October 9, 2018

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Natural Gas Roars To 9-Month High After Monday's 4% Spike; Realtime Natural Gas Inventories Projected To Top 3,000 BCF Today At The Latest Date In The Last 5 Years; Summer Officially On The Clock As Canadian Airmass Poised To Surge Southward & Boost Heating Demand; Dangerous Hurricane Michael Eyes Florida Gulf Coast & Well Inland

6:00 AM EDT, Tuesday, October 9, 2018
Natural gas quickly erased losses from late last week, surging 12 cents or 4.0% on Monday to settle at $3.27/MMBTU, topping my price target and reaching its highest level since January 2018. The close was the sixth highest of 2018 behind the 5-day stretch from January 23-29 during which prices topped out at $3.63/MMBTU. The rally was largely driven by expectations of an early southward surge of Canadian air over the next two weeks that could maintain a -600 BCF storage deficit versus the 5-year average through at least late October. It is also possible that rapidly developing Hurricane Michael played a role in Monday's strength. Although the storm is forecast to strike well east of the primary natural gas production wells, rig operators in the Gulf announced Monday that 11% of natural gas production--or around 0.4BCF/day--had already been shut in ahead of the storm. If such shut-ins did contribute to the rally, then it is a rather soft rally as it is unlikely that Michael will shut in more than 2 BCF/day during its lifetime, losses which could easily be exceeded by cooling demand losses associated with power outages and more cloudy, rainy temperatures well inland. While the rally in natural gas--which is now approaching 20% in the past three weeks--is certainly not unreasonable given the 5-year low inventories and ongoing favorable temperatures, I feel that natural gas is rising to levels that are not sustainable. While a series of modified arctic blasts over the next 10 days will drive early heating demand, November still looks to be above-average--though less so than it did this time last week--and this could prolong the tail end of the injection season, allowing inventories to rise higher than some expect. Natural gas is being driven almost entirely by the temperature outlook at this time and it is likely that investors have largely priced in the impact of the upcoming cold shots. The commodity is nearly "priced for perfection." Should the pattern flip to a milder set-up in November, the commodity could rapidly pullback. Until I see a new bullish catalyst capable of driving natural gas to its next level, I feel that downside risk now outweighs upside potential and the commodity could easily drop to under $3.10/MMBTU on an EIA inventory miss, warmer temperature forecast, or delay in any of the upcoming LNG export plants.

Crude oil, meanwhile, finished lower on news that the US may be softening its stance on Iranian oil exports, granting waivers to some nations come November. Losses were limited, however, by the threat of hurricane-related disruptions from Michael as well as news of a refinery fire in Canada. WTI finished down 5 cents or 0.1% to $74.29/barrel while Brent fell a steeper 25 cents of 0.3% to $83.91/barrel. At these prices, I remain neutral on WTI, with a bullish Brent-WTI spread contrasting sharply with memories of last week's 2018-high +8.0 MMbbl EIA-reported inventory build. Until a new catalyst presents itself--or US exports start behaving as one would expect with the economics of a wide WTI/Brent spread--I feel that WTI will be unable to climb above my price target of $77/barrel while Brent could be on a course back towards $80/barrel.

My Oil & Natural Gas Portfolio took it on the chin on Monday, thanks to heavy losses in my large natural gas short trade. The Portfolio fell -0.9% to reduce 2018 year-to-date gains to +19.9% or +25.8% annualized. With the spike in natural gas, my short trade now stands at 12.0% of my holdings, with a 21.1% UGAZ short position offset by a 9.1% DGAZ short position. The UGAZ short is down -27.2% from my basis while DGAZ is up +39.4%. As painful as being on the wrong side of this trade near-term has been, I continue to feel that current prices are unsustainable if and when temperatures moderate. Should the commodity top $3.30/MMBTU, I will consider adding to my short UGAZ trade, likely the final addition, taking the total short exposure to 15% of my portfolio. Should prices continue to rally above $3.30, I will exercise risk management, trimming the position size any time net exposure tops 20%, reducing exposure back to 15%-17.5%. At current prices, I am neutral on WTI and would target prices under $70/barrel before rebuilding my long trade after last week's profit-taking. I remain bearish on Brent prices and continue to expect the Brent-WTI spread to contract, which is why I have dedicated over35% of my holdings to an arbitrage trade via shorting offsetting positions in DWT and BNO that will be profitable when the spread contracts. My target spread remains $5/barrel. Finally, I continue to watch LNG shipper Golar Limited (GLNG) and will consider adding to my microscopic 2.6% position on a dip under $27.20/share, likely doubling the position size. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will rise today as unseasonably warm temperatures shift eastward, boosting cooling demand across the densely-populated I-95 corridor. Highs will rise into the 80s as far north as New York City today, 15F-20F above-average, with such warmth extending inland to cities such as Pittsburgh and Buffalo. Further west across the Great Lakes, temperatures will be similarly warm with Detroit, Chicago, and St Louis all rising into the 80s, also 15F-20F above-average. However, this un-ending summer will be on the clock as much colder temperatures prepare to sweep southwards from the Great Plains. Highs today will only be in the low 40s from Denver to Billings, MT to Bismarck, ND to Sioux Falls, SD, all around 20F colder-than-normal. On the back side of the storm system currently dumping prodigious rains across the Heartland, rain will turn to snow across central Nebraska today, dumping 2-4 inches in the Valentine area. Across the Deep South, Hurricane Michael will be quickly closing in on the Florida Panhandle today, ahead of a Wednesday landfall. Besides some late day thunderstorms from outer rainbands, there should be minimal direct effects from the system, with temperatures rising into the mid-to-upper 80s. As of 11 pm Monday, the storm was a high-end Category 1 storm with 90 mph winds but was still forecast to intensify into a dangerous Category 3 storm with winds of 120 mph by tomorrow. Fortunately, storms in this region have a history of rapidly weakening just before landfall due to the colder waters of the continental shelf (see Opal '95, Lili '02, and even Katrina '05)--except when they don't (see Camille '69). Regardless, the storm is a threat to bring a dangerous storm surge of 8-12 feet across parts of Apalachicola Bay and dangerous winds to Panama City, Apalachicola and other coastal cities in the region. Even inland, the storm is a major threat, particularly in the Tallahassee region, which is under an inland Hurricane Warning. In 2016, Hurricane Hermine made landfall in a similar spot as Michael is expected to as a mid-range Category 1 storm, and cut power to 325,000 people, including 80% of Tallahassee, for up to a week. Michael is expected to be a considerably stronger and larger storm and I would not be surprised to see power outages exceed those of Hermine. With the storm passing well east of the major natural gas infrastructure of the Gulf of Mexico with daily production shut ins not exceeding 0.5 BCF/day, I expect power outages and losses in cooling demand due to rain-cooled temperatures to be a bearish, but localized impact from the storm. See the NHC Homepage HERE for the latest on the storm. Returning to today, the forecast mean population-weighted nationwide temperature will rise 0.6F day-over-day to 71.3F, a massive 8.7F warmer-than-normal, thanks to the exceptional heat across the East. Total Degree Days will rise to 9.7 TDDs today, 2.1 TDDs greater than normal and the 7th most for October 9 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 +12 BCF/day daily natural gas storage injection, around 0.5 BCF smaller than Monday but still 1 BCF bearish versus the 5-year average +11 BCF/day. By mid-morning today, I project that Realtime natural gas inventories will top 3,000 BCF. As the Figure to the right shows, this would be by far the latest in the season that storage levels topped 3000 BCF in the last 5 years, nearly three weeks behind second place 2014 when inventories reached the threshold on September 20. In contrast, in 2016, inventories reached 3,000 BCF way, way back on June 7, more than 4 months earlier than this year. The storage deficit versus the 5-year average will continue to slowly contract, falling to -605 BCF by this evening while the year-over-year deficit narrows to -611 BCF. The two deficits will likely cross over by Thursday. Click HERE for more on today's projected injection and Realtime natural gas inventories.

For the remainder of the week, cooling degree days will plummet while heating degree days will soar as a Canadian airmass replaces the subtropical one currently in place across the East. However, the net effect on natural gas demand looks to be relatively minimal with daily injections holding near the 5-year average. As the Figure to the right shows, daily storage injections will be steady near +12 BCF/day through Thursday before potentially dropping to +11 BCF/day on Friday as much below-average temperatures reach the major cities of the East Coast. For the storage week of October 6-12, I am projecting a +83 BCF natural gas storage injection, a slight 4 BCF bearish versus the 5-year average but a huge 28 BCF larger than last year's 5-year low +55 BCF build. It would be the third largest injection in the last 5 years, ahead only of 2015's +91 BCF and 2014's +94 BCF builds. Should a +83 BCF injection verify, natural gas inventories would rise to 3039 BCF while the storage deficit versus the 5-year average would narrow to -603 BCF while the year-ago deficit would slide to -599 BCF. Click HERE for more on this week's projected storage injection.