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Natural Gas Squeezes The Shorts After The EIA Reports Second Straight Smaller-Than-Expected Injection--But Multi-Period Cooldown May Kneecap This Bullish Catalyst; Crude Oil Pulls Back Further On Demand Growth Concerns, But Commodity Remain Solidly Undervalued; Natural Gas Production Rises To A Record High While Temperature-Adjusted Powreburn Remains Strong

6:00 AM EDT, Friday, August 16, 2019
In its weekly Natural Gas Storage Report for August 3-9, the EIA announced that natural gas inventories rose by +49 BCF. This was right at the 5-year average and was a huge 13 BCF smaller than my projected build, the largest miss to the downside this summer and the second straight.

Latest EIA-Reported Natural Gas Inventories

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

With the injection, natural gas inventories rose to 2738 BCF while the storage surplus versus the 5-year average held flat at -111 BCF (-4%). Inventories are +357 BCF or +15% higher than the same week in 2018. The neutrality of the report was remarkably well distributed across all of the storage regions with each region coming in within 1 BCF of its 5-year average. The largest injection was in the Midwest Region which saw inventories rise +28 BCF, 1 BCF larger than the 5-year average. On the other hand, the South Central saw a -2 BCF inventory withdrawal, right at the 5-year average. While neutral, the draw is particularly impressive since the LNG plants the dot the region saw some of the lowest demand during the course of the week. All 5 storage regions remain at year-over-year storage surpluses, led by the South Central Region at +138 BCF (+17%), while four out of the five regions remain at storage deficits versus the 5-year average, interestingly led also by the South Central Region at -43 BCF (-4 BCF). At a +2 BCF surplus, the Midwest is the only region not at a deficit versus the 5-year average.

Click HERE for more on this week's official EIA storage data.

Daily Natural Gas Production

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

After releasing the storage numbers in the morning, the EIA followed up with its supply/demand data in the afternoon. Of note, this period--August 8-14--differs from the storage week of August 3-9. Most notable among this data was the fact that natural gas production rose to an all-time high for a second straight week, rising +0.3 BCF/day to 91.7 BCF. Production is up a massive +7.5 BCF/day year-over-year, as shown in the Figure to the right. However, the gain in total supply was blunted somewhat by weak Canadian imports which averaged just 4.2 BCF/day, down a full 1.0 BCF/day from a year ago. As a result, total supply averaged 96.0 BCF/day, up "only" 6.5 BCF/day from 2018. While it is encouraging near-term for the bulls to see Canadian production suppressed--it should be concerning as well. This is an additional 1 BCF/day of natural gas supply that can be rapidly turned back on should prices rise and it becomes economical again--just one more factor limiting serious rallies in the sector. On the demand side, powerburn rose to 41.4 BCF/day, tied for a summertime high. This is particularly impressive since it was 1.6 BCF HIGHER than 2018, despite that fact that gas-weighted degree days (GWDDs) for the week were 4.1% LOWER than a year ago, highlighting just how strong temperature-adjusted powerburn demand has been this year--3.04 BCF per GWDD versus 2.8 BCF per GWDD last year. This means that, were this year's GWDDs equal to those of 2018, powerburn would have averaged a whopping 43.2 BCF/day. Residential/commercial demand was 8.6 BCF/day, an encouraging 1.1 BCF/day higher than a year ago, while Mexican exports were essentially flat versus 2018 at 5.1 BCF/day. As I have discussed it repeatedly throughout the week, it should come as no surprise that it was LNG feedgas that let down natural gas demand last week. Feedgas averaged just 4.1 BCF/day, still up 0.8 BCF/day, but more than 2 BCF/day below its recent highs. Click HERE for more on the latest EIA-reported natural gas supply/demand data.

Forecast Daily Departure from Normal GWDDs

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

I have discussed multiple times that natural gas is oversold and undervalued at current levels--by around 17% according to my Fair Price Model--but that the commodity was lacking any sort of catalyst to sustain an upward move. With a second straight smaller-than-expected draw suggesting that cheap natural gas was finally supporting a tightening market, it seemed that natural gas had finally found a catalyst. And with 73% of money managers short the commodity according to the CFTC's latest data, the sector was set for a squeeze. And squeeze it did. The front-month September 2019 contract surged 9 cents or 4.2% to settle at $2.23/MMBTU, after trading intra-day as high as $2.27/MMBTU. It was the highest close in a month for the sector and is within 7% of my $2.40/MMBTU upside price target. However, the mileage that investors get out of this potential catalyst may be limited. Towards the end of the session and into the overnight hours, the temperature outlook abruptly turned rather less favorable across all timeframes. While the models are in good agreement that temperatures will be above-average for the remainder of August, the month of September has trended considerably cooler as both the ECMWF-EPS and CFSv2 long-term models are now showing a building trough across the Heartland that could bring a prolonged period of below-average temperatures to the Central US. The Figure to the right plots the daily departure from average gas-weighted degree day (GWDD) outlook for the next 6 weeks according to my Hybrid model which integrates data from the GFS ENS, ECWMF ENS, ECMWF-EPS, and CFSv2 models, showing this September cooldown. Click HERE for more on the near-term and long-term temperature outlook on my Advanced Model Page. Given this cooling trend, I would not be surprised to see the commodity pull back some to under $2.20/MMBTU in the days to come. No matter how tight the market becomes, the sector will struggle to rally should Mother Nature not cooperate. I am maintaining my $2.40/MMBTU upside price target, but acknowledge that natural gas will struggle to rally above current levels unless the temperature outlook flips back to a more favorable set-up.

Meanwhile, fears over global demand continue to weigh on the oil sector. WTI fell 76 cents or 1.4% to settle at $54.47/barrel after trading as low as $53.77/barrel. Brent slid $1.25 to $58.23 as the Brent-WTI spread continues to narrow, falling under $5/barrel, less than half the Springtime peak. Investors remain hyper-anxious about the threat of a recession and US-China trade war. According to my Fair Price model, the commodity is undervalued by 11% versus a Fair Price of $61.98/barrel based on current inventories alone. With the supply/demand imbalance still tight, this Fair Price rises to above $65/barrel by early November as I expect inventories to continue to fall. Should concerns ease about the global economy and oil demand, I feel that the sector therefore has serious upside. For this reason, I am maintaining my $65/barrel upside price target and remain aggressively long. At this time, I feel that crude oil represents the better bull trade from a risk/reward perspective.

My Oil & Natural Gas Portfolio took advantage of the sharp rally in natural gas, but did finish well off session highs. The Portfolio gained +0.8% after peaking up more than +1.6%. The rally pushed 2019 year-to-date gains to +10.2%, or +16.4%, as highly volatile trading continues. I made no trades on Thursday, but did cover the entirety of my large SVXY hedge on Monday's sell-off for a +9% profit and used Wednesday's drip to add to my oil long position via short DWT, boosting this position to a robust 9.6% of my holdings. Click HERE for more on my current oil and natural gas holdings.

Today's Forecast Departure From Normal High Temperatures

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

Natural gas demand will to wrap up the storage week today as temperatures warm across the Southeast and Texas while baking heat across the West and unseasonably chilly temperatures across the Midwest cancel out. Highs will rise into the 90s as far north as Richmond, VA today while Charlotte, NC, Atlanta, GA, and Jackson, MS will all also break the threshold, each up to 5F warmer-than-normal. Further west, Dallas and San Antonio could both top 100F today, as could parts of western Oklahoma and Kansas, 5F-10F hotter-than-normal. It will be another scorcher across the West, particularly California, where Fresno could approach 110F, nearly 15F above-average. On the other hand, September-in-August will continue across the Heartland, with Chicago, Minneapolis, and Milwaukee not clearing 80F, around 5F cooler-than-normal, with some areas more like 10F-15F below-average. Overall, today's forecast mean population-weighted nationwide temperature will rise 0.3F from Thursday to 76.9F, 0.1F warmer-than-normal. Total Degree Days (TDDs) will rise to 12.0 TDDs, 1.6 TDDs fewer than average and the 14th fewest for August 16 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.

Projected Natural Gas Storage Injection For August 10-16: 5-Year Historical Comparison

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

Based on this forecast and early-cycle pipeline data, I am projecting a +9 BCF/day daily natural gas storage injection, 1 BCF smaller than Thursday's build but still 2 BCF/day bearish versus the 5-year average +7 BCF/day. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. For the full storage week of August 10-16, I am projecting a +64 BCF natural gas storage injection, 13 BCF bearish versus the 5-year average and 17 BCF larger than last year's build. Gas-weighted degree days were 3.1% lower than 2018 for the week which, together with the more than 7 BCF/day year-over-year gain in production, drove the bearish build. As the figure to the right shows, it would be the 2nd largest injection for the week in the last 5 years, behind only 2014's +86 BCF injection. Should a +64 BCF injection verify, natural gas inventories would rise to 2802 BCF while the storage deficit versus the 5-year average would fall to -98 BCF. The year-over-year surplus would climb another 17 BCF to +374 BCF. The EIA will release its official storage numbers for the week next Thursday, August 22, at 10:30 AM EDT. Click HERE for more on the latest projection for the current storage week.

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