July 8, 2019

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Natural Gas Surges 5% Friday On Potential Sustained Mid-July Warmth While Oil Nets First Weekly Loss In Three On Selling-The-News, Demand Worries, & Smaller-Than-Expected Inventory Draw; Oil & Natural Gas Portfolio Reaches 2019 High; First Bullish Natural Gas Storage Withdrawal In 16 Weeks Expected In Thursday's EIA Report; Eyeing The Gulf For Potential Late-Week Tropical Development

6:00 AM EDT, Monday, July 8, 2019
For a second time in two weeks, natural gas shorts got squeezed. The commodity spiked 13 cents or 5.6% on Friday to settle at $2.42/MMBTU. For the week, the commodity was up +4.8%, the second straight weekly gain of more than 4%. It was also the highest close for natural gas since May 31 and welcome relief for a commodity that has spent much of the past two months near 3-year lows. Even with the rally, however, natural gas is still trading 15% lower compared to 2018 when prices settled at $2.86/MMBTU. However, one thing that is higher year-over-year is volatility. 10-day average volatility stands at a robust +/-1.8% per day, up a massive 0.8% year-over-year when volatility was languishing near +/-1.0% per day. And, as the Figure to the right shows, volatility has been consistently higher than 2018 since the beginning of May. This is good news for day traders and even swing traders who need this sort of movement to generate trading opportunities, but is bad news for long-term long holders of the leveraged ETFs, particularly UGAZ, DGAZ, and BOIL. As I've discussed previously, the leverage-induced decay of these products is accelerated by volatility, although traditionally this is a problem during the winter, not the typically slow summer.

The primary driver for this increase in volatility has been unusual variation in the near-term temperature outlook. Typically, run-to-run variation in 2-week computer model forecast is small during the summer and prices do not typically fluctuate much in response . However, this summer, investors are much more keyed into the near-term outlook and much greater than normal variation, particularly in the operational GFS. Throughout last week--and continuing over the weekend--this forecast trended steadily warmer for mid-July, a shown in the Figure to the right, with both the ECMWF ENS and GFS ENS forecasting above-average 14-day accumulated gas-weighted degree days (GWDDs), although the GFS ENS GWDD outlook did dip some Sunday evening. The longer-term late-July forecast has also continued to look warmer-than-normal. This will lend further support to powerburn demand, which has already been considerably higher year-over-year even with lackluster temperatures. It is for this reason that I am projecting smaller-than-normal natural gas storage injections for at least each of the next 3 weeks. While it is certainly possible that natural gas could pull back near-term as investors take profits from the recent run--the commodity is up more than 10% over the past 2 weeks--I remain bullish on the sector and am maintaining a summer 2019 price target of $2.60/MMBTU. Above this level, look for the fuel-switching that has driven powerburn more than 3 BCF/day higher than 2018 to begin to relax and the market to start to loosen back up.

Meanwhile, crude oil rallied on Friday, but this couldn't prevent the first weekly loss in 3 weeks. WTI rose 17 cents or 0.3% to $57.51/barrel while Brent gained a steeper 93 cents or 1.5% to $64.23/barrel. On the week, WTI fell 1.6% while Brent fell 0.8%. The weekly loss was driven by the combination of a sell-the-news event after OPEC agreed to keep production cuts in place, ongoing concerns about the global demand outlook, and a disappointing -1.1 MMbbl EIA-reported domestic inventory drawdown on Wednesday. Additionally, the commodity is up more than 10% from the early June lows and investors were waiting for any excuse to take profits--and they got three. Nonetheless, according to my Fair Price Model, the commodity still remains 4.4% undervalued versus a Fair Price of $60.32/barrel based on the latest inventories. And with supply/demand balance tightening, this Fair Price rises to $62/barrel by the end of the summer. At this time, I remain bullish on the sector an am maintaining a Price Target of $65/barrel on the assumption that the supply/demand balance will tighten further.

Thanks to another strong performance by natural gas, my Oil & Natural Gas Portfolio rose to a new 2019 high on Friday. The Fund gained +2.2% on the day--one of the best single days of 2019--to push year-to-date gains to +14.3% or +28.1% annualized. On the week, the Portfolio gained +0.8%. I made two trades last week. The first, on Monday, July 1, was to cover half of my short DWT position --a 4% position--that provided long WTI exposure for a +25% profit, when WTI was just under $60/barrel. This proved to be a fortuitous trade as the commodity promptly lost 5% shortly after the profit-taking. The second, on Tuesday, July 2, was a short sale of SVXY to further boost my long VIX exposure as a hedge on my oil and equity longs. Net long natural gas exposure via partially offsetting short positions in UGAZ and DGAZ stands at a modest 7.0% while long oil via short DWT stands at a small 4.2% after last week's profit taking. At this time, I am satisfied with my current positions. Should natural gas top $2.60/MMBTU, I will likely close out the entirety of my long exposure while I will cover my DWT short should WTI top $65/barrel. After last week's squeeze, I have no intention to add to my natural gas long holdings at these comparatively lofty levels, but will consider rebuilding my DWT short on a break under $56/barrel. Otherwise, I am content to hold onto both positions long term if needed as I will also likely realize profits via leverage-induced decay, especially since volatility in both sectors is elevated above seasonal averages. Click HERE for more on my latest oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for the week of June 29-July 5 this Thursday, July 11, at 10:30 AM EDT. At this time, I am projecting a +66 BCF storage injection which, after 16 straight bearish reports, would be 5 BCF bullish versus the 5-year average. As the Figure to the right shows, such a build would be the third largest in the past 5 years, but would be a mere 13 BCF larger than the 5-year minimum build of +53 BCF in 2016. The (potential) bullish build was driven by strong powerburn cooling demand (despite not particularly hot nationwide temperatures) that averaged 38.4 BCF/day, up 1.4 BCF/day from 2018, according to my Realtime Powerburn Calculations. Should a +66 BCF injection verify, natural gas inventories would rise to 2456 BCF while the storage deficit versus the 5-year average would rise to -157 BCF. Click HERE for more on this week's projected injection.

Over the weekend, natural gas demand held above-average but fell from Saturday to Sunday as below-average temperatures overspread the central US. I project daily injections of +7 BCF/day and just under +9 BCF/day on Saturday and Sunday, respectively, versus the 5-year average of +9 BCF/day. Gas demand will dip slightly today to what will likely be a weekly low. Highs will be at or below-average across much of the lower 48 today, with the exception of the Southeast. The largest anomalies will likely be across the Mid-Atlantic where rain and clouds will keep highs in the 70s to near 80F from Washington, DC to Baltimore and Philadelphia, 10F cooler than normal. It will also be a chilly day across the far less populous Intermountain West and Pacific Coast, where Billings, MT will only see the low 70s, Salt Lake City near 80F, and Sacramento the low 80s, all 5F-10F cooler-than-normal. Elsewhere highs will be up to 5F cooler-than-normal. The exception to this chill will be across the Southeast, where highs from Birmingham, AL to Atlanta, GA to Charlotte, NC will see the lower 90s, around 5F hotter-than-normal. Nonetheless, thanks to the cooldown elsewhere, today's forecast mean population-weighted nationwide temperature will cool 1.0F from Sunday to 75.8F, 1.5F cooler-than-normal. Total Degree Days (TDDs) will fall to 11.2 TDDs, 2.7 TDDs fewer than normal and the 10th fewest for July 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 +9 BCF/day daily natural gas storage injection, 0.5 BCF smaller than Sunday's build and very close tot he 5-year average. By tonight, projected Realtime natural gas inventories will reach 2380 BCF while the storage deficit versus the 5-year average will hold near -160 BCF. The year-over-year surplus, meanwhile, will rise by +3 BCF to +265 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. For the remainder of the week, look for natural gas demand to recover slightly with daily draws falling to +9 BCF/day by Wednesday, 2 BCF bullish versus the 5-year average, as temperatures warm across the Eastern Seaboard. However, one complicating factor is the potential for an area of low pressure to develop across the northeastern Gulf of Mexico by Thursday or Friday that could develop into a Tropical Depression or Tropical Storm. Such a system would be unlikely to impact Gulf production or LNG exports as it moves slowly south of the Florida panhandle for several days, but is likely to bring a prolonged period of rain and cloud cover to Florida and the Deep South. This could cut down on cooling demand across a major hub for powerburn this time of year and would likely be a net negative for natural gas supply/demand balance. Stay tuned.