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Monday Investing Commentary


Oil & Natural Gas Portfolio Rises 4% Last Week To Near 2017 High On Sector-Wide Rebound; Familiar Bullish & Bearish Forces Continue To Drive Natural Gas Prices As I Look To Exit Long Trade; Oil Outlook Remains Bullish With $60/Barrel 6-Month Price Target

Monday, October 16, 2017
Thanks to 4%+ gains in both oil and natural gas last week, my Energy Portfolio rebounded sharply from the previous week's losses and is once again approaching 2017 highs. The portfolio rose 4 out of 5 days last week, gaining 4.3% on the week and boosting returns since May 1 to +20.6%, less than 0.4% from a new high. I made two trades on the week, both on Thursday's EIA storage report extravaganza in which the Administration released both oil and natural gas inventory data due to Monday's Columbus Day Holiday. The first trade was a small short sale of UGAZ as this highly profitable long-term "maintenance" had dropped below 7% of my holdings and I wanted to protect long-side profits as the commodity's rally felt as though it was running out of steam. The second trade was a short sale of DWT to boost my oil long position in the inverse ETF in the wake of yet another bullish crude oil drawdown. In the week ahead, I will continue to closely watch natural gas for a potential exit point of my...

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Monday Investing Commentary

Oil & Natural Gas Portfolio Rises 4% Last Week To Near 2017 High On Sector-Wide Rebound; Familiar Bullish & Bearish Forces Continue To Drive Natural Gas Prices As I Look To Exit Long Trade; Oil Outlook Remains Bullish With $60/Barrel 6-Month Price Target


6:00 AM EDT, Monday, October 16, 2017
Thanks to 4%+ gains in both oil and natural gas last week, my Energy Portfolio rebounded sharply from the previous week's losses and is once again approaching 2017 highs. The portfolio rose 4 out of 5 days last week, gaining 4.3% on the week and boosting returns since May 1 to +20.6%, less than 0.4% from a new high. I made two trades on the week, both on Thursday's EIA storage report extravaganza in which the Administration released both oil and natural gas inventory data due to Monday's Columbus Day Holiday. The first trade was a small short sale of UGAZ as this highly profitable long-term "maintenance" had dropped below 7% of my holdings and I wanted to protect long-side profits as the commodity's rally felt as though it was running out of steam. The second trade was a short sale of DWT to boost my oil long position in the inverse ETF in the wake of yet another bullish crude oil drawdown. In the week ahead, I will continue to closely watch natural gas for a potential exit point of my long trade as temperature-independent supply/demand balance has tightened with record LNG feedgas, but the near- and extended-term temperature outlook looks less-than-favorable. Meanwhile, I plan to continue to maintain my large long oil position as I remain confident in higher prices through the end of 2017.



Natural Gas Percent Undervaluation Versus Fair Price For The Next 8-Months

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

After my addition to my UGAZ position last week, my net natural gas long stake has been reduced to 11% of my holdings (20% short DGAZ and 9% short UGAZ). My UGAZ maintenance position--held long-term to capitalize on contango- and leverage-induced decay rather than directional movement--is up 36% from my basis while my short DGAZ position has also returned to the black, up 5%. My sentiment towards natural gas remains mixed. On the one hand, temperature-independent supply/demand balance has tightened considerably over the past week with LNG exports rising to peak capacity at Sabine Pass and domestic production at least temporarily falling in the wake of Hurricane Nate. This will likely lead to a very bullish injection in this week's EIA storage report and a larger, but still bullish build the following week as well, building the natural gas storage deficit versus the 5-year average heading into the withdrawal season. Further, investors seem inclined to buy natural gas at these levels as the commodity climbed 3% on Thursday alone despite an otherwise forgettable storage injection. On the other hand, the temperature outlook for the next two weeks--as well as the next two months--continues to look consistently warmer-than-normal (see my Extended Outlook Page HERE) meaning that natural gas demand may not be getting much assistance from Mother Nature. And while natural gas production fell after Gulf of Mexico shut-ins, these have now resolved and there seems little to stop production from rising to new all-time highs. Additionally, the 3x natural gas ETFs have now rolled into the December 2017 contract which closed Friday at $3.16/MMBTU, still undervalued versus my Fair Price by around 7%, but considerably more expensive than the summer trading range, and this undervaluation falls further to under 3% once things roll into the January 2018 contract, as shown in the Figure to the right. And finally, while season-ending inventories--currently projected at 3847 BCF--will be at 3-year lows, such a storage level will still be robust historically and more than sufficient to get us through even a bitterly cold winter. For these reasons, I will have a low threshold to close out my long natural gas trade should prices rally any higher. My price target remains near $3.20/MMBTU for the December 2017 contract. Should the commodity reach this level, my tentative plan is to flip-flop my UGAZ and DGAZ positions. Specifically, I would cover about 75% of my DGAZ position, reducing it to around 5% of my holdings while adding to my maintenance UGAZ position, boosting this stake to 20% of my holdings, thereby going from net long to net short in one fell swoop. My intent behind holding onto a portion of my DGAZ position would be to capitalize on a sudden artic intrusion. Additionally, such a holding would reduce portfolio risk, would continue to capitalize on leverage-induced decay and, should I hold it for an extended period of time, would benefit from the steep spring-time backwardation. Should the December 2017 contract pull back and not reach $3.20/MMBTU, I won't be that disappointed. Compared to 10 days ago, I am less concerned about natural gas falling off a cliff even with a consistently mild forecast thanks to the rise in LNG exports and upcoming initiation of exports from Cove Point. However, I have no plans to add to my long position at this time.


Crude Oil Fair Price Percent Undervaluation Versus Fair Price

Figure 1: Click here for more information on on Crude Oil Fair Price Analaysis.

Not to sound like a broken record, but there has been little change in my sentiment towards crude oil. Last week's surprising EIA-reported -2.8 MMbbl crude oil storage drawdown--even with a large decline in exports--continued the steady contraction in the long-standing storage surplus. With a Fair Price of $64.84/barrel based on current inventories alone, oil remains substantially undervalued according to my model by 20%. For this reason, I maintain a 6-month price target of $60/barrel. I continue to hold 3 different positions to limit portfolio risk in this large long trade: a 14% stake short DWT, a 5% stake long UWT, and a 4% stake short DRIP. Both the DWT position (+16%) and UWT position (+5%) are comfortably up from my cost basis while DRIP (-1%) is underperforming slightly. At this time, I am happy to continue holding these positions. On a dip, I may be tempted to add to my UWT long position, but will likely abstain from further shorting of DWT so as to limit portfolio risk or DRIP as the trade just isn't working out all that well. Should oil reach $55/barrel, I will likely close my UWT position to take quick profits and limit leverage-induced decay. However, I plan to continue holding DWT until prices reach $60/barrel (or fundamentals change significantly) as this position benefits from leverage-induced decay over the long-term.


Disclaimer: Current Portfolio Holdings are released by Celsius Energy as experimental products. While they are intended to provide accurate, up-to-date data, they should not be used as trading recommendations nor should they be used alone in making investment decisions, or decisions of any kind. Celsius Energy does not make an express or implied warranty of any kind regarding the data information including, without limitation, any warranty of merchantability or fitness for a particular purpose or use.