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Daily Commentary

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Life's Just Not Fair For The Bears: Natural Gas Rises As Early November Outlook Trends Colder; Crude Oil Slumps After Unexpected Storage Build; EIA Projected To Announce +83 BCF Storage Injection Today, The Last Bearish Build For The Next 3 Weeks; Gas Demand To Rise Today As Canadian Airmass Finally Reaches The Northeast


6:00 AM EDT, Thursday, October 18, 2018
Natural gas appeared to be on its way to another typical trading session Wednesday morning: Opening up nearly 2% and losing all of its gains in the first three hours of the day. However, the commodity pulled out of its nosedive and rose sharply into the close, finishing near the day's highs. The front-month November 2018 contract finished Wednesday up 7 cents or 2.5% to settle at $3.32/MMBTU, the highest close since January 29. Natural gas is now up an impressive +13.8% year-over-year. Wednesday's mid-morning rally was driven by a sharp cooling trend during the late October and early November period, prolonging the current period of favorable weather conditions. While it is often a tendency to ignore temperature forecasts beyond 7 days, this 8-14 day outlook has an unusually strong signal amongst multiple computer models that forces one to take it more seriously than usual. For this reason, I would not be surprised to see natural gas continue to rally as it appears increasingly likely that inventories will not make it to 3200 BCF this year, the 9th lowest peak in the last 23 years. My near-term price target is $3.50/MMBTU. As a result, I made a significant portfolio adjustment yesterday, as detailed below.


Crude Oil Exports

Figure 1: Click here for more information on crude oil exports

In its weekly Petroleum Status Report, the EIA announced Wednesday morning that crude oil inventories rose by +6.4 MMbbls for the week of October 6-12. This was nearly 5 MMbbls bearish versus the 5-year average and was more than 8.5 MMbbls larger than the American Petroleum Institute's -2.15 MMbbl Tuesday forecast. It was also more than 12 MMbbls bearish versus last year's 5-year high -5.7 MMbbl draw. With the build, crude oil inventories rose to 416.4 MMbbls while the storage surplus versus the 5-year average rose to +7.1 MMbbls. The year-over-year deficit contracted sharply, falling to -40.1 MMbbls, a 2018-low. The bearish storage injection was driven largely by slumping exports, which fell 790,000 barrels/day week-over-week to 1.78 MMbbls/day as shown in the Figure to the right, despite the Brent-WTI spread holding above $9/barrel throughout the week, which would typically favor stronger exports in this climate. In fact, exports were 20,000 barrels/day lower last week than the previous year when the Brent-WTI spread was under $5/barrel. It is worth mentioning that some export weakness may be attributable to Hurricane Michael temporarily shutting down Gulf shipping traffic. Domestic production fell for the same reason, but only dipped 300,000 barrels/day to 10.9 MMbbls/day and is still up well over 1 MMbbls/day year-over-year. If there was a single favorable element from the report it is that refinery inputs were up 880,000 barrels/day year-over-year last week at 16.32 MMbbls/day, which mitigates much of the gain in production.


Nonetheless, by nearly all metrics, this was a bearish and disappointing report. It was therefore not surprising that crude oil prices had a rough trading session on Wednesday with the domestic WTI price point taking the brunt of it. WTI tumbled $2.17 or 3% to settle at $69.75/barrel, its lowest settlement since September 17, while Brent slumped $1.36 or 1.7% to close at $80.05/barrel. As a result, the Brent-WTI spread topped $10/barrel for the first time since July, although that spread seems to be of limited significance recently. With the sell-off, WTI prices fell below my target downside price of $70/barrel. However, this was an honest-to-goodness bearish report and buying on Wednesday felt like trying to catch a falling knife. However, given the long-term bullish supply/demand fundamentals, I am maintaining a $75/barrel price target on WTI and do feel that an entrypoint under $70/barrel is reasonable. However, I would recommend legging into any such long position very carefully and with a healthy appetite for risk. Click HERE for more on the latest EIA crude oil inventories.


Current Oil & Natural Gas Holdings

Figure 2: Click here for more information on on my current Oil & Natural Gas holdings.

My Oil & Natural Gas Portfolio gave up Tuesday's gains and then some yesterday, falling -0.9% to reduce 2018 year-to-date gains to +18.6% or +23.3% annualized. I made a significant change in my Portfolio directionality shortly after the open, covering an 11% stake in UGAZ--and taking a nearly 30% loss in the process--and using most of these funds to sell short a 7% stake in DGAZ, thus shifting from a net short to net long position. My DGAZ short stands at 15.4% of my portfolio and is partially offset by an 11.6% UGAZ short, providing a small 3.8% net long exposure. I made this dramatic shift for several reasons. First and foremost, the temperature outlook through the end of October is very bullish, made exceptionally so by historically low inventories. Additionally, this time last week, the ongoing cold pattern was expected to relent the last week of October. Then it was the first week of November. Now it may not be until mid-November. The computer models keep prolonging the duration that this pattern remains in place, which has to be a scary thought for the bears, including yours truly. Beyond just the favorable temperature outlook, nuclear reactor outages remain at 5-year highs, keeping natural gas substitution above 4 BCF/day. Finally, feedgas demand to Sabine Pass rose to 3.2 BCF/day Tuesday night, the highest since last spring, suggesting the at Train 5 may be soon entering commercial service, bolstering LNG feedgas demand, which has recently given up all of its year-over-year gains. In the end, I still feel that long-term, natural gas supply/demand balance favors the bears, but the near-term bullishness was too difficult to ignore. My price target for the December 2018 contract--which is currently held by natural gas ETFs--is $3.50/MMBTU, above which I will likely take profits and flip to a more aggressively net short position. Regarding crude oil, WTI prices reached my downside target of $70/barrel on Wednesday, but given the bearishness of the report, I was reluctant to jump in right away. Once the sell-off stabilizes, I will likely bolster my net long 3% DWT position to 6%-8% with an upside price target of $75/barrel. Finally, while I currently own a modest 5.4% stake in GLNG, my favorite natural gas export stock remains Cheniere Energy (LNG), and I have been in and out of this company several times over the past year. The stock has now pulled back more than 10% from its 52-week high of $71/share, closing Wednesday at $63.59/share. With the pullback and the company's Sabine Pass plant gearing up for its latest increase in capacity, I will have a low threshold to open a 5% stake in this stock in the coming days. Click HERE for more on my current oil and natural gas holdings.


Projected Natural Gas Storage Injection For October 6-12: 5-Year Historical Comparison

Figure 3: Click here for more information on natural gas inventories.

The EIA will release its weekly Natural Gas Storage Report for October 6-12 this morning at 10:30 AM EDT. For the week, I am projecting a +83 BCF storage injection. For a second straight week, such a build would be nearly neutral, just 4 BCF larger than the 5-year average +79 BCF injection. However, it would be a robust 28 BCF bearish versus last year's 55 BCF. As a result, the year-over-year deficit will contract to -599 BCF while the storage deficit versus the 5-year average will hold nearly steady at -603 BCF, the first time that the deficit versus 2017 has been the smaller of the two since last winter. As the Figure to the right shows, a +83 BCF storage injection would be the third largest in the last 5 years, behind only +91 BCF and +94 BCF injections in 2015 and 2014, respectively. The neutral build was driven by the combination of strong cooling demand across the Eastern US for the first half of the week followed by strong heating demand across the Central US to wrap up the week, all in the setting of record production. Additionally, nuclear outages remained near 5-year highs throughout the week, driving natural gas substitution to over 4 BCF/day, more than 1 BCF/day higher than last year. However, more than half of these gains were offset by the shutdown of the 0.75 BCF/day Cove Point LNG export plant which was shuttered through Thursday for scheduled maintenance, with flows rebounding to 0.36 BCF/day to wrap up the week. Click HERE for more on this week's projected storage injection. With much colder temperatures expected to last into early November, this will likely be the last bearish injection for at least the next 3 weeks--and perhaps for the rest of the year if inventories flip to withdrawals by the beginning of next month.


With investors glued to the late October and early November temperature outlook, I feel that today's storage number will be largely ignored unless it is really good or really bad. I expect it will take a reported injection of larger than +90 BCF to be considered unequivocally bearish and sufficient to at least temporarily dampen the upward momentum and drop prices back towards $3.25/MMBTU. On the other hand, I feel that a reported injection of less than +80 BCF would only fuel the flames of the bullish fire, driving prices above $3.35/MMBTU near-term. A reported injection between +80 BCF and +90 BCF would be neutral versus expectations with prices equally likely to rally or pull back.


Check back at 10:30 AM EDT for the official EIA storage withdrawal on my Current Natural Gas Inventories Page HERE. Also, I now have weekly natural gas supply and demand statistics on my Natural Gas Supply & Demand Page HERE that should be updated between 3 pm and 4 pm EDT.


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 jump today as the unseasonably cold airmass that has been dominating the Heartland makes its way to the Northeast. Freeze Warnings are in effect today from the Ohio Valley eastward to just outside the major cities of the I-95 corridor, where AM lows will fall into the upper 30s to lower 40s from Philadelphia to Boston. Highs today across this region will only be in the low-to-mid 50s, 10F-15F below-average. Across wet and chilly Texas, highs will continue their very slow moderation with Dallas and San Antonio perhaps reaching 60F today for the first time since Sunday, still 20F-25F below-average. A more significant warm-up will be underway further north across the Northern Plains where Minneapolis could top 60F, up to 5F warmer-than-average, after being stuck in the 30s and 40s since Sunday. However, thanks to the cooldown across the populous East, the forecast mean population-weighted nationwide temperature today will drop 2.7F day-over-day to 55.5F, a 5-month low and 4.4F below-average. Total Degree Days today will rise to 12.5 TDDs, 3.6 TDDs greater than normal and the 5th most for October 18 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 +4 BCF/day daily natural gas storage injection today, a bullish 7 BCF smaller than the 5-year average +11 BCF/day build. Realtime inventories will likely top 3070 BCF by this afternoon while the storage deficit looks to record a third consecutive 4-year high of around -635 BCF. Click HERE for more on today's daily storage injection and Realtime natural gas inventories. Gas demand will plummet tomorrow as temperatures quickly rebound across the Northeast and the Plains warmers further with a near-average daily injection expected. However, it won't be enough to prevent an exceptionally bullish +45 BCF projected weekly storage injection for October 13-19, a massive 32 BCF smaller than the 5-year average and the single smallest injection for the period in the last 5 years by a nearly 20 BCF margin. I will have more on this week's projected injection in Friday's commentary, but in the meantime, click HERE for more.



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