November 8, 2017

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Natural Gas Continues Weeklong Meltdown Thursday After EIA Reports Surprise +2 BCF Weekly Storage Injection; Gas Demand To Soar Today As Rare Winter Storm Targets The Gulf Coast, But Won't Be Enough To Prevent Another Bearish Weekly Withdrawal; Natural Gas Fundamentally Broken, But Still Due For A Near Term Bounce

6:00 AM EDT, Friday, December 8, 2017
Natural gas extended its rout on Thursday after the EIA reported a surprised storage injection for November 25-December 1, tumbling 16 cents or 5.4% to settle at $2.76/MMBTU. The close was the lowest for the front-month contract since October 27. Since reaching $3.12/MMBTU in the pre-dawn hours Monday, the commodity is now down an enormous 11.5%, having fallen 3 of 4 days this week. The sell-off this week has largely erased the long-standing backwardation between the winter and spring months with the April 2018 contract now trading just 6 cents lower than the January 2018 contract at $2.70/MMBTU versus 20 cents just a few weeks ago. The next 11 futures contracts remain under $3.00/MMBTU and the December 2018 contract is on the cusp of doing so, closing Thursday at just $3.01/MMBTU. Crude oil, meanwhile, recovered after falling to a 3-week low on Wednesday, rising 73 cents or 1.3% yesterday to close at $56.69/barrel. My Oil & Natural Gas Portfolio took it on the chin Thursday, falling 1.6% as returns since May 1 dropped to +28.3%, down 3% from a 52-week high. Still, the portfolio is up +6.2% over the past 30 days and 18% over the past 90 days and was overdue for a pullback. Subscribers can click HERE to view my current holdings, trades and twice-weekly Investing Commentaries. To learn more about subscribing and supporting the site, click HERE.

In its weekly Natural Gas Storage Report, the EIA announced Thursday morning that inventories rose by +2 BCF for the week of November 25-December 1, a month after the injection season had informally ended. The surprise build was 8 BCF larger than my projected -6 BCF withdrawal and an enormous 71 BCF bearish versus the 5-year average -69 BCF withdrawal. All 6 Regions saw bearish builds or injections, led by the South Central Region whose +21 BCF injection was 35 BCF bearish on its own versus its -14 BCF 5-year average withdrawal. Even the East and Midwest Regions which saw -8 BCF and -10 BCF withdrawals were quite bearish versus their respective -19 BCF and -27 BCF draws. With the small build, natural gas inventories rose to 3695 BCF while the storage deficit the 5-year average was slashed by more than two thirds to just -36 BCF, down more than -90 BCF from the intra-week peak of -130 BCF from just 3 weeks earlier.

While the exceptionally bearish storage injection was largely driven by record warmth across the Plains, such unseasonably mild temperatures still would have projected a withdrawal somewhere between -15 BCF and -25 BCF. It is this bearish loosening of supply/demand balance independent of temperature that has investors concerned and likely contributed to Thursday's weak report as well as the day's 5% sell-off. Following its morning release of the week's natural gas storage data, the EIA announced later in the afternoon its supply and demand data covering the same week of November 25-December 1. In the report, the EIA announced that domestic production rose another 0.5 BCF/day to a record 76.6 BCF/day, up a huge 5.5 BCF/day versus 2016. Canadian imports (5.2 BCF/day) and LNG imports (0.2 BCF/day), are both down negligibly from 2016 by -0.2 BCF and -0.1 BCF/day, respectively. Things look slightly better on the demand side with LNG feedgas demand up 1.6 BCF/day and LNG exports to Mexico up 0.3 BCF/day year-over-year. Even powerburn demand was up 0.3 BCF/day at 21.5 BCF/day despite the bearish weather pattern. Losses in the demand sector last week were driven by temperature-dependent variables such as residential and commercial demand. Regardless, the small gains in temperature-independent demand by no means come close to canceling out the surge in production. As a result, temperature-independent supply/demand balance--the difference between production, LNG and Canadian imports versus LNG and Mexican exports. As the Figure to the right shows, the year-over-year change in this temperature-independent supply/demand balance has transitioned steadily from a tight market last spring and summer to one that is modestly loose versus 2016. This temperature-independent looseness is being driven entirely by production with small year-over-year declines in LNG and Canadian imports and small gains Mexican and LNG exports insufficient to overcome this single variable. If the natural gas market is to rebalance itself and not be completely at the mercy of Mother Nature and res/com heating demand, demand elements such as powerburn and exports are going to need to rebound as prices drop and gas becomes increasingly competitive. Otherwise, come springtime when heating demand dries up for the year, the market could be very vulnerable should this imbalance persist. Click HERE for more on natural gas supply and demand data.

Following the EIA's Storage Report, I updated the rankings in my Natural Gas Storage Contest through Week 5. The top 10--out of 101 total entrants--are shown in the Figure to the right. Thanks to the surprise storage injection and sell-off in the sector throughout the week, it was a particularly challenging week for prognosticators. Of the 101 in the contest only 10 people received a non-zero score and only 5 of those didn't have that score thrown out as one of their two lowest so far. The highest score on the week was a mere 14 points compared to as high as 78 points in previous weeks. As a result, movement near the top of the rankings this week came down to who had built up a cushion of solid scores and was able to absorb a single bad week. SaintSinnerIdiot moved up one spot from second to first with 134 points while last week's leader Dclong is less than 1 point behind, also with 134. Outsider continues to hold down 3rd place. These three are currently in position to take home $250, $100, and $50, respectively, should they hold their spots for the next 5 weeks. RMF319 made the biggest move in the top 10, rising 5 spots to number 6 while Samson50 rose the most in the entire field, climbing 13 to #50. Submissions for Week 6 are now open, covering the storage week of December 2-8 and the closing price of natural gas for next Thursday, December 14. Here's to hoping that its a less volatile trading week with a more predictable storage withdrawal. Click HERE to view the updated rankings, inspect entrant profiles and submit your picks for Week 6. Do so now to role the dice but pick up a large time bonus or wait until the deadline next week to sacrifice the bonus multiple for higher precision.

Natural gas demand will continue to rise today as arctic air sets the stage for a rare winter weather event along the Gulf Coast. Lows this morning will be in the low 30s from the Texas-Mexico border all the way to eastern Louisiana with highs today only rising into the upper 30s and lower 40s, 20F colder than normal. As precipitation overrides this cold air, rain was changing to snow overnight from South Texas all the way to the northern Houston suburbs. Winter Storm Warnings are in effect from Corpus Christi to Alice this morning, an exceptionally rare region to see such headlines, where 2-4 inches of wet snow is possible. Even Brownsville, Tx, on the Rio Grande on the Texas-Mexico border is under a Winter Weather Advisory for up to an inch of snow, which would be only the third accumulating snow event since 1895. As the day progresses and this system tracks northeast, rain could change to snow from southern Louisiana--even including New Orleans--Mississippi, Alabama, and Georgia where a mix of Winter Weather Advisories and Winter Storm Warnings are in effect. Elsewhere, highs will be seasonally cool across most of the Ohio Valley and Mid-Atlantic where readings will be in the 30s to low 40s--5F-10F cooler than average. Across the northern Midwest and Northeast, readings will generally be within 5F of normal. This could set the stage for the first snow event of the year this weekend from the Tidewater of Virginia up to Boston as the Gulf storm slides northeast. Overall, the forecast mean population-weighted nationwide temperature today will fall another 1.4F day-over-day, thanks largely to the chill across the Deep South, to 39.8F, 3.3F colder than normal. Total Degree Days will rise to 25.5 TDDs, 2.7 TDDs greater than normal and the ninth most for December 8 in the last 37 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 very bullish -25 BCF/day daily natural gas storage withdrawal, 3 BCF larger than Thursday and more than double the -11 BCF/day 5-year average. By the end of the day the natural gas storage deficit versus the 5-year average--which likely flipped briefly to a storage surplus early in the week--will rise to around -17 BCF on its way towards -75 BCF over the next 2 weeks. Click HERE for more on today's projected draw and intraday natural gas inventories.

Looking ahead to next week, expect demand to be at or above average throughout the week as arctic air remains in place from the Great Lakes to the Northeast. Daily withdrawals will generally be in the -20 BCF/day to -30 BCF/day range, comfortably above the 5-year average -18 BCF/day. Right now it appears that next Wednesday, December 13, will be the coldest day of the week with a very bullish -30 BCF/day withdrawal possible as a reinforcing shot of arctic air settles south. The Figure to the right plots daily withdrawals for December 9-15. For the week, I am currently projecting a strong -171 BCF weekly withdrawal which would be 46 BCF bullish versus the 5-year average, propping the storage deficit back up to -60 BCF. Despite the bullishness of the build, 2016 will still have it beat with its -200 BCF draw and the year-over-year deficit will continue to fall, contracting to -165 BCF. Click HERE for more on next week's storage withdrawal.

Beyond next week, the models are in good agreement that there will be a warm-up, though there remains considerable disagreement as to its magnitude and duration with models repeatedly flipping back and forth between colder and warmer solutions. Regardless, with natural gas under $2.80/MMBTU in the heart of the winter with an ongoing and building storage deficit, natural gas investors have likely largely priced in a sustained warm-up through the end of the year. According to my Natural Gas Fair Price Model, the commodity is now undervalued by a steep 17% versus its Fair Price of $3.35/MMBTU. While natural gas is undoubtedly facing a significant long-term challenge from record production and a potential near-term threat from a mid-December warm-up, the bearishness in the sector right now is so ubiquitous and so pervasive that the commodity is due to rally, although admittedly I would be very surprised if we see $3.35/MMBTU this winter outside of a record January arctic blast. Cheaper prices, if anything, should spur fuel switching and boost temperature-independent demand over the next few weeks, something that we may already be seeing with daily natural gas powerburn consistently higher year-over-year despite colder temperatures this time last year. It is rare that we talk about powerburn during the winter months, but should this component of demand rise in coming weeks on the heels of cheaper prices, it could help blunt the impact record production and keep springtime inventories under 1800 BCF.

While I will not argue that natural gas is a solid long term investment based on current fundamentals (it's not), short-term upside outweighs near-term downside risk for at least a temporary bounce over the next week or two. I will not advocate going long in size, but will strong advise against getting short at these levels. Remember, natural gas fell to $2.75/MMBTU on October 27 as gloom and doom hung over the trading pits. Two weeks later after the temperature outlook trended colder (and with an assist from the November-December contract rollover and its associated contango), the commodity hit $3.20/MMBTU.