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Daily Commentary

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Natural Gas Opens The Week Flat While Oil Gives Up Geopolitical Premium On US Storage & Global Demand Concerns; EIA Drilling Productivity Report Shows Continued Slowdown In Drilling, But Is It Enough? Computer Models Continue To Trend Towards Warm Start To July; Gas Demand To Fall Slightly Today On Rain-Cooled East & Central Plains


6:00 AM EDT, Tuesday, June 18, 2019
Natural gas opened the week flat, trading down less than 1 cent to hold at $2.39/MMBTU. Investors seem to be caught in a bit of a conundrum. On the one hand, the commodity is trading at its lowest in more than 3 years and is down 21% from 2018. Additionally, temperatures will steadily warm over the next week and looking to be above-average for the final week of the month and at least for the first week of July. On the other hand, this will not immediately translate to bullish inventory builds. While powerburn is seeing sizable year-over-year gains, the temperature-adjusted supply/demand imbalance is still around 3 BCF/day loose year-over-year thanks to large gains in production such that neutral to even modestly warmer-than-normal temperatures will still result in slightly bearish builds. It is likely this underlying looseness that is preventing a sustained bounce in prices...for now. Should the supply/demand imbalance continue to tighten and temperatures warm as expected, it will be hard to justify prices this low, hence my $2.60/MMBTU upside price target. Meanwhile, oil fell sharply to start the week, as domestic storage and global demand concerns overtook rising geopolitical tension in investors' psyches. WTI slumped 58 cents or 1.1% to $51.93/barrel while Brent fell a steeper $1.07 to $60.94/barrel, nearly erasing the premium added to the commodity after last week's targeting of tankers in the Gulf of Oman. Oil's direction for the remainder of the week, barring any further inflammation in the Middle East, will be dictated by Wednesday's EIA weekly Petroleum Status, with another inventory build significantly increasing the changes WTI falls under $50/barrel near-term. Stay tuned after the close of trading today for the American Petroleum Institute's (API's) forecast numbers. With natural gas flat, Monday's performance of my Oil & Natural Gas Portfolio was dictated by the pullback in oil. Thus, the Portfolio slid 0.4% to reduce year-to-date gains to +9.2%, or +20.2% annualized. I made no trades on the day. Click HERE for more on my current holdings.


Latest EIA-Reported Drilled But Uncompleted Wells (DUCs)

Figure 1: Click here for more information on on crude oil inventories.

On Monday, the EIA released its monthly Drilling Productivity Report for May, providing, along with Friday's weekly Baker Hughes Rig Count Report, some insight into future growth of US oil and natural gas production. In particular, the EIA announced that Drilled But Uncompleted (DUC) wells continues to slide. This suggests that more wells from this pool are being completed to offset the decline in new wells being drilled in order to maintain production growth. Overall, the EIA reported the DUCs slid by 77 wells in the month of May from 8,360 wells to 8,283 wells, as shown in the Figure to the right. After a rapid rise in DUCs over the past two years, this was the third straight month in which the number of DUCs has declined. Of note, this includes wells for both oil and natural gas though, in this modern era, most wells produce a mixture of both commodities. Six out of the seven largest basins continue to steadily decline, lead by the Anadarko in Oklahoma which dropped 33 wells to 963. However, the Permian Basin in West Texas continue to accumulated DUCs, thanks to limited takeaway capacity in the region that has restricted the completion of wells, climbing by 41 to 3971 DUCs, by far the largest of any basin. Complimenting this data, the EIA also reported that only 1318 new wells were drilled during the month of May, the fewest since April 2018. The supports the thesis that new expenditures on exploration and drilling are slumping and it is due only to the pool of DUCs that production is being maintained and increased. Unfortunately for the bulls, with over 8,000 DUCs remaining and the count sliding by only 77 last month, producers can keep this pace up for years before the DUC pool is depleted. However, should drilling continue to decline--as reported weekly by Baker Hughes--expect the depletion of DUCs to accelerate and it to become harder and harder to maintain the current rate of growth in both oil and natural gas. Click HERE for more from the EIA's latest drilling productivity report.


Forecast Daily Departure From Normal GWDDs For The Next 6 Weeks

Figure 1: Click here for more information on on the temperature forecast

Also on Monday, the long-term ECMWF-EPS came out with its latest 6-week model run. The model continued its recent warming trend, particularly for the first 10 day or so of July. It now appears increasingly likely that the current setup, characterized by a ridge across the West and a trough across the Central and Eastern US will break down over the next week and will be replaced by the inverse pattern. A building ridge across the central US will allow temperatures to warm from Texas to the Great Lakes while a trough will bring cooler readings to the Pacific Coast. This is a net benefit for natural gas demand due to the greater population density and consumption per capita across the East. The ECMWF's stablemate CFSv2 is on board with this forecast as well, though it has consistently trended hotter. However, the ECMWF-EPS is given greater weight given its superior performance throughout 2018. Beyond the first two weeks of July, it appears that a more seasonal pattern will setup with readings generally within 5F of normal nationwide though the CFSv2 is once again somewhat hotter. The Figure to the right plots daily departure from normal Gas-Weighted Degree Days (GWDDs) according to my Hybrid Model which integrates the long-term ECMWF-EPS and CFSv2 models as well as the near-term GFS ENS and ECMWF ENS. While the large early-July anomalies could result in a return to below-average injections, seasonally warm temperatures as forecast for late June and early July will still likely result in slightly larger-than-normal builds, though gone are the days of triple-digit weekly injections. Click HERE for more on the latest near- and long-term temperature forecasts on my Advanced Modeling Page HERE.


Today's Forecast Departure From Normal High Temperatures

Figure 1: Click here for more information on on the near-term forecast.

Natural gas demand will fall slightly today as temperatures across the Northeast cool down thanks to heavy rain across the area. Highs today will be 5F-10F below-average region-wide with Philadelphia and New York City only seeing the mid-70s and Boston only the upper 60s. It will be another seasonally cool day across most of the Central US with highs from Chicago to Des Moines to Kansas City in the mid-to-upper 70s, 0F-5F cooler-than-normal. Larger anomalies may be found across eastern Nebraska where rain will keep highs in Omaha only in the lower 70s, around 10F below-average. You once again have to head out West to find above-average readings. In particular, much of northern California and southern Oregon will be around 10F hotter-than-normal, especially the northern Central Valley where a Heat Advisory is in effect for highs that could top 100F. Overall, forecast mean population-weighted nationwide temperatures will actually warm by 0.3F from Monday to 73.4F thanks to the heat across the West, but will remain 0.7F below-average. Total Degree Day (TDDs) will fall to 8.9 TDDs, 2.3 TDDs fewer than normal and the 11th fewest for June 18 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.


Projected Realtime Natural Gas Inventories

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

Based on this forecast and early-cycle pipeline data, I am projecting a +14 BCF/day daily natural gas storage injection for today, 1 BCF larger than Monday and 4 BCF bearish versus the 5-year average. By tonight, look for Realtime natural gas inventories to reach 2245 BCF while the storage deficit versus the 5-year average falls to -199 BCF. The year-over-year surplus will rise to +208 BCF. Click HERE for more on today's projected daily injection and Realtime natural gas inventories.



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