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Natural Gas Continues Organized Pullback As Expectations For Bullish EIA Injection Prop Up Bullish Sentiment Near-Term; Gas Demand To Rebound Today As East Coast Warms; Late August & Early September Broad Cooldown Possible, But Uncertainty Remains

6:00 AM EDT, Tuesday, August 14, 2018
Natural gas pulled back for a second straight day on Monday, but continued to hold up against a serious breakdown. After dropping over 1% right at the open, natural gas rallied through the first half of the session and finished the day down just 0.5% to $2.93/MMBTU. Despite a late August and early September outlook that is looking more seasonal than the consistently above-average warmth the country has seen so far this month, expectations for a very bullish EIA storage report this Thursday likely acted as support. While a near-term pullback either via sell-the-news action after Thursday's report or in response to cooler weather would not be unreasonable, with the storage deficit exceeding -600 BCF--a 4-year high--and the supply/demand imbalance only modestly loose, the sector is likely to be insulated against a broad sell-off and my Q3 price target remains at $3.00/MMBTU.

WTI crude oil, meanwhile, slumped 2% early in its Monday session and briefly traded under $66/barrel before staging a fierce rally just before the 2:30 PM close of trading to finish down just 43 cents or 0.6% at $67.20/barrel. The weakness was driven by both domestic and international elements with analysts expecting another inventory build in this Wednesday's EIA Petroleum Status Report, a strong dollar, and well as fears over possible geopolitical consequences of the collapse in the Turkish Lira. At this time, there remains no obvious catalyst to pull oil out of this sell-off, although cheaper prices might begin to support increased demand. At this time, I have no interest in buying oil at prices above $65/barrel.

Today's Forecast Departure From Average High Temperatures

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

My Oil & Natural Gas Portfolio fell 0.3% on Monday, but did recover from intraday losses that approached 1%. The portfolio is currently up +17.2% year-to-date or +27.9% annualized. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

By mid-day Monday, I projected that natural gas inventories topped 2400 BCF, nearly simultaneously w/ the 5-yr avg hitting 3000 BCF, a level I don't expect we will see until sometime around Oct 3. Natural gas demand will begin to rebound today as temperatures warm across the Southeast and East Coast. Highs today will reach the mid-80s from Washington, DC through Boston, up to 5F warmer-than-normal while further south Atlanta to Charlotte to Norfolk could hit 90F. However, it will be another unseasonably cool day across Texas and the Southern Plains as wet weather continues. Dallas may finally make it to the lower 90s today--5F below-average--but Oklahoma City will only reach the mid-80s and Kansas City only the upper 70s, both 10F cooler-than-normal. Overall, the forecast mean population-weighted nationwide temperature today will warm 0.6F day-over-day to 78.3F thanks to the East Coast warm-up, 1.4F warmer-than-normal. Total Degree Days today will rise to 13.9 TDDs, the 8th most for August 14 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 2: Click here for more information on on natural gas storage.

Based on this forecast and early-cycle pipeline data, I am projecting a +7 BCF/day daily natural gas storage injection today, 1 BCF smaller than Monday and very close to the 5-year average injection. After topping 2400 BCF intraday yesterday, inventories will likely finish today near 2412 BCF while the storage deficit reclaims -602 BCF. The year-over-year deficit, meanwhile, will continue to slowly contract and will finish the day near -688 BCF. Eventually, the year-over-year deficit will contract below the deficit versus the 5-year average, which I project will occur in mid-October, shortly before inventories peak for the season. Click HERE for more on today's projected daily injection and Realtime natural gas inventories.

10-14 Day NWS Temperature Outlook

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

Looking longer-term, computer models are coming into increasing agreement on backing off on consistent heat, particularly across the Midwest and Plains. This is reflected in NOAA's 10-14 day outlook as shown in the Figure to the right. As a result, I am projecting weekly storage injections for the second half of August that are close to the 5-year average. However, some models, such as the usually-reliable ECMWF are suggesting that the cooldown will be even more widespread and could involve some of the major population centers of the Northeast. Should this trend verify, storage builds for late August and early September could wind up more bearish than currently reflected. If so, once the EIA reports its exceptionally bullish build this week, bullish catalysts needed to sustain the current run may dry up and the commodity could pullback in the medium-term. However, I continue to feel that any such pullback would be temporary given the sizable storage deficit and approaching winter heating season uncertainty. Click HERE for more on the extended term temperature outlook.

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