November 9, 2018

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The Polar Vortex Arrives As Natural Gas Demand Steamrolls Higher; Record Storage Withdrawal Expected Next Week As Reinforcing Shots Of Arctic Air Will Keep The Heaters Running; EIA Reports Larger-Than-Expected Storage Injection & Loosening Supply/Demand Imbalance, But Investors Don't Care; Crude Oil Slides Into Bear Market

6:00 AM EDT, Friday, November 9, 2018
In its weekly Natural Gas Storage Report for the week of October 27-November 2, the EIA announced Thursday morning that inventories rose by +65 BCF. This was 2 BCF larger than my projection and 17 BCF bearish versus the 5-year average. Total inventories rose to 3208 BCF in what is likely the penultimate injection of 2018 while the storage deficit versus the 5-year average contracted down to -621 BCF or -16%. The year-over-year storage deficit fell a sharp 42 BCF week-over-week to -580 BCF or -15%.The bearishness of the build was driven by the Midwest Region (+24 BCF versus 5-year average +15 BCF) and, for a second straight week, the South Central Region (+30 BCF versus 5-year average +23 BCF). You may recall that over the summer, the South Central Region was a consistent bullish overachiever thanks to strong powerburn cooling demand and LNG exports. However, with the shoulder season, powerburn demand has dried up and temperature-independent gains in electricity generation--even with strong substitution demand due to robust nuclear reactor maintenance--has not allowed demand to keep pace. Nonetheless, the South Central Region maintains the largest absolute storage deficit versus the 5-year average of any region by nearly a factor of 3 at -297 BCF, but the recent loosening of supply/demand balance in this stalwart for the bulls is somewhat concerning. On the other hand, the Northeast--which had seen consistently bearish injections throughout the summer--saw a mere +5 BCF injection, 1 BCF bullish versus the 5-year average and the only region that saw a bullish injection last week. This was likely due in part to colder temperatures across this region, but also due to a recent spike in transport capacity out of the Marcellus and Utica shales which has helped to decongest the region.

Overall, I view this week's EIA Report to be a modest disappointment, coming in bearish and slightly above most analyst estimates, including my own. Click HERE for more on the latest natural gas inventories.

After the morning's storage data, the EIA released its weekly natural gas supply and demand data just after the market close. On the bullish side of things, domestic production dropped 0.4 BCF/day from last week's record high to 87.5 BCF/day, although this is still up a mammoth 10.1 BCF/day year-over-year. Imports from Canada, meanwhile, dropped to another multi-year low of just 3.5 BCF/day, down 1.9 BCF/day from 2017. Imports have been curtailed since early October after a pipeline explosion in the network that pumped gas to the Sumas hub in Washington state. This pipeline is not expected to return to service until mid-November so expect several more weeks of suppressed imports. On the bearish side of things, however, Powerburn demand averaged just 21.9 BCF/day last week, down a disappointing 0.9 BCF/day year-over-year. Natural gas bulls had likely been hoping that after an exceptionally strong summer for powerburn, there could be some carryover after the cooling season ended thanks to new infrastructure and temperature-independent sources. Additionally, with strong nuclear outages just beginning to dip, expect substitution demand to be cut in the weeks to come, potentially suppressing powerburn demand further. Residential/Commercial heating demand was 23.4 BCF/day last week, up 1.1 BCF/day year-over-year in what was a mild week. All-told, total demand averaged 83.0 BCF/day, up just 1.9 BCF/day from 2017 which just isn't enough to compensate for the huge gains in production. As a result, temperature-adjusted supply/demand balance loosed 1.0 BCF/day week-over-week to -3.0 BCF/day loose versus the 5-year average, as shown in the Figure to the right. After an initial tightening to start the heating season to in the beginning of October, the supply/demand imbalance has weakened over the past three weeks, perhaps in response to higher natural gas prices leading some degree of demand destruction. Click HERE for more on the latest EIA supply and demand data.

Following the EIA's Storage Report, natural gas chopped around on either side of break-even before finishing the day down 0.3% at $3.54/MMBTU. It was the third straight day of rather listless trading for the commodity following Monday's 8.6% price spike. It is likely that, despite the modestly disappointing storage report, investors continued to overlook prior weeks' data in favor of the near term temperature outlook. There seems to be increasing downward pressure on natural gas, but continued exceptionally bullish runs of both the GFS and ECMWF computer models have repeatedly blunted any attempted pullbacks. Overnight, the GFS model did trend slightly warmer for the second half of November, perhaps bookending the upcoming series of arctic blasts. While the GFS at this range has head-faked investors before, it is possible this warming is the excuse that investors have been looking for to take profits. However, with the storage deficit versus the 5-year average likely to be approaching 4-year highs of -675 BCF by this time next week and the reliable ECMWF remaining cold through at least next weekend, investors may want something a bit more concrete before abandoning their longs. While I would not be surprised to see near-term strength in the sector as late-to-the party bulls get energized by the arrival of arctic air and large storage withdrawals, I continue to view the path of least resistance as favoring lower prices. I am maintaining a $3.25/MMBTU near-term price target on the commodity.

Crude oil tumbled for a ninth straight session on Thursday in the wake of a disappointing EIA Status Report on Wednesday, officially entering a bear market. WTI fell $1.00 or 1.6% to settle at $60.67/barrel, the lowest close since mid-March, while Brent slid $1.42/barrel to $70.65/barrel. While global demand fears have faded somewhat thanks to strong Chinese imports last month, investors are alarmed at the rapid rise in worldwide output, particularly from Saudi Arabia, Russia, and the US, following an over-correction in response to summertime fears of a supply crunch. While it seems to be an unpopular sentiment, I do feel that oil has over-corrected to the downside, and am looking for WTI to establish a bottom near $60/barrel. Nonetheless, I have reduced my price target to $66/barrel as I expect it will take some time for supply/demand balance to tighten back up in response to lower prices.

For the natural gas storage week of November 3-9 that ends today, I am projecting a +34 BCF injection, likely the last of the season. Despite the late-week surge in demand, such a build would still be 15 BCF bearish versus the 5-year average thanks to early week warmth. As the Figure to the right shows, it would be the third largest injection in the last 5 years, behind only identical +37 BCF builds in 2015 and 2016. It would also be a massive 47 BCF larger than last year's 5-year high -13 BCF withdrawal. While temperatures tumbled late, the mean nationwide temperature averaged 57.1F throughout the week, nearly 4F warmer-than-normal, fueled largely by exceptionally mild readings along the Eastern Seaboard with 70s as far north as Boston. Additionally, nuclear reactor outages continued to slide with substitution demand falling to 3.3 BCF/day, down nearly 1 BCF/day from the mid-October peak. These factors helped to drive double-digit daily injections during the first half of the week that more than countered the late week withdrawals. Should a +34 BCF injection verify, natural gas inventories would rise to 3242 BCF, although inventories likely peaked intra-week near 3250 BCF on Wednesday before withdrawals began the last two days of the week. The storage deficit versus the 5-year average would contract to -606 BCF while the year-over-year deficit would fall to -532 BCF. The EIA will release its official storage numbers for the week next Thursday, November 15, at 10:30 AM EDT. Click HERE for more on this week's projected injection.

Looking ahead to next week, the pattern will be dominated by the Polar Vortex, with likely two reinforcing shots of arctic air. The first shot moving southward from Canada today will slide eastward over the weekend bringing below-average temperature to nearly all areas east of the Rockies. However, it won't bring the same level of bitter cold that the Plains and Midwest are seeing today to the major demand centers of the Northeast. Nonetheless, it will still be sufficient to drive daily storage withdrawals on the order of -14 BCF/day through Monday. By early next week, however, a reinforcing piece of the Polar Vortex will rapidly slide south and, unlike its predecessor, will bring temperatures upwards of 20F below-normal to the entire East Coast. This could drive a daily withdrawal of -17 BCF/day by Wednesday, 13 BCF bullish versus the 5-year average -4 BCF/day, as forecast mean population-weighted nationwide temperatures fall to just 43.1F, more than 6F colder than today. While temperatures may moderate late in the week, it will be far too little too late to prevent a huge weekly withdrawal. The Figure to the right plots projected daily storage injections for the upcoming week. Overall, for the storage week of November 10-16, I am currently projecting a massive -92 BCF storage withdrawal which would be the largest in the last 5 years by a 31 BCF margin and the largest all-time for the period, handily topping the -78 BCF draw from 1996. It is also worth noting that with a surge in production across Appalachia over the past year, there remains some uncertainty about the impact of arctic air and freeze-offs, which could be far greater this year due to the northward progression of production. It is therefore possible that this projected draw could rise over the next week based on observed pipeline data. Regardless, should a -92 BCF draw verify, natural gas inventories would tumble to 3150 BCF in the first withdrawal of the season while the storage deficit, which had fallen each of the past two weeks, will surge to a new 4-year high of -672 BCF. This remains a preliminary projection and will be adjusted over the next 10 days based on observed temperatures and pipeline data. The EIA will release its official storage numbers for the week on Thursday, November 23, at 10:30 AM. Click HERE for more on next week's projected build.