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Natural Gas Reverses Gains As EIA Reports Smaller-Than-Expected Storage Withdrawal and Computer Models Continue To Trend Milder; Crude Oil Bounces On Saudi Export Cut Pledge; Natural Gas Supply Continues To Rise As Production Falls But Canadian Imports Bounce; Gas Demand To Fall For A Fifth Straight Day Today With Single-Digit Draw Expected

6:00 AM EDT, Friday, December 14, 2018
In its weekly Natural Gas Storage Report for December 1-7, the EIA announced Thursday morning that inventories dropped by -77 BCF.

Current EIA-Reported Natural Gas Inventories

Figure 1: Click here for more information on natural gas inventories.

This was 5 BCF smaller than my -82 BCF projection and was a neutral 2 BCF smaller than the 5-year average. With the draw, inventories fell to 2914 BCF while the storage deficit versus the 5-year average dropped for the first time in a month, falling to -723 BCF or -20% in what will likely be the first of a string of weeks that could see this deficit fall under -600 BCF.

The two largest regions for driving heating demand--the Midwest and East--reported near-average draws at -29 BCF and -20 BCF, respectively. A bearish -7 BCF withdrawal in the South Central region (5-year average: -15 BCF) was partially countered by a bullish -15 BCF draw in the Pacific region (5-year average: -10 BCF). All 5 regions continue to maintain storage deficits that are in excess of 10%, led by the South Central region at -326 BCF or -27%. Expect this to change over the next 2-3 weeks as much warmer temperatures prompt a collapse in heating demand. Click HERE for more on current natural gas inventories.

Total Natural Gas Supply (Canadian Imports + LNG Imports + Production)

Figure 2: Click here for more information on on natural gas supply.

Following the morning's storage data, the EIA also released its weekly natural gas supply and demand data for December 6-12 shortly after the market close. Note that this is different than the 7-day period for storage data. The greatest action was found on the supply side. After rising to record highs each of the past three weeks, natural gas domestic production unexpectedly slumped by 1 BCF/day from the previous week to 87.6 BCF/day. It is unclear whether this is due to an actual decline in production or whether the previous weeks were overestimates and those numbers will ultimately be revised lower. Nonetheless, domestic production remains up a huge 9.5 BCF/day year-over-year. As a counter to the drop in production, Canadian imports jumped 1.1 BCF/day week-over-week to 4.8 BCF/day, the highest since late October. Canadian imports had fallen to multi-year lows last month after a pipeline explosion in southern British Columbia cut imports to the Pacific Northwest by over 1 BCF/day, a situation which now appears to be resolved. Canadian imports are still down 0.6 BCF/day year-over-year. The gain in Canadian imports, coupled with a 0.1 BCF/day increase in LNG imports, was more than enough to counter the surprise drop in production and boosted total natural gas supply by 0.2 BCF/day from the previous week to 92.6 BCF/day, up 8.9 BCF/day year-over-year. On the demand side, residential/commercial heating demand remained strong for one final week at 45.6 BCF/day, up a strong 7 BCF/day year-over-year. Of some concern, however, powerburn demand remained week, perhaps in response to demand destruction from higher prices, sliding 1.3 BCF/day from 2017 to 25.0 BCF/day. Click HERE for more on current natural gas supply and demand.

44-Day Forecast Departure-From-Average Gas-Weighted Degree Days

Figure 3: Click here for more information on on the temperature forecast

Natural gas prices gapped up 3% overnight Wednesday following a nearly 10% 2-day loss on Tuesday and Wednesday after the 00Z and 06Z model runs trended colder. Prices briefly topped $4.30/MMBTU just before the storage data was released. However, the combination of a withdrawal slightly below expectations and a warming trend in the 12Z model runs prompted the commodity to erase these gains and then some, losing 1 cent and closing at $4.12/MMBTU. It was the third straight day of losses for the sector. The sell-off was prompted by a warming trend in the 14-day computer model outlook by both the ECMWF and GFS models. This warming trend extended to the long-term twice-weekly 44-day ECMWF-EPS model, the most recent run of which was released on Thursday. This model continued to trend milder and for the first time in several weeks actually is actually warmer than its stablemate CFSv2. Both models agree that while temperatures may cool for the last few days of December, there could be a renewed period of warming for the first week of January that would drive gas-weighted degree days back below-normal, as shown in the Figure to the right. Click HERE for on the near- and long-term model forecast on my Advanced Model Page. While I am maintaining my $4.00/MMBTU near-term price target on the commodity, I would not be surprised to prices fall towards $3.75/MMBTU should the current model trends hold. If models were to trend transiently colder again, I see a bounce as a profit-taking or short selling opportunity, not as the beginning of a new leg higher.

Crude oil, meanwhile, recovered from Wednesday's disappointing EIA inventory numbers and late-day fade, rallying sharply late in Thursday's session to finish the day up $1.43 or 2.8% and settle at $52.58/barrel. Brent tacked on $1.30 or 1.2% to close at $61.45/barrel. The rally was driven after Saudi Arabia would cut exports to US refineries in an attempt to prevent domestic inventories from ballooning. This is yet another key fundamental move to rebalance US and global oil supply/demand balance and comes after oil prices were once again approaching 52-week lows following a tepid investor reaction to last week's OPEC+ supply cuts. While the pledged reduction in Saudi exports is not a cure-all and on its own will not rebalance US markets, I feel the most bullish aspect of the news is what it shows: major oil producers are increasingly committed to keeping WTI prices above $50/barrel and Brent above $60/barrel. It is for this reason that I am maintaining a WTI upside price target of $60/barrel.

Current Oil & Natural Gas Holdings

Figure 4: Click here for more information on on my current Oil & Natural Gas holdings.

My Oil & Natural Gas Portfolio staged a sharp intrasession rebound on Wednesday, recovering an early session drop of -1.1% to finish the day up +1.0. Year-to-date gains now stand at +4.7%. The late-day move higher was driven by my short DWT position, which tumbled 10.5% on the day. My long WTI position via short DWT stands at 7.6% of my holdings (with the remainder of the holding goings towards offsetting my short BNO position as part of a Brent-WTI pair trade). I added to this position on Wednesday's drop, boosting my holdings by around 1.5%. At this time, I am in the trade for the long haul. I have no plans to add to the position unless WTI falls under $50/barrel. My price target remains $60/barrel. My natural gas short position stands at a modest 7.3% of my holdings, comprised of a 5.6% DGAZ long and a 1.7% UGAZ short position. My downside target remains $4.00/MMBTU. Should natural gas drop below $4.00/MMBTU--or perhaps even $3.90/MMBTU should forecasts trend milder still--I will plan to take profits on half of my position and will transfer the remainder of the funds to short UGAZ so as to better protect against leverage-induced losses. I will cover the entirety of my 5.6% DGAZ position and then short a 2% addition to UGAZ. This will reduce my DGAZ holdings to zero, boost my UGAZ holdings to around 3.7% and halve overall natural gas exposure. I will only add to my short position should natural gas rally back up towards $4.25-$4.50/MMBTU. My largest directional holding remains my long position in Cheniere Energy (LNG). On the one hand, a slowing global economy is of significant concern for the growth of LNG exports, but declines in US natural gas are only boosting his the company's profit spread. At this time, my price target is conservatively set at $75/share. Click HERE for more on my current oil and natural gas holdings.

Today's Forecast Departure From Average High Temperatures

Figure 5: Click here for more information on on the near-term forecast.

Natural gas demand will fall for a fifth straight day today as well-above average temperatures dominate nearly the entire nation. With the exception of the highest elevations in the Rockies, all of the lower 48 looks to top the freezing mark today. The largest anomalies will be across the Northern Plains and Ohio Valley. Highs will reach the low 40s as far north as north Dakota while areas further east from Indianapolis towards Detroit and Pittsburgh approach 50F, all 10F-20F warmer-than-normal. The exception to the above-average temperatures today looks to be the state of Texas which, in the wake of Thursday's potent storm system, will only reach the mid-40s across the northern part of the state to mid-50s across the central and southern regions. It will be a wet and windy day across the Mid-Atlantic and Northeast today with isolated flash flooding possible where heavy rain falls atop the recent snowpack. Highs along the I-95 corridor today will be generally in the 50s from Washington, DC through New York City, 10F warmer than normal. Overall, the forecast mean population-weighted nationwide temperature today will warm 2.9F from Thursday to 48.4F today, a robust 6.8F above-average. Total Degree Days will fall to a mere 16.7 TDDs, 7.4 TDDs fewer than normal and the 7th fewest for December 14 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day data. Based on this forecast and early-cycle pipeline data, I am projecting a very bearish -7 BCF/day daily natural gas storage withdrawal, 4 BCF smaller than Thursday's draw and 14 BCF bearish versus the 5-year average. Click HERE for more on today's temperature and degree day data.

Projected Natural Gas Storage Withdrawal For December 8-14: 5-Year Historical Comparison

Figure 6: Click here for more information on natural gas inventories.

For the natural gas storage week of December 8-14 that ends today, I am projecting a -130 BCF natural gas storage withdrawal. On the one hand, this would be the largest weekly draw so far this season. However, it would still be 14 BCF bearish versus the 5-year average and 36 BCF smaller than last year's draw. As the Figure to the right shows, it would be the third smallest draw in the last 5 years, less than half the 5-year high of -270 BCF, one of the largest draws on record, from back in 2013. Should a -130 BCF withdrawal verify, natural gas inventories would fall to 2784 BCF while the storage deficit versus the 5-year average will contract for a second straight week, sliding to -709 BCF. The year-over-year deficit, meanwhile, will tumble to -686 BCF. Click HERE for more on this week's projected draw. The EIA will release is official storage numbers next Thursday, December 20, at 10:30 AM EDT.

Disclaimer: Natural Gas & Oil Storage Projections, Intraday Natural Gas Stats, Renewable Energy Stats, Morning Reports, and fundamental pricing models are released by Celsius Energy as experimental products. While they are intended to provide accurate, up-to-date data, they should not be used alone in making investment decisions, or decisions of any kind. Celsius Energy does not make an express or implied warranty of any kind regarding the data information including, without limitation, any warranty of merchantability or fitness for a particular purpose or use. See full Privacy Policy HERE.