January 9, 2019

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Natural Gas Tries To Rally With So-So Catalyst As Near-Term Temperature Outlook Trends Modestly Colder; Crude Oil Tops $50/Barrel Overnight Ahead Of Today's Forecast Slightly Bullish EIA Petroleum Status Report; Gas Demand To Sharply Recover Today As Projected Realtime Inventories Fall Under 2600 BCF

6:00 AM EDT, Wednesday, January 9, 2019
Natural gas continued to establish a base on Tuesday, reversing some of Monday's losses to finish up 3 cents or 0.8% at $2.97/MMBTU. However, the commodity finished near the session lows after trading more than 3% higher at $3.04/MMBTU in the opening minutes of the day. Since plunging the final day of 2018 to under $3.00/MMBTU for the first time since September, natural gas volatility has screeched to a halt with the front-month February 2019 contract trading within a comparatively tight 10 cent range. Bulls and bears continue to face eachother in what has become a bit of a standoff, weighing the impact of an extended string of exceptionally mild temperatures that will ultimately more than halve the storage deficit versus the 5-year average and completely erase the year-over-year deficit against prices that have far undershot their Fair Value, even accounting for this contraction, and the prospect of colder-than-average temperatures returning for late January and February. Tuesday's small rebound was driven by a near-term temperature outlook that trended colder with the 12Z ECMWF model forecasting above-normal 14-day total gas weighted degree days (GWDDs) for the first time in nearly two weeks, as shown in the Figure to the right. However, significant gains continue to be kept in check by the fact that longer term forecasts--namely those of the CFSv2 and ECMWF-EPS models--continue to show a return to seasonally cool conditions but no true arctic air. This is a rather lukewarm forecast. I still maintain that it is not safe to short deeply discounted natural gas into a cooldown of any magnitude in early January under $3.00/MMBTU, or even $3.25/MMBTU--the risk/reward is just not in the bear's favor at these levels. On the other hand, the bulls just don't have a compelling catalyst. It will be cooler and intermittently cold, but not on a sustained level. My price target remains $3.50/MMBTU, but this is rather speculative as it will take a true February arctic resurgence--which is not currently explicitly in the forecast--to achieve. Otherwise, I expect continued rangebound trading between $2.90/MMBTU and $3.10/MMTBU.

WTI crude oil, meanwhile, rose $1.26 or 2.6% on Tuesday to settle at $49.78/barrel, near the session's highs. It was the highest close since December 17 and marked the seventh straight day of gains, the longest streak since the period ending July 3, 2017. Brent added $1.39 or 2.4% to close at $58.72/barrel. The rally continues to be driven by expectations that OPEC+ members, led by Saudi Arabia, are actively making good on their pledge to remove 1.2 MMbbls/day from the worldwide oil market. The sector has also been propped up by Friday's better-than-expected Jobs Report announcing that 312,000 new jobs were created in December and optimism that a resolution in the US-China trade war may be in the works. Long-term, the commodity remains steeply undervalued--by nearly 16% according to my Fair Price Model--on a fundamental basis. However, the oil market is becoming increasingly overheated near-term and is one equities sell-off or bearish EIA Storage Report away from a quick pullback. I would therefore advise new investors to the sector to wait before aggressively entering the long trade at these levels and, for those already long, particularly the shorter term swing-traders, to consider taking profits should WTI punch through $50/barrel or Brent through $60/barrel.

My Oil & Natural Gas Portfolio continued its hot start to 2019 with a +1.2% daily gain on Tuesday. Year-to-date gains stand at +4.0% with gains in four out of the first five trading days of 2019. All five of my positions were in the black yesterday, led by my long oil position via short DWT with a +6.9% gain. This position stands at a moderate 6.2% of my holdings. Should WTI break $50/barrel, I will consider reducing exposure, even by realizing what will likely be around a 30% loss, to under 4% with the intention of re-accumulating on the long side at under $48/barrel. Long-term, my WTI price target remains $60/barrel. For the reasons discussed above, I continue to maintain a modest natural gas long position, currently worth 6.7% of my holdings via short DGAZ. This trade continues to lack a positive catalyst which is why the position is not larger. Should the temperature forecast status quo remain intact, I will consider reducing my holdings and moving to the sidelines should February 2019 prices top $3.10/MMBTU. Should prices drop under $3.90/MMBTU, on the other hand, I will consider accumulating further up to a maximum of 10% of my holdings. Should the commodity remain rangebound between these two price points, I am content to continue holding and let leverage-induced decay work in my favor. My largest current holding remains my long Cheniere Energy (LNG) trade, worth 10.9% of my holdings and up +6.5% from my basis after Tuesday's +2.9% daily gain. This position will benefit from cheap domestic natural gas, but could face a headwind from falling Asian natural gas prices. At this time, I have no intention to add to my position above $60/share, but will remain aggressively long with a conservative price target of $75/barrel. Click HERE for more on my current oil and natural gas holdings.

The EIA will be back to its traditional reporting schedule and will release its weekly Petroleum Status Report for December 29-January 4 this morning at 10:30 AM EDT. The American Petroleum Institute (API) announced after Tuesday's close that it was forecasting a -6.1 MMbbl crude oil storage drawdown, very bullish versus the 5-year average -2.6 MMbbl draw and the seventh largest draw for the December 29-January 4 period in the last 34 years since 1984. Should it verify, crude oil inventories would slide to 435.3 MMbbls while the storage surplus versus the 5-year average would contract to +29.5 MMbbls. Countering this large draw, the API also announced that it was forecasting large refined product inventory builds, as is typical over the holiday season. The Institute is forecasting a huge +10.2 MMbbl distillate build, more than 3 MMbbls bearish versus the 5-year average +7.1 MMbbl build but a +5.1 MMbbl gasoline build which is actually slightly bullish versus the 5-year average +6.5 MMbbl gain. All told, Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to rise +9.1 MMbbls, which is slightly bullish versus the 5-year average +10.9 MMbbl draw. The usual caveats apply regarded API data following consistently large misses throughout the last3 months. Nonetheless, following the report, crude oil traded steadily higher into the early overnight hours with WTI topping $50.50/barrel, up 1.5%. However, in order to maintain prices over $50/barrel, I expect that the EIA is going to have to deliver the goods today and announce a sizable inventory draw. Given the interval rally since last Friday, a report similar to that day's reported flat inventories accompanied by a large refined product build would likely prompt a pullback. However, should inventories fall more than -5 MMbbls and total refined products rise somewhere in the neighborhood of the API's split forecast, I expect investors would view this as a sign that inventories are beginning to tighten in response to supply cuts driving reduced imports and cheap oil fueling strong demand and prices could rally as high as $52/barrel near-term. Check back after 10:30 AM EDT on my Crude Oil Inventories Page HERE for the official EIA storage numbers.

Natural gas demand will surge today following Tuesday's dismal -2 BCF/day draw as arctic air nudges into the northern Plains and much more seasonable temperatures overspread the major demand centers of the Eastern Seaboard. Across North Dakota, highs will struggle to climb above 0F today with the town of Devil's Lake expected to only reach -1F and Grand Forks 3F. Of larger towns in the area, highs in Minneapolis will struggle into the mid-teens while Chicago will only reach the upper 20s, each 5F-10F below average. After reaching the mid-60s each of the past two days, today's readings only in the low 40s in St Louis and Kansas City--very close to historical normals--may feel quite a bit colder than they actually are. And further east, highs in Washington, DC, Philadelphia, and New York City will cool 5F-10F day-over-day into the upper 40s, "only" 5F-10F warmer-than-normal while Boston will enjoy one more mild, if rainy, day with highs near 50F, 10F-15F above-average. Thanks to the extensive cooldown, today's forecast mean population-weighted nationwide high temperature will plunge by 6.5F from Tuesday's readings but, highlighting just how balmy it was yesterday, this will still be a robust 5.1F warmer-than-normal. Total Degree Days (TDDs) will climb to 21.2 TDDs, still 5.4 TDDs fewer than normal and the 16th fewest TDDs for January 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 -16 BCF/day daily natural gas storage withdrawal, 14 BCF larger than Tuesday's draw but still an ugly 16 BCF bearish versus the 5-year average -32 BCF/day. By the late morning, projected Realtime natural gas inventories will (finally) fall below 2600 BCF and will settle near 2590 BCF by tonight. The storage deficit versus the 5-year average will fall to near -355 BCF--officially halving November's peak -730 BCF deficit--while the year-over-year deficit falls to -74 BCF. I project that this deficit will flip to a surplus for the first time in over a year on or around January 14 next week, though its rate of contraction will slow considerably. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories.