February 9, 2018

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Natural Gas Can't Hold Onto Gains As Dow Jones Falls Over 1,000 Points For The Second Time This Week; EIA Reports Natural Gas Production Rises To New Record High For Second Straight Week; Gas Demand Falters Today As Temperatures Moderate, But First Bullish Weekly Withdrawal In Three Weeks Projected For February 3-9

6:00 AM EDT, Friday, February 9, 2018
For the second time this week, the Dow Jones lost over a 1,000 points in a single session, dragging the commodity sector down with it. Natural gas traded over 1% higher early in the session before fading in the afternoon after the EIA reported a bearish weekly storage withdrawal and US markets plunged. Ultimately, the commodity lost a half cent or 0.2% to settle just under $2.70/MMBTU. In its weekly Natural Gas Storage Report, the EIA announced that natural gas inventories declined by -119 BCF for the period of January 27-February 2. While this was 1 BCF smaller than my -118 BCF draw and 10 BCF large than the -109 BCF analyst consensus, it was still 32 BCF bearish versus the 5-year average -151 BCF draw. Overall, I consider the withdrawal neutral versus expectations. With the withdrawal, natural gas inventories fell to 2078 BCF while the storage deficit versus the 5-year average broke under -400 BCF to -393 BCF. During the bearish withdrawals of the past two weeks, the storage deficit has contracted by 93 BCF from a peak of -486 BCF. Four out of the five natural gas storage regions saw bearish draws with the exception of the Midwest region whose -53 BCF draw just exceeded its 5-year average -49 BCF withdrawal. So far this heating season, a total of -1712 BCF has been withdrawn from storage through the first 13 weeks of the season, the second largest in the last 5-years and 162 BCF bullish versus the 5-year average. Click HERE for more on current natural gas inventories.

Crude oil, meanwhile, continued to deal with the ramifications of yesterday's record-setting upward revision of domestic production. WTI fell 34 cents or 0.6% to settle at $61.45/barrel, the lowest since January 2. The 5-session losing streak is the longest since March, 2017. Thanks to some post-2:30 PM selling, the WTI ETF USO finished 2.3% lower. Brent oil also saw its share of losses, falling 70 cents or 1.1% to $64.81/barrel, as the Brent-WTI spread fell to just $3.36/barrel, which could put further pressure on US exports.

For subscribers, my Oil & Natural Gas Portfolio was able to avoid most of the carnage and squeaked out a +0.1% daily gain. Gains since May 1, 2017 stand at a 52-week high, up +37.6%. I made 2 trades on the day, taking advantage of weakness in most markets. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

Following the release of its morning Natural Gas Storage Report, the EIA released its supply and demand data later Thursday afternoon for the week of January 27-February 2.. The Administration reported that natural gas production rose to another record, climbing 0.8 BCF/day week-over-week to 77.8 BCF/day, a massive 7.2 BCF/day higher year-over-year. Other elements of supply and demand have unsuccessfully chipped away at this massive year-over-year gain. Canadian imports stand at 5.9 BCF/day, down 0.1 BCF/day year-over-year, LNG exports are up 1.3 BCF/day and exports to Mexico are up 0.4 BCF/day. As a result, temperature-independent natural gas supply/demand balance is 5.5 BCF/day loose year-over-year, which is actually 0.8 BCF/day tighter than last week despite the rise in production, thanks to a recovery in LNG feedgas demand. The Figure to the right plots temperature-independent supply/demand tightness or looseness versus 2017 showing the steadily loosening market with last week's small recovery. Presently this 5+ BCF/day year-over-year market looseness has been overcome by strong residential/commercial, industrial, and powerburn demand in what has generally been a colder-than-average winter. However, when this heating demand fades in a month or so, many analysts and investors are expecting that this looseness will be fully realized and could result in rapidly building inventories and a contracting storage deficit, thereby justifying sub-$3.00/MMBTU prices despite a storage deficit in excess of -400 BCF. If there is one positive to take out of the data for the bulls, it is that production growth appears to have at least temporarily slowed with production only increasing by around 0.1 BCF/day to around 77.9 BCF/day for the current week ending on Friday. Click HERE for more on the latest natural gas supply and demand data.

Natural gas demand will tumble today to near-average levels as temperatures across the South and Mid-Atlantic rebound ahead of the next push of arctic air across the far northern Plains. There will be a very sharp dividing line between unseasonable warmth and arctic cold today across the Midwest with St Louis rising into the mid 50s--nearly 15F warmer than average--while just 300 miles to the northwest Des Moines will only reach the upper teens, 15F colder than average. This represents the trailing cold front of the storm system that is bring Chicago upwards of a foot of snow today, its largest storm in 3 years. Out ahead of this front, temperatures will warm 10F-15F day-over-day from eastern Texas through Arkansas, Tennessee, Kentucky, and into southern Ohio where highs will generally be in the upper 50s to lower 60s, 5F-15F warmer than average. The Megalopolis will be seasonal today with highs in the upper-40s in Washington, mid-40s in Philadelphia and New York City, and lower 30s in Boston, all within 5F of normal. The true arctic cold will be restricted to the far northern Plains today with much of the sparsely-populated Dakotas and Minnesota restricted to the single digits above or below zero, up to 20F colder than normal. As has been the story in February, this airmass will struggle to make much southward progress. Overall, the forecast mean population-weighted nationwide high temperature will warm 2.5F from Thursday to 43.3F today, 2.1F warmer than average. Total Degree Days will drop to 21.7 TDDs, 2.7 TDDs fewer than average and the 16th fewest for February 9 in the last 38 years. 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 -22 BCF/day daily natural gas storage withdrawal today, 7 BCF smaller than Thursday and right at the 5-year average. Click HERE for more on today's daily storage projection and intraday natural gas inventories.

For the natural gas storage week of February 3-9 that ends today, I am projecting a -183 BCF storage withdrawal, 29 BCF larger than the 5-year average -154 BCF, a welcome return to bullish storage withdrawals after a 2-week absence. As the Figure to the right shows, such a withdrawal would be the second largest in the past 5 years behind only 2014's -236 BCF draw. With domestic production remaining roughly stable just under 78 BCF/day, the 64 BCF week-over-week gain in withdrawal's from last week's -119 BCF draw will be driven by an increase in demand. With colder air settling south and east, I expect residential and commercial heating demand to rise by around 6 BCF/day week-over-week to 44 BCF/day with smaller gains in industrial demand (+1 BCF/day week-over-week) and powerburn demand (+1.5 BCF/day week-over-week). LNG feedgas demand looks to hold flat near 3.2 BCF/day, up a solid 1.2 BCF/day year-over-year. Should a -183 BCF withdrawal verify, natural gas inventories would fall to 1895 BCF, the lowest since May 7, 2015. The storage deficit versus the 5-year average would climb back above -400 BCF for the third time this winter to -422 BCF or -18% while the year-over-year deficit will rise to a new 2018 high of -567 BCF. For what it's worth, this corresponds to an historical Fair Price of $4.01/MMBTU, a 32% premium to current prices. The EIA will release its official withdrawal numbers for the week next Thursday, February 15, at 10:30 AM EDT. Click HERE for more on this week's projected natural gas storage withdrawal.

Long-term, temperatures continue to look seasonal to mild for the middle of February with some of the computer models still pointing to a return to colder weather for late February and early March, although this signal is not as strong as it was earlier in the week. As a result, my projected season-ending inventories have climbed by around 100 BCF over the past week from 1200 BCF to around 1320 BCF through March 30, 2018 as of this morning. As the Figure to the right shows, such a season-ending level would be the second lowest in the last 5 years behind only 2014's 824 BCF. It would be 382 BCF below the 5-year average and 731 BCF lower year-over-year. Inventories would be down an impressive 1150 BCF from 2016's record high 2468 BCF level. A 1320 BCF end-of-season storage level would correspond to a $3.92/MMBTU historical Fair Price. Click HERE for more on long-term natural gas storage projections.