, the EIA also issued its weekly supply/demand update just after the market close, covering the week of May 30-June 5. Of note, this differs from the storage week (May 25-31). Despite the bearishness of the actual storage report, there were some positives for the few remaining bulls out there in this report. First, production growth continues to flatline. The EIA reported production at 88.8 BCF/day, down 0.6 BCF/day from the previous week. While output is up 7.7 BCF/day from a year ago, since reaching 88.6 BCF/day the week ending December 5, 2018, production growth has done absolutely nothing. Should production continue to hold under 90 BCF/day for the rest of the summer, this year-over-year gain could be down to under 3 BCF/day by early Fall. Additionally, the EIA announced that powerburn demand continues to make substantial gains as we move out of the shoulder season into the summer cooling season. As the Figure to the right shows, Powerburn gained 3.2 BCF/day from the previous week to 33.1 BCF/day, up 3.0 BCF/day year-over-year despite mean nationwide temperatures that are slightly cooler from this time last year. This suggests that lower natural gas prices may be starting to have an impact on demand. Otherwise, LNG exports continue to hold onto yearly gains at 5.3 BCF/day versus 2.7 BCF/day, as do exports to Mexico at 4.9 BCF/day versus 4.5 BCF/day. Canadian imports rose 0.4 BCF/day to 5.3 BCF/day but remain down 0.8 BCF/day from last year.

Overall, I calculate that the temperature-adjusted imbalance versus a year ago appears to be bottoming out, which is supported by the above data. I calculate that this imbalance tightened by 0.2 BCF/day week-over-week to 3.6 BCF/day loose versus the same week in 2018. This means that, for any given temperature, I would expect the daily natural gas storage injection to be 3.3 BCF/day larger--or bearish--compared to the same temperature with fundamentals consistent with the 5-year average. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make accurate long-term storage and price projections. While still bearish, as the Figure to the right shows, this imbalance has held steady over the past month after a rapid late-spring loosening. Should powerburn start outpacing 2018, production hold steady, and LNG exports return to their highs, this imbalance could begin to relatively rapidly tighten over the next 1-3 months. Click HERE for more on the latest EIA supply and demand data.

Unsurprisingly, natural gas investors were not thrilled with the +119 BCF build. June 2019 front-month prices slid 5 cents or 2.3% to $2.32/MMBTU, another 3 year low and the cheapest prices have been this late in the season since 2012. While it was not surprising to see the sell-off, these present-day cheap prices will likely be the cure for long-term cheap prices, boosting powerburn and suppressing production. Despite the bearish build, I am not changing my price target of $2.60/MMBTU remain long the sector. Meanwhile, after trading slightly lower through most of the session, crude oil soared into the close after rumors hit the wire that the Trump administration was considering delaying tariffs on Mexico. WTI rose 91 cents or 1.8% to $52.59/barrel and kept right on rising after the settlement of physical trading to top $53/barrel. Brent meanwhile rose $1.04 to $61.67/barrel. While the tariff news temporarily relieved some concerns over global demand, bullish investors face significant near-term headwinds. Yesterday's EIA report was, frankly, a disaster with the +6.8 MMbbl build more than 7 MMbbls bearish versus the 5-year average, sending inventories to a 2-year high. Not only that, the ongoing huge Adjustment Factors of upwards of 0.8 MMbbls/day introduce a level of uncertainty into the data investors use to make trading decisions that makes them all the more skittish. Nonetheless, I continue to feel the sector is oversold should refinery demand finally pick up in the weeks to come. I reduced my WTI price target to $60/barrel from $65/barrel, but this still represents nearly 15% upside from current levels. Meanwhile, my Oil & Natural Gas Portfolio saw a volatile day, but finished the day sharply higher thanks to the rally in crude oil. The Portfolio finished the session up +0.9% to improve 2019 year-to-date gains to +9.3% or +21.4% annualized. I made no trades on the day. I am relatively aggressively long oil (an 11.9% short position in DWT) and natural gas (net long with a 13.8% short DGAZ position partially offset by a 5.4% short UGAZ position). At this time, I plan to continue this positioning. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will dip slightly today to finish out the week as cooler temperatures begin to build across the South, even as readings remain toasty across the Eastern Seaboard and northern Plains. Two weeks removed from seeing upper 90s to even triple digits, highs from Raleigh to Columbia to Atlanta will only reach the low-to-mid 80s today, around 5F cooler-than-normal. Further west, highs in Dallas and Oklahoma City will likewise only reach the mid-80s, up to 5F cooler-than-normal. On the other hand, Minneapolis will reach the upper 80s while Sioux Falls, SD and Bismarck, ND could both top 90F, more than 15F hotter-than-normal. Overall, today's forecast mean population-weighted nationwide temperature will fall 0.3F from Thursday thanks to the cooldown across the South to 73.5F, still 2.0F warmer-than-normal. Total Degree Ddays (TDDs) will fall to 9.8 TDDs, still 0.7 TDDs greater than normal and the 14th most for June 7 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 +14 BCF/day daily natural gas storage injection, down less than 1 BCF/day from Thursday and 1 BCF bearish versus the 5-year average +13 BCF/day daily natural gas storage injection. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.

For the storage week of June 1-7 that ends today, I am projecting a preliminary +103 BCF natural gas storage injection. Such a build would be a slight 11 BCF bearish versus the 5-year average--the 13th straight bearish build--and 8 BCF larger than last year's injection. As the Figure to the right shows, such a build would be the third largest in the last 5 years, behind only a +109 BCF injection in 2014 and a +105 BCF build a year later. Should a +103 BCF injection verify, natural gas inventories would rise to 2089 BCF while the storage deficit versus the 5-year average falls again to -229 BCF. Inventories will finish the week up +190 BCF over 2018. The EIA will release its official storage numbers for the week next Thursday, June 13, at 10:30 AM EDD. Click HERE for more on this week's projected injection. Looking ahead into next week, an unusually strong cold front will sweep southward across the Plains and off the East Coast by Monday, bringing much colder temperatures to all areas east of the Rockies next week. The core of the cold will be focused on Texas and the Southeast where highs 10F-15F cooler than normal likely across a large areas. As a result, daily injections could top +16 BCF/day by late-week, 4 BCF/day bearish versus the 5-year average. For the week, I am projecting a +106 BCF storage injection, 22 BCF bearish versus the 5-year average, driving the year-over-year gain in inventories to +201 BCF. Click HERE for more on next week's projected injection.