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April 8, 2019

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Natural Gas Hangs On For Dear Life But Downside Risk Factors Beginning To Overwhelm Upside Catalysts Even As Major Winter Storm Tries To Rescue Demand This Week; Crude Oil Breaks Out To New Highs But Rig Count Finally Jumps; Gas Demand To Fall To 2019 Low Today As Spring-Like Warmth Dominates Lower 48


6:00 AM EDT, Monday, April 8, 2019
Natural gas continued a choppy trading pattern on Friday, but ended the week on a high note as the commodity rallied 1.1% to settle at $2.66/MMBTU. On the week, the commodity was essentially flat, up less than a penny with a narrow trading trade between an intraweek high of $2.72/MMBTU and a low of $2.63/MMBTU. On the bullish side, the storage deficit versus the 5-year average remains over -450 BCF, the near-term temperature outlook for April has trended more bullish compared to a week ago including the possibility of an historic Plains blizzard this week, and the commodity is now trading at a discount year-over-year. On the bearish side, even with the cooldown, I expect a steady contraction in the storage deficit which will still likely flip to a surplus versus 2018 within the next month. Additionally, record production and slumping LNG exports have reversed the recent trend of a tightening market and will support oversized injections throughout the first half of the Shoulder Season, even with slightly above-average gas-weighted degree days. Thursday's EIA-reported +23 BCF injection, larger than most analysts had expected, supports this loosening trend. While I remain cautiously long natural gas at this time, I am increasingly pessimistic about the sector's near-term prospects and my upside price target at this time is an anemic $2.70/MMBTU, above which I feel like it starts to make sense to get short targeting prices under $2.60/MMBTU.


Meanwhile, the rally in the oil sector continues to be unstoppable. WTI rose 98 cents or 1.6% on Friday to settle at $63.08/barrel, fueled by a better-than-expected jobs report. The commodity finished up 4.9% on the week and is up a massive 39% year-to-date. Brent oil rose 94 cents to $70.34/barrel, topping the $70/barrel threshold for the first time since November 8. That price point is up 31% year-to-date. The rally in the oil pits continues to be driven by optimism that OPEC's aggressive production cuts is successfully rebalancing global supply/demand balance, and may even overshoot. However, I am beginning to see signs that could lead to a pullback. While last week's larger-than-expected +7.2 MMbbl EIA-reported storage injection can be explained away as a one-off due to the close of Houston's shipping channel, the agency did announce that production rose to a new record high last week at 12.2 MMbbls/day, up 1.7 MMbbls/day from the year previous. Additionally, on Friday, Baker Hughes reported that the active oil rig count surged by 15 rigs, its largest jump since February 9, 2018. The move reverses a long stretch in which the rig count had seemingly ignored rising oil prices and continued to retreat, as shown in the Figure to the right. This suggests that producers are starting to "feel" prices over $60/barrrel. Should production rise in response to this increase in the rig count, oil sentiment could begin to sour, especially given the magnitude of the rally the sector has seen this year. At this time, I am maintaining a price target on WTI of $65/barrel, but above this level, I will begin to aggressively trim my long exposure.


My Oil & Natural Gas Power finished the week on a strong note, rising +0.7% on Friday behind strength in both oil and natural gas. On the week, the Portfolio rose +1.0% to finish at a new 2019 high, up +11.3% year-to-date, or +43.1% annualized. I made only a single trade on the week on Thursday, boosting my net long natural gas exposure by 2% via shorting additional DGAZ. My net long natural gas exposure stands at a moderate 7.8% of my holdings with an 11.8% short DGAZ position partially offset by a 4.0% UGAZ short. As discussed above, I am not feeling very strong about the upside potential of natural gas here and this will likely be a short-term swing trade. I will likely flip from net long to net short should the front-month contract take out the $2.70/MMBTU level this week. Meanwhile, my long WTI oil position--via short DWT--continues its winning ways with the 6.1% position up a massive +34% from my basis. Despite the sharp rally and rising rig count, at this time I am cautiously continuing to hold the entire position. But should the commodity reach $65/barrel, I will likely quickly take profits on this position and even consider flipping to short via short UWT. Click HERE for more on my current oil and natural gas holdings.


On Friday, the Commodity Futures And Trading Commission (CFTC) released its latest data detailing the natural gas holdings of money managers trading on the NYMEX through Tuesday, April 2. Continuing a recent trend, investors are transitioning their money from long to short--although they are taking their time about it given current prices. Open long positions fell by 16,044 contracts to 210,109 while shorts rose by 2,703 contracts to 78,848. Long holdings are down 60,131 contracts versus 2018 but shorts are down a steeper 78,656, as shown in the Figure to the right. This represents a net year-over-year excess of long holdings of 18,525 contracts. With each natural gas contract worth 10,000 MMbtus, or around $26,600 based on current pricing, NYME money managers have a robust $492.8 Million more wagered on the long side this year compared to last year, despite current prices being slightly cheaper than a year ago. On the one hand, this suggests investor confidence in the sector. However, should production continue to hit record highs and the storage deficit versus 2018 flip to a surplus within the next month as I fully expect it to, the exodus of this large surplus of long holdings could accelerate what would have otherwise been an organized pullback and overextend the commodity to the downside, under $2.50/MMBTU in a worst-case scenario. Thus, longer term, this year-over-year rise in bullish sentiment could come back to benefit the shorts. Stay tuned. Click HERE for more on current investor holdings.


The EIA will release its official Natural Gas Storage Report week of March 30-April 5 this Thursday at 10:30 AM EDT. For the week, I am projecting a +30 BCF injection. Such a build would be 25 BCF bearish versus the 5-year average, the fourth straight bearish report. As the Figure to the right shows, it would be the single largest injection in the last 5 years, just ahead of the +29 BCF build from 2015. The bearish build was driven by exceptionally weak demand at the beginning and end of the week that easily overwhelmed the brief shot of cold air and storage withdrawals on Sunday, Monday, and Tuesday. Mean nationwide temperatures averaged a balmy 53.8F on the week, which is very close to average which is a bearish set-up this time of year. Should a +30 BCF verify, natural gas inventories would rise to 1160 BCF while the storage deficit versus the 5-year average would slip to -480 BCF. The year-over-year deficit would slump a steep 25 BCF to -178 BCF. Click HERE for more on this week's projected injection.


Over the weekend, natural gas demand slumped to 2019 lows as a large area of seasonally mild temperatures overspread the nearly the entire Lower 48. Daily storage injections rose to +15 BCF/day and +18 BCF/day on Saturday and Sunday, respectively, significantly bearish versus the 5-year average +3 BCF/day build. Gas demand will continue falling today as the warmth remains entrenched. Along the densely populated I-95 corridor, Washington, DC and Philadelphia will approach 80F--nearly 20F warmer-than-normal--while New York City nears 70F, a more modest 10F warmer than normal. Further west, Chicago, Des Moines, and Detroit will reach the lower 70s while Minneapolis nears 70F, each 15F warmer than normal. Elsewhere across the Lower 48, highs will generally be at least 5F warmer than normal. The only exceptions be across far northern New England--Maine and New Hampshire--parts wof which are actually under Winter Storm Warnings for 4-8 inches of wet snow, but these areas are so sparsely populated and contribute little to nationwide demand. Overall, today's forecast mean population-weighted nationwide temperature will warm another 2.4F from Sunday to 66.1F, a balmy 10.7F warmer than normal. Total Degree Days (TDDs) will fall to just 5.4 TDDs, 5.8 TDDs fewer than normal and the single fewest for April 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 massive +20 BCF/day daily natural gas storage injection, 2 BCF larger than Sunday and 17 BCF bearish versus the +3 BCF/day 5-year average. The bearishness of the injection will be supported by LNG feedgas demand which over the weekend fell to a new 2-month low thanks to ongoing maintenance at the Sabine Pass plant and will remain soft today at just 3.3 BCF/day, down over 2 BCF/day from the recent highs and up a mere 0.1 BCF from a year ago. Projected Realtime natural gas inventories will top 1200 BCF by this morning and by the end of the day today will 1212 BCF. The storage deficit versus the 5-year average will contract sharply down to -435 BCF, down nearly 150 BCF from the recent intra-week peak just a month ago, while the year-over-year deficit will drop a steep 25 BCF today to -112 BCF, down nearly 200 BCF during the same period and within 3 weeks of flipping to a surplus. Click HERE for more on today's projected injection and Realtime natural gas inventories.


The remainder of the week's weather pattern will be dominated by a large and potentially historic Great Plains storm system. On the system's cold, northern side across the Dakotas, Minnesota, and Wisconsin, upwards to 2 feet of heavy, wet snow could fall as cold air is dragged southward. This will result in a spike in late-season heating demand. However, warm air surging northwards ahead of the system across the major population centers of the Eastern Seaboard will blunt the rise in demand and keep daily injections above +7 BCF/day throughout the week. At this time, I am projecting an exceptionally bearish +92 BCF natural gas storage build for the week of April 6-12, 71 BCF bearish versus the 5-year average and a massive 125 BCF larger than last year's -34 BCF withdrawal. As the Figure to the right shows, it will not only be the largest injection in the past 5 years, but the largest all time for the April 6-12 period, handily topping 2010's +80 BCF injection. Should it verify, inventories will soar to 1252 BCF while the deficit versus 2018 falls to an inconsequential -53 BCF. This remains a preliminary projection and will evolve as the temperature outlook and pipeline numbers do. Click HERE for more on the projected build.