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Natural Gas Demand Falls Below Average To Start The Week As September-Like Airmass Dominates East, But Early-July Forecast Trends Warmer Over The Weekend; Natural Gas Remains Undervalued & A Solid Long-Term Buying Opportunity; Preliminary Bullish +54 BCF Storage Injection Projected For June 17-23

6:00 AM EDT, Monday, June 26, 2017
Natural gas rose by 4 cents or 1.2% on Friday to settle at $2.93/MMBTU. However, the rally was insufficient to cancel out Monday's nearly 5% loss and the commodity lost 3.6% on the week. The losses were driven by forecasts that trended sharply cooler for the last week of June and the first week of July that will likely blunt natural gas demand for the next few days. However, even taking these forecasts into account, natural remains undervalued by an average of 4.1% according to my 8-month Fair Price Model as demand now appears likely to quickly rebound in early July as forecasts warmed over the weekend as well as ongoing market tightness that should support longer term demand.

Crude oil also rebounded on Friday, climbing 27 cents or 0.6% to settle at $43.01/barrel. It was the commodity's 5th consecutive weekly loss--an ugly 4.4% dive--the longest such streak since the initial oil rout in mid-2015. Oil's losses have continued unabated even as crude oil inventories fall to multi-month lows thanks to continued gains in domestic oil production, which investors feel could undermine OPEC's efforts to manage a normalization of supply/demand balance.

On the week, my Oil & Natural Gas Portfolio lost 1.4%, but halved early week losses in the past two days with gains of 0.3% and 0.85% on Thursday and Friday, respectively. Since May 1, the portfolio is up 9.1%. See my Portfolio Page HERE for my live holdings, as well as a new Trading Commentary for the upcoming trading week. If you have not yet subscribed, click HERE to learn more and help support the site. Thank you again to all who have signed up so far!

NYMEX Long & Short Positions Of Money Managers

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

On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly report detailing money manager oil and natural gas positions on the NYMEX as of June 20. The CFTC showed that natural gas investors continue to liquidate their long exposure to natural gas, although the increase in short positions has slowed. Open long positions tumbled by 25,541 contracts week-over-week to 254,149 as investors were likely either forced out or abandoned ship as prices fell under $3.00/MMBTU. Open short positions rose 1,116 contracts--the smallest weekly increase in 6-weeks--to 199,981. Natural gas Bullish Sentiment--the fraction of open money manager contracts held long--fell by 2 percentage points to 56%. The Bullish sentiment remains in the lower third of its 52 week range (43% to 79%) and 6 percentage points below its 52-week average (62%), but still 9 percentage points higher than this time last year. Overall, I continue to feel the further the Bullish Sentiment falls below the 52-week average, the more pressure there will be on the short side to maintain a steady stream of bearish news to keep the price down. Should the temperature forecast warm, the market tighten, or even investors just come to the realization that season-ending inventories are unlikely to top 4,000 BCF, the commodity is poised to rally as weak short positions bail. See more on natural gas investor holdings HERE. Crude oil Bullish Sentiment tumbled a whopping 7 percentage points week-over-week as long positions fell by 17,210 contracts and short positions rose by an enormous 40,668 contracts. At 61%, bullish sentiment is down 13 percentage points year over-year and within 5 percentage points of the 52-week low of 56%. The Bullish Sentiment reached as high as 91% in February and it has been downhill ever since as investors continue to express their anxiety over rising domestic production with their pocket books. Eventually, the bearish skew of investor holdings will help bolster a sustained rally in the sector once fundamentals improve. The keyword there is "eventually." Make no mistake: the bears are currently in control of the oil sector and will be until either domestic production or the rig count falls or the storage surplus continues to fall despite rising production such that investors can no longer ignore it. See more on crude oil investor holdings HERE.

Natural Gas Storage Projection For June 17-23: 5-Year Historical Comparison

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

The EIA will release its weekly Natural Gas Storage Report for June 17-23 this Thursday at 10:30 AM EDT. I am projecting a preliminary +54 BCF storage injection for the week which would be 18 BCF bullish versus the 5-year average. As the Figure to the right shows, it would be the second smallest storage injection for June 17-23 in the last 5 years behind only last year's exceptional +41 BCF build, which is also the smallest build in the full 23 year period for which EIA storage data is available. The injection was driven by persistently warmer-than-average temperatures, particularly across the Desert Southwest, California, and the Northeast. On the week, the mean population-weighted nationwide temperature averaged 77.1F, a solid 2.3F warmer than the historical average of 74.8F. This, in addition to cheaper natural gas prices, helped drive powerburn to a weekly average of 30.5 BCF, up 0.7 BCF/day week-over-week. On the other hand, LNG feedgas deliveries to the Sabine Pass Liquefaction plant were just 11.1 BCF this week, down a steep 4.2 BCF from last week's 15.3 BCF as Tropical Storm Cindy reduced tanker traffic in the Gulf of Mexico forcing pipeline flows to decline. Most of these losses were likely countered by production rig shuts in the Gulf which likely shaved off at least 0.5 BCF/day in production for the week. Should a +54 BCF verify, natural gas inventories would rise to 2824 BCF while the storage surplus versus the 5-year average would drop sharply to +188 BCF or +7%, the first time the surplus has been below +200 BCF since mid-February. The year-over-year deficit, however, would slide to -312 BCF or -10%, a trend that will likely accelerate in coming weeks, something may have scared investors last week, despite the otherwise very bullish nature of this report. See more on this projection on my Weekly Natural Gas Storage Page HERE. This remains a preliminary projection and will be revised further over the next 48 hours as finalized pipeline data is integrated into my model.

Today's Forecast Nationwide Departure From Average High Temperatures

Figure 3: Click here for more information on on the near-term forecast.

Over the weekend, natural gas demand fell sharply as a much cooler September-esque airmass settled over the Heartland and shifted east. Estimated daily injections rose to near +8 BCF on Saturday and then reached the 5-year average daily build for the first time in 2 weeks on Sunday with a +10 BCF injection. Estimated natural gas powerburn on Sunday only reached 24 BCF, due to a combination of the traditional weekend lull in electricity demand as well as the cool temperatures. Natural gas demand will continue to weaken as the work-week begins as temperatures cool further across the East and remain unseasonably chilly across the Plains and Midwest. Highs today will be in the lower 60s from Minneapolis to Milwaukee to Buffalo, NY--nearly 20F cooler than average--while areas from northern Oklahoma, Arkansas, Tennessee, and North Carolina will struggle to get out of the 70s. This will dramatically suppress Powerburn levels from week ago levels and I expect that Powerburn will be under 30 BCF/day today. Highs across the Megalopolis will range from around 80F in Washington, DC to the mid-70s in New York City and Boston, around 5F cooler than average. Areas across the Pacific Northwest will remain warm with Seattle and Portland both likely reaching the low-to-mid 80s--around 10F warmer than average--although this will by no stretch mitigate the chill across the East. Overall, the forecast mean population-weighted nationwide temperature today will only reach 72.3F today, down nearly 6F from last week's peak and 3.4F cooler than average. Forecast Total Degree Days will only reach 8.4 TDDs today, a whopping 4.4 TDDs fewer than average and the second fewest for June 26 in the last 37 years dating back to 1981. See more on today's temperature and degree day outlook HERE. Based on this forecast and early-cycle pipeline data, I am projecting a +11/day BCF daily storage injection, just over 1 BCF bearish versus the 5-year average. See more on today's projected storage injection HERE.

NWS 10-14 Day Temperature Outlook

Figure 4: Click here for more information on on the extended-term forecast.

For the remainder of the week, natural gas demand will likely bottom on Tuesday and Wednesday and Wednesday with daily storage injections reaching +12 BCF/day--2 BCF/day bearish. By the end of the week, demand could rise sharply as temperatures across the Mid-Atlantic and Northeast rise back into the upper 80s and lower 90s and readings across Texas and the Southeast return to near seasonal levels, even as the Northern Plains remains unseasonably cool. Nonetheless, the damage will have been done and, for the week of June 24-30, I am projecting a +66 BCF weekly storage injection which would be neutral versus the 5-year average and would be the third smallest storage in the last 5 years (though by a large margin), behind only 2012's +38 BCF build and 2016's +39 BCF build. Looking longer term, over the weekend, the outlook for the first week of July trended warmer with at-or-above average temperatures now expected over the Heartland by the 4th of July weekend and lasting into mid-July. This is reflected in the Figure to the right showing the National Weather Service's 10-14 day outlook. As a result, my projected injections for the weeks ending July 7 and July 14 have trended smaller as demand rises with builds likely in the +50s, although an injection in the upper +40s cannot be ruled out for July 8-14. As it stands on Sunday evening, should the current forecast hold, total natural gas inventories will likely be just under 3,000 BCF by July 14 while the storage surplus versus the 5-year average will have fallen to around +165 BCF, nearing a 5-month low of +156 BCF on February 17. Stay tuned as this forecast evolves.Click HERE for more on the extended temperature outlook

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