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Natural Gas Flat Near 2-Year Lows After Uninspiring EIA Storage Report & Warming Long-Term Models While Crude Oil Rises On US-China Trade War Optimism; Natural Gas Supply/Demand Imbalance Tightens On Recovering LNG Feedgas & Discounted Prices; Gas Demand To Rise Today As Arctic Air Expands, Driving A Return To Bullish Weekly Storage Withdrawals

6:00 AM EDT, Friday, February 15, 2019
In its weekly Natural Gas Storage Report for February 2-8, the EIA announced Thursday morning that natural gas inventories rose by +78 BCF. This was equal to my projection and was a very bearish 82 BCF smaller than the 5-year average -160 BCF draw.

Latest EIA-Reported Natural Gas Inventories

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

The bearishness of the draw was led by the South Central Region which saw an ugly +4 BCF regional storage injection versus the 5-year average -44 BCF draw, driven by consistently warmer-than-normal temperatures as well as sharply lower LNG exports from Sabine Pass and Corpus Christi due to maintenance and fog. All five regions remain at large storage deficits versus the 5-year average that exceed 8%, but three out of the five are now at year-over-year surpluses. Interestingly, the South Central Region has the largest absolute deficit versus the 5-year average (-118 BCF), but also the largest year-over-year surplus (+47 BCF) of any region. With the -78 BCF draw, natural gas inventories fell to 1882 BCF while the storage deficit versus the 5-year average contracted to -333 BCF. Inventories are a slight -30 BCF smaller than this time last year. Click HERE for more on the latest EIA-reported natural gas inventories.

Temperature-Adjusted Supply/Demand Imbalance Versus The 5-Year Average

Figure 2: Click here for more information on on natural gas supply/demand balance

After the morning's storage data, the EIA released its supply/demand data in the afternoon, covering the slightly different period of February 7-13. There were no earth-shattering changes in the report. Production climbed 0.4 BCF/day week over week to 87.7 BCF/day, 10.4 BCF/day year-over-year. LNG exports began their recovery, climbing 0.7 BCF/day week-over-week to 4.0 BCF/day, up 0.7 BCF/day year-over-year. Powerburn demand out-performed, averaging 26.3 BCF/day, up a strong 2.4 BCF/day year-over-year, despite residential/commercial heating demand being effectively flat year-over-year last week. I calculated that the temperature-adjusted supply/demand imbalance tightened slightly last week by 0.4 BCF/day to -1.3 BCF/day loose versus the 5-year average. This means that, for any given temperature, I would expect the daily natural gas storage withdrawal to be 1.3 BCF/day smaller--or bearish--compared to the 5-year average. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make long-term storage and price projections. The natural gas sector remains loose versus the 5-year average thanks to surging production but, as the Figure to the right shows, has become steadily less so since October and November as natural gas prices have tumbled thereby increasing the competitiveness of natural gas to other fuels, domestic production has seemingly plateaued, and LNG feedgas demand moves towards new highs. With the commodity trending towards $2.50/MMBTU and the Elba Island, Freeport, and Cameroon LNG export plants set to open in the coming months, I expect this imbalance to continue to tighten up, perhaps catching the bears by surprise. Click HERE for more on the latest natural gas supply/demand data.

44-Day Hybrid Model Forecast Departure From Average Daily GWDDs

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

Following the EIA's data releases, natural gas put up a total snoozefest of a trading session, falling less than a penny to $2.57/MMBTU. The EIA's reported storage withdrawal fell within expectations and the near-term computer models responsible for Wednesday's sell-off stabilized. The gold-standard long-term 44-day ECMWF-EPS model did come out Thursday evening and, as expected based on the performance of the short-term ECMWF and its ensembles, trended sharply warmer. As a result, my Hybrid Model, which integrates ECMWF ENS, GFS, ECMWF-EPS, and CFSv2 data, continued to warm. As shown in the Figure to the right which plots daily departure-from average gas-weighted degree days (GWDDs) for the next 44-days, this model is now forecasting a double-peak of colder-than-normal temperatures, first on February 19 and then on February 28 before steadily warming thereafter. Daily GWDDs are now unlikely to be more than 10 GWDDs/day greater than normal on any day--my threshold for an "arctic outbreak"--as all near- and long-term models are consistent in maintaining a stubborn ridge across the East allowing above-average temperatures to remain over the major demand centers even as the Heartland is exceptionally cold. If there is one silver lining for the bulls it is that the ECMWF-EPS--and my Hybrid Model--are not forecasting a dramatic pattern flip in which arctic air is replaced by a balmy Gulf airmass. Instead, it currently appears that, after the arctic cold retreats, the lower 48 will remain generally seasonal into the end of March. As a result of these changes, I am currently projecting season-ending natural gas inventories to finish near 1175 BCF, 460 BCF smaller than the 5-year average. Based on all currently available model data, it now appears very unlikely that the storage deficit versus the 5-year average tops -500 BCF, which is a pre-requisite of mine for natural gas to reach $3.00/MMBTU. Thus, I am maintaining a $2.90/MMBTU near-term price target on the commodity representing more than 10% upside, which will likely be only reached should 6-week temperature forecasts remain stable or even cool some from current levels.

Meanwhile, WTI and Brent oil both rose on Thursday as investors cheered expectations that the US will extend the deadline for implementing new Chinese tariffs by an additional 2 months. WTI rose 51 cents or 1% to $54.41/barrel while WTI climbed 96 cents to $64.57/barrel, its highest close since November. The Brent-WTI spread again topped $10/barrel, which theoretically should suppress imports to the US and support exports.

My Oil & Natural Gas Portfolio settled down -0.2% on Thursday as natural gas ETFs fell, reducing year-to-date gains slightly to +4.1% or +32.2% annualized. Fearing a pullback and over-exposed in US equities, I made a single trade on the session, selling the entirety of my Kinder-Morgan (KMI) position, realizing a +4.7% 1-week gain. Click HERE for more on my current oil and natural gas holdings.

Today's Forecast Departure From Average High Temperatures

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

Natural gas demand will rise slightly today to wrap up the week as arctic air expands across the heartland, but will remain below-average thanks to unseasonable warm from the Gulf Coast to Maine. Highs will rise into the 60s as far north as the Philadelphia suburbs, while New York City and Boston both reach the low-to-mid 50s, all 10F-20F warmer-than-normal. Across the Southeast, Raleigh, NC and Richmond, VA could both reach the low 70s, 20F-25F warmer-than-normal. On the other hand, after falling to below 0F overnight, Minneapolis, MN will struggle into the lower teens today while Chicago will be stuck in the upper teens and Kansas City only reaches the lower 20s, all around 20F colder-than-normal. Further south, Topeka, KS will only reach the lower 20s while Oklahoma City, which was approaching 80F early in the week, will barely reach 40F, both 15F-25F colder-than-normal. Nonetheless, due to population patterns, the warmth across the East will drive demand today. The forecast mean population-weighted nationwide temperature will cool -0.5F from Thursday thanks to the expanding arctic air across the Central US but will still be 4.0F warmer-than-normal thanks to the balmy East Coast. Total Degree Days (TDDs) will rise to 19.7 TDDs, still 3.5 TDDs fewer than normal and the 11th fewest for February 15 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day forecast.

Projected Natural Gas Storage Withdrawal For February 9-15: 5-Year Historical Comparison

Figure 5: Click here for more information on natural gas inventories.

Based on this outlook and early-cycle pipeline data, I am projecting a -18 BCF/day daily natural gas storage withdrawal, 3 BCF larger than Thursday's bearish draw, but still 3 BCF smaller than the 5-year average. For the natural gas storage week of February 9-15 that ends today, I am projecting a preliminary -162 BCF natural gas storage withdrawal. This would be a welcome return to above-average weekly withdrawals--15 BCF larger than the 5-year average--after the previous week's 5-year low -78 BCF draw. It would be the second largest draw for the February 9-15 period, behind only 2014's -227 BCF draw. The bullishness of the draw was driven by much cooler temperatures which averaged 40.9F, down from 47.7F a week earlier, as well as LNG feedgas demand which rose 10.5 BCF week-over-week to 28.9 BCF as flows the Sabine Pass and Corpus Christi rapidly recovered. Should a -163 BCF draw verify, natural gas inventories would fall to 1719 BCF while the storage deficit versus the 5-year average would begin its recovery, climbing to -348 BCF. Additionally, the temperature-independent natural gas supply/demand would continue to tighten, falling to just 0.6 BCF/day loose versus the 5-year average. The EIA will release its official storage numbers for the week next Thursday, February 21 at 10:30 AM EDT. Click HERE for more on this week's projected withdrawal. Look for natural gas demand to rise through the weekend as arctic air expands and for a second straight bullish storage withdrawal next week.

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