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Natural Gas At 3-Month Low After EIA Reports Smaller-Than Expected Weekly Withdrawal; Natural Gas Demand Begins Downturn With -8 BCF Daily Draw Today; Record Warmth This Weekend & Next Week To Drive Daily Injections & Record Bearish Weekly Withdrawal

6:00 AM EDT, Friday, February 17, 2017

***US markets are closed Monday for the President's Day Holiday. The next Daily Commentary will be on Tuesday, February 21.***

In its weekly Natural Gas Storage Report, the EIA announced Thursday that inventories for the week of February 4-10 declined by -114 BCF. This withdrawal was 8 BCF smaller than my projected -122 BCF projection, and 10 BCF smaller than the analyst consensus -124 BCF.

Latest Natural Gas Inventories

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

More importantly, it was 42 BCF smaller than the 5-year average -156 BCF withdrawal. At 2445 BCF, total natural gas inventories now officially stand at +87 BCF or +4 BCF larger than the 5-year average. It is the largest surplus since December 9, 2016. The bearish withdrawal was a group effort with all 5 of the natural gas storage regions seeing draws equal to or smaller than the 5-year average. Once again, the weakest withdrawal was in the South Central region where a period of spring-like temperatures squashed demand, leading to a -22 BCF withdrawal, less than half the 5-year average -45 BCF. Inventories in this region are now +105 BCF or +12% larger than the 5-year average, by far the largest regional surplus. The least bearish withdrawal occurred in the East region where a -41 BCF reported draw was "only" 5 BCF smaller than the 5-year average -46 BCF. However, with the transient bearish impact of temperature removed as a variable, I calculate that supply/demand balance was 3.8 BCF/day tight year-over-year as declines in production and new LNG exports trump a decrease natural gas share of powerburn due to higher prices. Further, the market was an estimated 2.9 BCF/day tight versus the 5-year average last week, up slightly from the previous week's 2.1 BCF/day, but looser than the 4-week average 3.2 BCF/day tight. Overall, the market has loosened since early in the winter when weekly tightness topped 5 BCF/day.

Through the first 13 weeks of the Withdrawal Season, natural gas inventories have dropped by -1602 BCF through February 10. This remains the 2nd largest 13-week draw in the last 5 years, but the gap between this year and the winter of 2013-2014's -2141 BCF draw continues to grow, now exceeding 500 BCF. 2016-2017 also slid to 4th place from 3rd place in the full 22 year period of record.

See more on current natural gas inventories HERE.

Following the report--a bearish withdrawal that came in even more bearish than expected--natural gas unsurprisingly fell for the fourth time in the last 5 sessions, dropping 7 cents or 2.4% to a new 2017 low of $2.85/MMBTU. It was the lowest close since November 11 as between the EIA and mother nature the commodity can't seem to catch a break.

Today's Forecast Departure From Average Temperatures

Figure 2: Click here for more information on on the near-term forecast.

Natural gas demand will plummet to finish the week as a bubble of warmth across the Plains balloons in size. Highs today will rise into the 60s as far north as Minneapolis, Omaha, Ne, and Des Moines, Ia. Such readings are nearly 40F warmer than average. Should the high temperature reach 60F in Minneapolis, it will not only be a record daily high, but will be just the fifth time in February dating back to 1873 that the temperature has reached 60F in the Twin Cities. The warmth will also spread eastward with highs in Indiana, Kentucky, Ohio, and Michigan all rising more than 20F day-over-day. After a seasonally cool day on Thursday along the Eastern Seaboard in the wake of the latest Nor'Easter, temperatures will moderate across the Southeast and Mid-Atlantic with temperatures rising into the 50s as far north as Washington, DC, around 5F warmer than average, even as New England remains seasonally chilly for one more day. Overall, the forecast mean population-weighted nationwide temperature today will rise more than 3 degrees day-over-day to 47.9F, 5 degrees warmer than average. Based on this outlook and early cycle pipeline demand, I am projecting a daily -8 BCF natural gas storage withdrawal, 9 BCF smaller than yesterday and 15 BCF smaller than the 5-year average -23 BCF/day. For the storage week of February 11-17 ending today, I am projecting a bearish -85 BCF storage withdrawal, 73 BCF smaller than the 5-year average. It would also be the smallest weekly withdrawal in the last 5-years for the second straight week, nearly 50 BCF smaller then the second weakest draw, last year's -130 BCF. See more on this week's projection HERE.

Projected Daily Storage Changes For February 18-24

Figure 3: Click here for more information on Week 2 natural as storage

Previewing next week, natural gas demand is likely to be historically suppressed as record warmth dominates the nation. Between Saturday and Thursday, highs across the northern Plains from the Dakotas to Minnesota to Illinois look to be at least 20F warmer than average each day. Minneapolis is forecast to reach 50F for at least 6 straight days beginning today through next Wednesday, which would tie the all-time record. As a result, natural gas demand will plummet and, as the chart to the right shows, daily storage withdrawals could flip to small injections on multiple days next week before cooler air finally arrives by next Friday. Based on the current forecast, I am projecting an exceptionally bearish -11 BCF weekly withdrawal for the week of February 18-24. This projection has steadily shrunk as confidence for the increasingly mild outlook increases. A -11 BCF weekly storage withdrawal would be a mammoth 121 BCF smaller than the 5-year average and would send the projected storage surplus ballooning to +284 BCF. Not only would such a withdrawal be the smallest for the February 18-24 timeframe in the last 5 years, it would be the weakest for the entire month of February for the entire 22-year period of record, beating the -24 BCF withdrawal back in 1995. It is possible that the projection could weaken further and a weakly storage injection cannot be ruled out, particularly if the late-week return to cooler temperatures is in any way delayed, a trend that was suggested in overnight model runs. We will have a much better idea once pipeline data starts becoming available over the weekend. See more on this staggeringly bearish week HERE.

Weekly Natural Overvaluation (Red Bars) Or Undervaluation (Green Bars) Versus Fair Price

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

This is a particularly challenging environment for natural gas traders. On the one hand, with natural gas settling to more than 3-month lows and the commodity oversold by most technical indicators, it may be tempting to get long expecting that natural gas can't fall any lower. On the other hand, with sustained warmth expected at least through the end of the end of the month and the commodity still overvalued by around 2% according to my Fair Price model (as shown in the image to the right), the fundamentals suggest that there could be further near-term downside pending normalization of temperatures. While such steep weather-driven declines often provide strong long-term entry-points, I feel that the risk versus benefits of instituting such a trade just aren't favorable yet. I continue to hold a modest long-term long position, but will keep the remainder of my cash on the sidelines for now.

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