November 8, 2018

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Natural Gas Wants To Trade Lower--But Mother Nature Won't Let It; EIA Projected To Announce Modestly Bearish +63 BCF Natural Gas Storage Injection In Today's Report; First Daily Inventory Draw Of The Season Expected Today As Arctic Air Funnels Southward; Oil Falls To New 8-Month Low After EIA Reports Seventh Straight Storage Build & New Production Record

6:00 AM EDT, Thursday, November 8, 2018
For a second straight day, natural gas traded aimlessly on Wednesday, alternating between small losses and gains before ultimately settling flat at $3.56/MMBTU, but remained within 2% of multi-year highs. The commodity spiked nearly 9% on Monday after computer models trended sharply colder over the weekend as an early-season shot of the polar vortex will make its presence known over the next 10 days. Since then, the commodity has seemingly wanted to pullback, perhaps on expectations of a mild second half of November and December, opening each of the last 2 sessions lower, but has subsequently rallied as the near-term computer model outlook has trended bullish, and has stayed cold for longer. The Figure to the right plots the historical trend for the American GFS model's forecast total degree days for the next two weeks, which has steadily trended towards prolonging a polar influence on US temperatures, perhaps well into the third week of November. This has likely capped selling and kept prices near the recent highs. On the one hand, investors have shown a clear inclination towards profit-taking and natural gas is poised to trade lower should forecasts show any consistency towards a milder pattern. For this reason, I am maintaining a downside price target of $3.25/MMBTU. At the same time, however, should the models continue to prolong out the period of arctic chill, at some point the bears could throw in the towel due to rising anxiety over large storage withdrawals in the setting of inventory levels already at decade lows and prices could experience another dramatic jolt higher, as was seen on Monday. While I am cautiously maintaining my bet on downside risk outweighing upside potential, I acknowledge that the natural gas trade remains an extremely challenging one with both the bulls and bears presenting valid arguments. I feel that the best strategy is to keep position sizes and risk tolerance to a minimum and to be highly selective on entry and exit points.

In its weekly Petroleum Status Report for October 27-November 2, the EIA announced Wednesday morning that crude oil inventories rose for a seventh straight week, climbing +5.8 MMbbls. While this was smaller than Tuesday's American Petroleum Institute forecast of a +7.8 MMbbl build, it was 4 MMbbls bearish versus the 5-year average and was the third largest build for the week all-time. The build can be blamed on multiple factors. The most glaring bearish number in the report was a new record high in production of 11.6 MMbbls/day, up a massive 0.4 MMbbls/day week-over-week. However, this number does not truly reflect such a large weekly gain and is likely due to a re-benchmarking of the calculated production value. This doesn't change the fact that production is now up a massive 1.98 MMbbls/day or 20.6% year-over-year. Demand growth just is not keeping pace. Refinery demand averaged just 16.41 MMbbls/day last week, effectively flat week-over-week, and up a mere 0.1 MMbbls/day year-over-year, as shown in the Figure to the right. The softness of US demand may the result of demand destruction in the wake of higher summertime prices when WTI topped $75/barrel, the impact of which is just now being reflected. US oil exports averaged 2.41 MMbbls/day last week, up 1.54 MMbbls/day year-over-year, but only due to a temporary drop last year. Year-over-year gains over the past month have been on the order of just 0.5 MMbbls/day, hardly enough to cut into the gains in production. On the supply side, imports aren't doing the bulls any favors either, up 0.16 MMbbls/day year-over-year. While floating storage has dropped precipitously in recent weeks which often presages a drop in imports, there is no doubt that US supply and demand are imbalanced at this time. Perhaps the final nail in the bull's coffin on Wednesday was refined product inventories. While distillate stocks fell a robust -3.4 MMbbls for their 7th straight week of declines, gasoline inventories confounded expectations by rising +1.8 MMbbls, very bearish versus the API forecast of a -1.1 MMbbl draw and the 5-year average -2.7 MMbbl draw.

Click HERE for more on crude oil inventories and HERE for more on refined product stocks.

Following the report, WTI prices tumbled 1.5% to under $61.50/barrel before rallying slightly to settle down 54 cents or 0.9% to $61.67/barrel, a new 8-month low. For a second straight day, Brent outperformed, falling just 6 cents to $72.07/barrel as the Brent-WTI spread rose to a new 4-month high of $10.40/barrel. To be honest, I'm a bit surprised WTI didn't fall further based on the inventory report, as bearish as it was across effectively all components. However, the sector may be finally running out of sellers and there may be some faint optimism ahead of this weekend's scheduled meeting between OPEC and its allies, including Russia. Given the bearishness of the Wednesday's numbers, I am reducing my WTI price target from $70/barrel to $66/barrel and expect the commodity to remain under $70/barrel for the foreseeable future.

Thanks to ongoing weakness in the oil sector, my Oil & Natural Gas Portfolio saw another small pullback on Wednesday, falling -0.3% to reduce year-to-date gains to +16.2% or +18.9% annualized. My net long oil position via short DWT stands at 8% with the remaining 7.5% going towards offsetting my 22.7% short BNO stake as part of a Brent-WTI arbitrage trade. At this time, I have no plans to add to my oil long and would not be surprised to see the commodity challenge the $60/barrel level, especially if this weekend's OPEC/Russia meeting does not re-affirm some degree of global production curbs. Regarding my natural positions, my sentiment is unchanged. My net long position stands at a modest 5.7% of my holdings with a 13.1% short UGAZ position offset by a 7.4% DGAZ short. While I am concerned about the cooling trend seen in the latest computer models, I still believe that the cold has been appropriately priced in and that the path of least resistance is downward. I am maintaining a price target of $3.25/MMBTU. However, I am not sufficiently confident to build this position at larger at current levels and would be unlikely to do so under $3.70/MMBTU. Click HERE
I project that natural gas demand will soar today as an arctic cold front pushes southeastward, driving the season's first daily inventory withdrawal. The largest anomalies will be located across the northern and central Plains. Oklahoma City will struggle into the mid-40s today while Topeka, KS and Kansas City will not get out of the 30s, all 20F-25F below-average. Further north, Bismarck, ND will be stuck in the lower 20s, 25F colder-than-normal. Across the Midwest and Great Lakes, there will be a more modest chill with Chicago reaching the low 40s and Indianapolis, Detroit, and Pittsburgh the upper 40s, each around 10F below-average. The major cities of the Eastern Seaboard will continue their steady cooling trend but will still be seasonable with the Washington, DC to Boston corridor reaching the upper 50s, within 2F-3F of normal. Overall, the forecast mean population-weighted nationwide temperature will tumble 3.9F day-over-day to 52.6F, now 0.7F below-average. Forecast Total Degree Days will rise to 14.9 TDDs, 1.5 TDDs greater than normal and the 12th most degree days for November 8 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 -1 BCF/day daily storage withdrawal today, the first of the 2018-2019 heating season. Such a draw would be 4 BCF bullish versus the 5-year average +3 BCF/day daily injection. The timing of today's withdrawal is historically right on schedule for the start of the heating season and within 3 days of the beginning of the withdrawal season last year. Click HERE for more on today's projected daily withdrawal and Realtime natural gas inventories.

Natural gas demand will continue to rise on Friday as arctic air funnels southward with a -4 BCF/day daily draw. For the storage week of November 3-9 that ends tomorrow, I am projecting a preliminary +32 BCF storage injection, still 13 BCF bearish versus the 5-year average and 45 BCF larger than last year's draw. Inventories would rise to 3237 BCF, which will likely represent the peak for the year--though storage likely peaked intraweek near 3242 BCF. I will have much more on this week's projected injection in Friday's Commentary, but in the meantime see more in my Weekly Storage Page HERE.