April 9, 2018

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Natural Gas Storage Inventories Tumble Towards 1300 BCF As Withdrawals Extend Into The Second Week Of The Historical Shoulder Season Amidst Record April Cold; Nuclear Reactor Outages Remain Below-Average As Maintenance Season Fails To Deliver; Crude Oil Crushed Despite Bullish Fundamentals As Trade War Talks Heat Up

6:00 AM EDT, Monday, April 9, 2018
Natural gas rebounded on Friday, climbing 3 cents or 2% to settle at $2.70/MMBTU, as computer models continued to point to a sustained period of unseasonably cold temperatures heading into the second half of April that will blunt the beginning of the injection season. Nonetheless, thanks to a soft EIA storage report on Thursday and profit-taking, natural gas still lost 1.2% on the week as the commodity remains tightly rangebound. Natural gas could see some early-week strength this week as the natural gas storage deficit versus the 5-year average is expected to once again approach early-January levels near -500 BCF by mid-April. While inevitably warmer temperatures will likely result in a dramatic loosening of supply/demand balance leading to an erosion of this deficit, a -500 BCF deficit is quite the cushion and could rally enough support to the bullish cause to prevent a swandive once the big injections start. However, I continue to feel that higher prices near-term are only a set-up for lower prices later this spring with a price floor near $2.50/MMBTU, even if it takes us a bit longer to get there. Long-term I continue to feel that a decline to $2.50/MMBTU is bullish for natural gas in that it will boost powerburn demand, limit the rate of erosion of the storage deficit before new demand projects come online later this year that will more permanently rebalance the market.

Crude oil, meanwhile, was caught up in a global market rout amidst fears of an escalating US-China trade war, falling $1.48 or 2.3% on Friday to settle at $62.06/barrel, the lowest close since March 19. The pullback was also supported by news out of Baker Hughes that the oil rig count surged by 11 rigs last week to 808, the highest oil rig count in 3 years since March of 2015. WTI lost 4.4% on the week, its largest percent loss since the week ending February 9. Despite the pullback, domestic fundamentals remain strong with the EIA reporting on Wednesday that US inventories had declined by -4.6 MMbbls the week ending March 30, the largest drawdown since January and the third largest for the March 24-30 period--typically part of the commodity's bearish shoulder season--in the last 33 years. Additionally, Brent oil fell only 3.2% to $67.11/barrel last week compared to WTI's 4.4% tumble meaning that the Brent-WTI spread rose back above $5/barrel. This should continue to support US exports, which had already climbed to a record 2.18 MMbbl/day the previous week, and limit imports, further tightening supply/demand balance. The concern among investors, of course, is that a trade war between the US and China, the world's top oil consuming nations, could significantly suppress worldwide demand. Nonetheless, there is no evidence of this to date and I remain an oil bull despite all the blustering talk with a $70/barrel 4-month price target for WTI.

My Oil & Natural Gas portfolio took it on the chin on Friday, tumbling -1.6%, one day after climbing to within 0.3% of a new all-time high. For the week, the portfolio lost 1.1%. Gains since the portfolio's inception on May 1, 2017 stand at +41.7% while 2018 year-to-date gains stand at +8.3% or +31.7% annualized. Since rising to new highs on March 22, the portfolio has largely been trading laterally as I have repositioned and re-allocated cash. Despite last week's decline, I remain confident in my current holdings. For subscribers, I have published a new Monday Investing Commentary HERE. 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.

The EIA will release its weekly Natural Gas Storage Report for the week of March 31-April 6 that ended last Friday on Thursday at 10:30 AM EDT. I am projecting a -15 BCF storage withdrawal for the week. While this is considerably smaller than the -20 + BCF draw this time last week as it is becoming increasingly apparent that supply/demand balance is loosening as heating demand (slowly) falls, it remains a strong 24 BCF bullish versus the 5-year average +9 BCF storage injection, typically the season's first. The bullish withdrawal was driven by consistently colder-than-average temperatures throughout the week, particularly across the major heating demand centers of the Midwest and Great Lakes. While the mean population-weighted temperature last week was only 1F colder-than-average at 53.2F, this reading was inflated by above-average warmth across the South, a region that contributes little to demand this time of year, masking the large colder-than-average anomalies across the northern tier driving strong heating demand. As the Figure to the right shows, such a withdrawal would be the largest in the last 5 years for the March 31-April 6 period, easily topping 2013's -7 BCF draw. It would also be the fourth largest for the period since 1994. Should a -15 BCF withdrawal verify, natural gas inventories would fall to 1339 BCF, the lowest since May 2014, while the storage deficit versus the 5-year average would rise to -371 BCF. The year-over-year deficit would rise to -721 BCF. This remains a preliminary projection and will be revised over the next 48-72 hours as finalized temperature and pipeline data is integrated into my model. Click HERE for full details on the week's projected withdrawal.

Over the weekend, natural gas demand rose as record cold April temperatures remained entrenched across the Midwest and Great Plains. Highs on Sunday were at least 10F below-average across essentially all areas east of the Rockies as another reinforcing shot of arctic air cleared the Eastern Seaboard. Projected daily withdrawals reached -12 BCF/day and -13 BCF/day for Saturday and Sunday, respectively, more than 15 BCF bullish versus the 5-year average daily injection of +5 BCF/day. Natural gas demand will fall today to start the week, but will remain well-above average for this time of year. Once again, most areas east of the Rockies will be at or colder-than-average today with the largest anomalies across the northern Plains and Mid-Atlantic where highs will be in the 30s and 40s and 40s and 50s, respectively, each 15F-20F below-average. In the wake of another coating of snow on Sunday, Minneapolis will limp into the upper 30s while Chicago, Des Moines, and Detroit will only reach the lower 40s. Amidst a cold rain, the I-95 corridor from Washington, DC to Boston will only reach the mid-40s, 10F to 20F colder-than-normal. The Southeast will see a moderating trend with highs rising from the 50s and low 60s on Sunday into the 60s to 70s today from east Texas through Georgia today, within 5F of normal. Overall, the forecast mean population-weighted nationwide temperature today will rise 2.0F from Sunday to 50.1F, still a chilly -5.6F colder-than-normal. Total Degree Days today will tally 17.1 TDDs, 6.0 TDDs greater than normal and the 7th most for April 9th in the last 37 years since 1981. Click HERE for on today's temperature and degree day outlook.

Based on this forecast and early-cycle pipeline data, I am projecting a -9 BCF/day daily natural gas storage withdrawal, 4 BCF smaller than Sunday but still a whopping 14 BCF bullish versus the 5-year average +5 BCF/day injection. By this evening, projected Realtime natural gas inventories will be agonizingly close to dropping below 1300 BCF at around 1305 BCF. Late yesterday, the natural gas storage deficit versus the 5-year average climbed back above -400 BCF for the first time since February and will finish today near -415 BCF. The year-over-year deficit, meanwhile, will top -750 BCF early this morning, likely on its way to -800 BCF within the next week or two. Click HERE for more on today's projected daily storage withdrawal and realtime natural gas inventories.

Natural gas demand will continue to slide on Tuesday with daily withdrawals falling to just -3 BCF/day with daily injections resuming on Wednesday meaning that, at this time, it appears unlikely that inventories will drop below 1300 BCF this year, settling intra-week near 1302 BCF or 1303 BCF. By Thursday and Friday, daily injections could break double digits into bearish territory as nationwide temperatures rapidly moderate, marking the end of the withdrawal season. Overall, for the week of April 7-13, I am projecting a preliminary -14 BCF/day natural gas storage withdrawal, a huge -52 BCF bullish versus the 5-year average and the only weekly storage withdrawal for the period in the last 5 years. Click HERE for more on this week's projected withdrawal. Thanks to the late-week storage injections, natural gas inventories would finish the week at 1323 BCF, good enough to push the storage deficit versus the 5-year average to -425 BCF and the year-over-year deficit to -784 BCF. While the injection season is likely to (finally) begin the next week, I do expect enough cold air to stick around to prompt another bullish departure from the 5-year average with an injection between +45 BCF and +55 BCF, which would push the year-over-year deficit above -800 BCF.

In other news, nuclear reactor outages have remained well below-average as we move further into the spring maintenance season, restricting an important seasonal source of natural gas demand. Through Friday, total outages tallied just 369 GWh, or 15.5% of capacity. This is down 169 GWh or -31% from 2017 and 121 GWh or -25% versus the 5-year average. As the Figure to the right shows, outages have been rising over the past 6 weeks but have remained consistently below the 5-year average since mid-February and below year-ago levels since mid-March. 12 reactors are currently reporting 100% outages while another 16 are reporting partial outages ranging from 1% to 80% of capacity. The April-to-May period is historically at time when nuclear reactors shut down for scheduled maintenance and refueling, a process that can take several weeks, during which time natural gas typically steps in to fill the lost output. This is an important source of natural gas demand during the typically weak shoulder season. As of Friday, however, natural gas substitution demand stood at just 3.1 BCF/day, a dismal 1.4 BCF/day less than last year and 1.2 BCF/day below the 5-year average. So far, Mother Nature has picked up the slack and favorable temperatures continue to drive gas demand, but weak nuclear substitution demand is yet another bearish factor driving an underlying loosening of natural gas supply/demand balance. When heating demand fades, weakness in this typically reliable source of demand will further exacerbate market looseness driven by record production.