October 2, 2019

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Bears Hit Natural Gas On Two Fronts As Losing Streak Sets All-Time Record; After Two Weeks Of Small Builds, EIA Expected To Announce Very Bullish Crude Oil Inventory Draw Today; Remarkable Eastern Heatwave And Northern Plains Arctic Outbreak To Both Climax Today

6:00 AM EDT, Wednesday, October 2, 2019
Natural gas extended its losing streak to 11 straight days on Tuesday, which is the longest such streak on record, dating back to at least 1990, as shown in the Figure to the right. Front-month November 2019 prices slid another 5 cents or 2% to settle at $2.28/MMBTU. The commodity continues to be hammered by a brutal 1-2 punch of record domestic production as takeaway capacity from the congested Permian Basin comes online and forecasts that point to a much warmer-than-normal October that will suppress heating demand. While natural gas is very oversold at current levels--and is undervalued by 12% according to my Fair Price Model based on current inventories--the bearish momentum is unrelenting and it is not surprising to see the sector overshoot to the downside. While long-term upside potential outweighs downside risk, it would not be surprising to see the commodity continue to pull back, perhaps dropping under $2.20/MMBTU should the warmest iterations of the 6-week temperature outlook verify.

Meanwhile, crude oil continued its move lower and finished Tuesday near 2-month lows. WTI fell 45 cents or 0.8% to settle at $53.62/barrel, the lowest close since August 8 and pushing that sectors losing streak to 6 sessions, the longest since November 2018. Brent closed down 36 cents to $58.89/barrel. Despite an undervaluation based on current US inventories of nearly 15% according to my Fair Price Model, oil continues to be punished over fears of a slowdown in global demand as a key US manufacturing index fell to its lowest level in a decade on Tuesday. Futures were also weighed down by news that Ecuador would be leaving OPEC at the New Year, raising concerns that it would be then free to liberalize its output. Nonetheless, I am still expecting record-setting US exports for much of the 4th quarter and project inventories to fall under 400 MMbbls by the end of the year. I remain bullish on the sector with an upside price target of $65/barrel. for this reason, on the dip under $54/barrel, I added to my DWT short position providing long exposure on Tuesday, boosting the total position to 10.4% of my holdings, my second largest net position.

The EIA will release its weekly Petroleum Status Report for September 21-27 this morning at 10:30 AM EDT. After Tuesday's close, the American Petroleum Institute (API) announced that it was expecting a -5.4 MMbbl crude oil inventory drawdown. This would be an impressive 6.4 MMbbls bullish versus the 5-year average +0.5 MMbbl build and would be the first draw in the last 3 weeks. Should it verify, crude oil storage would fall to 413.6 MMbbls, a new 2019 minimum and the lowest inventories have been since October 5, 2018. Inventories will continue to straddle the 5-year average with the fresh storage surplus flipping back to a -4.9 MMbbl deficit. The long-standing year-over-year surplus will fall to +9.6 MMbbls and could be within weeks of flipping to a deficit of its own. The bullishness of the expected crude oil draw will be countered slightly by forecasts for neutral to bearish refined product storage changes. The API expects gasoline stocks to rise by +2.1 MMbbls versus the 5-year average +0.6 MMbbls while distillates are expected to fall by -1.7 MMbbls, very close to the 5-year average -2.0 MMbbls. All-told, Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to fall by -5.5 MMbbls, a moderate 4.6 MMbbls bullish versus the 5-year average -0.9 MMbbl draw. Undoubtedly, this would be a bullish report should such numbers verify. It remains to be seen whether it will outweigh the global demand concerns and help pull oil out of its nosedive. Immediately after the API's numbers were released, WTI jumped by over 1% to $54.25/MMBTU, so at least some investors think so. Check back after 10:30 AM EDT for the EIA's official storage number on my Crude Oil Inventory Page HERE.

Natural gas demand will reach a weekly maximum today as temperatures reach a across the major demand centers of the East Coast. Highs will be 15F-25F above-average regionwide stretching from New York to Georgia and west to Arkansas. Pittsburgh, PA, Washington, DC, and Louisville, KY will all reach 90F today, a remarkable 20F hotter than normal. Richmond, VA will reach the upper 90s and isolated spots along the mid-Atlantic tidewater could even challenge 100F. On the flipside, unseasonably cool temperatures will once again dominate across the Northern Plains and Rockies. Bismarck, ND will struggle to reach 40F, a massive 25F cooler-than-normal. Highs will be 10F-20F below-average stretching from western Minnesota all the way to the Pacific Coast. The difference between the hottest and coolest maximum temperatures today across the Lower 48 will approach 60F, remarkably high for this time of year. Overall, today's forecast mean population-weighted nationwide temperature will warm 1.0F from Tuesday to 72.8F, a massive 7.7F hotter-than-normal. Total Degree Days will rise to 11.6 TDDs, 4.7 TDDs greater-than-normal and the single most TDDs for October 2 in the 38 years since 1981. This is the second straight day that TDDs have reached a 38-year high. 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 +13 BCF/day daily natural gas storage injection, 1 BCF smaller than Tuesday and very close to the 5-year average injection. Once again, it has to be disappointing to see nearly perfect weather only capable of driving a near-average storage injection, courtesy of the bearish influences of record production and flat LNG exports. By tonight, projected Realtime natural gas inventories will reach 3380 BCF, while the storage deficit versus the 5-year average will hold steady at -19 BCF and the year-over-year surplus will hold at +462 BCF. Click HERE for more on today's projected daily natural gas storage injection and Realtime natural gas inventories.