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Natural Gas Falters Again After EIA Reports Bearish, But Better-Than-Expected -69 BCF Weekly Withdrawal; Domestic Production Remains Near Record High, But Demand Elements Beginning To Compensate; Gas Demand Rises Today With Heating Season-High Daily Withdrawal; Shake-Up In Latest Natural Gas Storage Contest Rankings

6:00 AM EDT, Friday, December 15, 2017
In its weekly Natural Gas Storage Report, the EIA announced Thursday morning that inventories dropped by -69 BCF for the week of December 2-8. The draw was 9 BCF bearish versus the 5-year average -78 BCF, but came in 4 BCF larger than my projected -65 BCF withdrawal. The bearishness of the draw driven primarily by the East Region, which saw a -13 BCF decline in local inventories versus the 5-year average -20 BCF. This is likely due to the fact that the arctic cold front that caused natural gas demand to skyrocket at the end of the week traveled from west to east and reached the major demand centers of the Eastern Seaboard last. Elsewhere, the Midwest, Pacific, and South Central regions all saw negligibly bearish draws while the Mountain Region managed a slightly bullish -8 BCF withdrawal versus the 5-year average -5 BCF. With the -69 BCF withdrawal, natural gas inventories fell to 3626 BCF while the storage deficit versus the 5-year average narrowed to -27 BCF (although it likely flipped to a storage surplus briefly intraweek before the arctic air arrived to drive demand quickly back above average). Click HEREfor more on current natural gas inventories through December 8.

Despite the slightly larger-than-expected withdrawal and the fact that the late December outlook continues to look generally favorable for temperature-dependent demand, natural gas continued its slump on Thursday, falling another 3 cents or 1.1% to close at $2.68/MMBTU, a fresh 10-month low. The commodity jumped briefly immediately following the EIA's report and traded higher by around 0.5%, but sellers quickly returned and the commodity was back in the red moments later. It was the second straight day that natural gas seemingly disregarded near-term fundamentals--a slightly bearish, but better than expected EIA-reported withdrawal, a growing storage deficit, a substantial undervaluation versus its Fair Price and a late-December temperature outlook that again trended colder with bullish storage withdrawals expected for each of the next 4 weeks--and instead succumbed to the gravitational forces of the bearish black hole that the commodity seems to be caught in. If this is natural gas in a generally favorable environment, I would hate to see how it trades when near-term fundamentals turn bearish. Crude oil, meanwhile, bounced 44 cents or 0.8% to settle at $57.04/barrel. Since peaking at $59/barrel on Black Friday, oil's volatility has collapsed and the commodity is merely chopping around between $56-$58/barrel as investors await some sense of direction...or the New Year. Brent oil rose 87 cents to settle at $63.31/barrel as a major North Sea pipeline remains shuttered for repairs with no return-to-service data announced, driving the Brent-WTI spread back above $6/barrel. My Oil & Natural Gas Portfolio continued its organized pullback, dipping 0.3% but finishing well off the lows of the day to reduce gains since May 1 to +27.3%. Subscribers can click HERE to see my current holdings, latest trades, and to read twice-weekly Investor Commentaries. To learn more about subscribing and helping to support the site, please click HERE.

Temperature-Independent Supply/Demand Balance Vs 2016

Figure 1: Click here for more information on on natural gas supply/demand balance.

Following the EIA's storage report Thursday morning, the agency released its weekly supply and demand data including the same December 2-8 period later in the afternoon. Domestic production finally took a breather, falling 0.4 BCF/day from a record 76.5 BCF/day to 76.1 BCF/day. Still, production is up a massive 5.5 BCF/day year-over-year. With Canadian and LNG imports both flat vs 2016, total supply is up the same at 81.7 BCF/day. It is up to the demand side to cut into these gains. Of temperature-independent variables, LNG feedgas averaged 3.1 BCF/day last week, up 1.6 BCF/day year-over-year. Additionally, LNG exports to Mexico are up 0.5 BCF/day year-over-year at 4.2 BCF. As a result, this counters nearly half of the gain in production, reducing the temperature-independent supply/demand imbalance to 3.4 BCF/day loose year-over-year, as shown in the Figure to the right. This is still a bearish evolution from the summer when the market was tight year-over-year and is likely driving much of the ongoing sell-off. However, if we attempt to include temperature-dependent variables--namely Powerburn and Residential/Commercial Demand--the market tightens up quickly. Through the first 6 weeks of the withdrawal season, natural gas powerburn is averaging 23.3 BCF/day, topping year-ago levels by 0.9 BCF, including 1.3 BCF/day the past week. Additionally, Res/Com demand is averaging 28.8 BCF, 2.5 BCF/day higher than the same period in 2016. Assuming that these two variables maintain a similar differential for the remainder of the withdrawal season, this would add 3.4 BCF/day of additional demand, neatly canceling out the 3.4 BCF/day year-over-year temperature-independent looseness discussed above. Further, at the beginning of the heating season, the EIA announced that it was forecasting that Powerburn demand would average 1.5 BCF/day higher year-over-year over the course of the winter while Res/Com demand would be up 2.9 BCF/day. This would add an additional 1.5 BCF/day of average demand to the figure quoted above. With natural gas trading far cheaper than forecast, there is no reason to doubt this forecast and, with the additional fuel-switching that comes with such a discount, it may even be conservative. Finally, a further 0.8 BCF/day of temperature-independent demand is likely to come online within the next 1-2 weeks once the Cove Point LNG export facility finally begins operations. This would make estimated total supply/demand balance 2.3 BCF/day tight year-over-year, giving domestic production liberal room to rise and still prevent a supply/demand mismatch from forming. This is just one more reason why I feel that natural gas under $2.70/MMBTU in mid-December with a storage deficit versus the 5-year average is quite oversold and due for a bounce. Click HERE for more on natural gas supply and demand data.

Top 10 Through Week 6

Figure 2: Click here for more information on on my natural gas storage contest.

Following the EIA's storage data, I updated my Natural Gas Storage Contest rankings through Week 6 of 10 Thursday evening. The top 10 are shown in the Figure to the right. The big news on the week was the coup staged by StevenNashua as he surged 8 spots to take over at #1 following a spectacular 50.5 point performance on the week, the best in the 107-member field. While his -58 BCF projected withdrawal missed the observed draw by 11 BCF, earning only a single point, he nailed the $2.68/MMBTU close nearly spot on, earning 17 points. He submitted his forecast early enough in the entry period to earn a 2.74x bonus multiple, thus accumulating the 50.5 point tally. With 158 total points, he holds a slim 1 point lead over last week's leader SaintSinnerIdiot who picked up a solid 22.9 points on the week to keep things close. KATI climbed back into the top 3 despite a lackluster 8.9 point week thanks to a strong performance earlier in the contest. These three are currently in line to pick up the $250, $100, and $50 first, second, and third place prizes, respectively. Multi-week leader Dclong is one point behind KATI in 4th with 147 points, also just 11 points out of first. The top 10 remains tightly clustered with 10th place Denswabe only 30 points out of 1st with 128 points, meaning that the contest remains wide open. To view the rankings and to submit your picks for Week 7, please click HERE. You will be submitting your projected storage withdrawal for the week of December 9-15 and the closing price for the front-month January 2018 contract for Thursday, December 21, the date of next week's EIA Storage Report.

Today's Forecast Departure From Average High Temperatures

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

Natural gas demand will rise to finish out the week today as a quick shot of colder air moves across the Southeast, Mid-Atlantic, and Northeast. Highs today will only rise into the lower 30s from Washington, DC to Boston, a frigid 10F-15F colder-than-normal across a densely-populated region. Further south, temperatures will be seasonally cool with highs only in the upper 40s from Nashville to Birmingham to Atlanta, 5F-10F colder-than-normal. Across the northern Plains, much warmer temperatures will slowly build east with Billings, Mt and Denver both reaching the low 50s, nearly 20F warmer than normal, and Omaha the low 50s, 10F warmer than normal. This airmass will be the primary driver of demand early next week. However, it is too early for it to have significant influence and today's mean population-weighted nationwide temperature will cool 1.3F day-over-day to 39.7F, 1.7F colder-than-normal, primarily due to the chill across the East. Total Degree Days will rise to 24.8 TDDs, 0.3 TDDs greater than normal and the 11th most for December 16 in the last 38 years. Click HERE for more on today's temperature and degree day outlook. Based on this forecast and early cycle pipeline data, I am projecting a very bullish -28 BCF/day daily natural gas storage withdrawal, 10 BCF larger than the 5-year average -18 BCF/day and the largest of the 2017-2018 heating season, so far. Should it verify, natural gas inventories will be approaching 2450 BCF by tonight and the storage deficit versus the 5-year average will exceed -75 BCF. Click HERE for more on today's projected daily withdrawal and intraday natural gas inventories.

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

Figure 4: Click here for more information on natural gas inventories.

For the natural gas storage week of December 9-15 that ends today, I am projecting a -174 BCF withdrawal, a very bullish 49 BCF larger than the 5-year average withdrawal and the largest of the 2017-2018 heating season by more than a 100 BCF margin. The large draw was driven by a spike in temperature-dependent demand prompted by a persistent arctic airmass across the eastern half of the nation, one that brought a rare snowfall to the Southeast last weekend. In particular, residential/commercial demand likely jumped nearly 13 BCF/day week-over-week to 40 BCF/day, even with 2016, while Powerburn demand averaged 27.2 BCF/day on the week, up 4 BCF week-over-week and nearly 3 BCF/day compared to last year. Exports to Mexico climbed 0.2 BCF week-over-week to 4.3 BCF/day on the week while LNG feedgas was flat at 3.1 BCF/day. Natural gas production remained flat at 76.1 BCF, but is still up over 6 BCF/day year-over-year. Overall, a -174 BCF weekly withdrawal would be the third largest weekly withdrawal in the past 5 years, as shown in the Figure to the right, well behind the -254 BCF and -200 BCF withdrawals in 2013 and 2016, respectively, but much higher than the sub-100 BCF draws of 2012, 2014, and 2015. Should a -174 BCF withdrawal verify, natural gas inventories would fall to 3452 BCF while the storage deficit would rise to -75 BCF, up nearly 100 BCF in the past 2 weeks. The EIA will release its official withdrawal numbers next Thursday, December 21 at 10:30 AM EDT. This remains a preliminary projection and will be revised further as finalized temperature and pipeline data is integrated into my model. Click HERE for more on this week's projected withdrawal.

Looking ahead to next week, natural gas demand looks to form a "V" pattern leading to a near-average weekly withdrawal. Demand will remain strong over the weekend as the densely-populated East Coast remains colder than average. By early next week, a building southerly flow across the Plains will shift eastward, flushing the cold air out and leaving most areas east of the Rockies well above average by mid-week with a daily withdrawal as low -8 BCF/day possible, 10 BCF bearish versus the 5-year average. By the end of the week, an arctic cold front will begin knifing southward across the plains, boosting withdrawals back above -20 BCF/day. For the week of December 16-22, I am projecting a near-average -114 BCF withdrawal, still 3 BCF bullish versus the 5-year average. More on next week's projected withdrawal in Monday's Commentary. This arctic airmass looks to make itself at home the following week--albeit with significant computer model variability--and projected withdrawals for the week of December 23-29 range anywhere from -150 BCF to -200 BCF depending on the day and the model run, but will likely be bullish versus the 5-year average. Click HERE to view projections for the next 4 storage weeks.

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