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Natural Gas Rises Slightly After EIA Reports Record-Setting -150 BCF Storage Withdrawal; Natural Gas Now Overvalued As Supply/Demand Balance Continues To Loosen; Natural Gas Inventories Likely To Bottom For The Season Today As Prolonged Period Of Warmth Arrives

6:00 AM EDT, Friday, March 24, 2017
In its weekly Natural Gas Storage Report, the EIA announced on Thursday that natural gas inventories declined by -150 BCF for the week of March 11-17. The withdrawal was 10 BCF larger than my -160 BCF projection. Nonetheless, the withdrawal was 129 BCF bullish versus the 5-year average and the largest for the March 11-17 timeframe in the full 22 year history of EIA data. The week's draw was driven by a -59 BCF withdrawal in the East region, 47 BCF bullish versus the 5-year average. On its own, this would have been the second largest nationwide withdrawal for the period in the last 5-years. While the East may have had the largest draw, the most bullish withdrawal was in the South Central Region whose -45 BCF draw was 49 BCF bullish versus the 5-year average of a +4 BCF weekly build. The Mountain Region likewise saw a very strong -51 BCF draw (5-year average -14 BCF) while the Mountain and Pacific Regions saw small neutral to bearish storage injections of +0 BCF and +5 BCF, respectively.

Latest EIA Natural Gas Inventories

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

With the -150 BCF draw, inventories plunged to 2092 BCF while the storage surplus versus the 5-year average contracted all the way from +395 BCF last week to +266 BCF. The year-over-year deficit rose sharply to -399 BCF or -16%. Through the first 18 weeks of the withdrawal season (which may end up being the full season), inventories declined by -1955 BCF, which is a near-average 41 BCF smaller than the 5-year average. It is the fourth largest withdrawal in the last 5-years, behind 2013-2014's -2881 BCF, 2014-2015's 2143 BCF, and 2012-2013's 1990 BCF. It is also a nearly neutral 10th largest (or 14th smallest) 18-week withdrawal in the full 22-year period of EIA data.

Despite the massive weekly withdrawal, signs once again pointed towards a loosening of supply/demand balance. With temperature eliminated as a variable, I calculate that supply/demand balance was 0.1 BCF/day loose versus the 5-year average last week, nearly unchanged from last week when the market was 0.15 BCF/day loose. This compares to the 1-month average of -1.2 BCF/day tight and late fall/early winter tightness that exceeded 4 BCF/day. Natural gas supply/demand balance remains 1.4 BCF/day tight year-over-year. It is possible that the market could tighten upsomewhat in coming weeks as a rapid rise in nuclear power outages should prompt additional natural gas substitution demand, which has been lagging dreadfully much of the year.

See more on my Current Natural Gas Inventories Page HERE.

Natural Gas Overvaluation Versus 8-Month Average Fair Price

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

Immediately following the report, natural gas dropped from +1% pre-report to down 0.5% in the minutes immediately proceeding 10:30 AM, falling below $3.00/MMBTU. However, the commodity recouped its losses and traded steadily higher the remainder of the day, climbing more than 4 cents or 1.4% to $3.05/MMBTU. The commodity remains in the upper portion of its 2-week trading range between $2.90/MMBTU and $3.10/MMBTU. Following the rally, natural gas is trading at a 2% overvaluation based on current inventories alone and a 5.4% overvaluation versus its 8-month average Fair Price, which takes into account the ongoing loosening of the market. Weekly overvaluations for the next 8-months are shown in the Figure to the right. See more on my Fair Pricing Page HERE. Based on this data, I expect further upside to be limited barring a late-season arctic outbreak, which currently looks unlikely, and I would not be surprised to see natural gas continue range-bound trading between $2.80-$3.10/MMBTU. I feel that significant sustainable gains north of $3.20/MMTBU will be difficult given that such prices will likely prompt further fuel switching for Powerburn that is already trailing year-over-year levels by upwards of 2 BCF/day. I continue to hold a long position in natural gas via a short stake in the 3x inverse ETF DGAZ with the idea being that leverage-induced decay in a choppy trading environment will add to profits. This position is worth around 60% of my target position size. I plan to continue holding, but should natural gas trade north of $3.20/MMBTU, I will have a low-threshold to begin taking profits on the position. I would not have any intention of starting a short position unless natural gas traded above $3.30-$3.50/MMBTU or excessive additional fuel switching occurred.

Today's Forecast Departure From Average High Temperatures

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

After natural gas demand spiked to 10 BCF/day above-average on Wednesday and Thursday, demand will plunge today to finish the week as temperatures moderate. High temperatures will rise nearly 20F day-over-day across the Midwest and Great Lakes today with St Louis warming from the 50s to 70s and Chicago from the 40s to 60s, both around 15F warmer than average. And along the Eastern Seaboard, highs across the Mid-Atlantic will rise from the 50s to 60s, around 5F warmer than average from Washington, DC to Philadelphia. New York City and Boston will remain seasonally chilly in the 40s to low 50s today under cloudy and showery conditions, 5F colder than average. Elsewhere across the country, temperatures will fall more than 20F day-over-day across the sparsely-populated western Plains with 40s and 50s replacing 70s and 80s across western Nebraska, Kansas and eastern Colorado as a spring blizzard impacts the foothills of the Rockies where Denver could pick up 3-6 inches of wet snow after reaching the low 70s yesterday. Overall, the forecast nationwide temperature will rise nearly 6F day-over-day to 54.8F today thanks to the warming trend across the Midwest and Mid-Atlantic, more than 3F warmer-than-average. Based on this outlook and early-cycle pipeline data, I expect natural gas inventories to be essentially unchanged today with a +0 BCF build. Such a build is 4 BCF bearish versus the 5-year average -4 BCF daily withdrawal. For more on today's projected storage levels, please see my Intraday Storage Page HERE.

Withdrawal-Season Ending Natural Gas Inventories 22-Year Comparison

Figure 1: Click here for more information on on natural gas storage

For the natural gas storage week of March 18-24 ending today, I am projecting a preliminary -47 BCF weekly storage withdrawal. Such a draw would be modestly bullish versus both the 5-year average -27 BCF and last year's -19 BCF draws. Should it verify, natural gas inventories would fall to 2045 BCF. With warmer weather the remainder of March likely to prompt storage builds, today's ending inventories will likely represent the Heating Season minimum. As the Figure to the right shows, such a storage level would be the third largest on record. Interestingly, both of the two larger season-ending levels occurred in the past 5-years: 2012's 2369 BCF and 2016's 2468 BCF. In the last 22 years, inventories have dropped as low as 654 BCF and, more recently, to 824 BCF in 2014. This week's projection remains preliminary and will be revised further over the next 4 days. See more on this week's projected withdrawal HERE and more on season-ending storage statistics HERE.

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