October 22, 2019

Natural Gas Sell-Off Resumes As November Temperature Outlook Moderates; Sentiment & Fundamentals Still Bearish, But Shorting Natural Gas Here Is Becoming An Increasingly Risky Endeavor; Gas Demand To Rebound Today As Heartland Cools, But Injections Remain Well Above-Average

6:00 AM EDT, Tuesday, October 22, 2019
Despite an upcoming nationwide cooldown, natural gas resumed its Shoulder Season sell-off on Monday, erasing three-quarters of last week's gains in a single session. The front-month November contract dropped 9 cents or 3.5% to settle at $2.24/MMBTU, the lowest settlement since October 11. The 1x ETF UNG completed its monthly rollover on Monday and, like the 3x product UGAZ, now holds only December 2019 contracts, which settled at $2.44/MMBTU, maintaining a 20 cent contango. Meanwhile, oil prices saw more of a slow bleed as that commodity faces ongoing concerns over global demand, even as most analysts project domestic inventory drawdowns to resume near-term. WTI slid 47 cents or 0.9% to settle at $53.31/barrel while Brent fell a nearly identical 46 cents to $58.96/barrel. It was the lowest close for oil since October 8. The front-month November 2019 WTI contract will expire at today's close and will be replaced by the December 2019 contract, which closed at $53.51/barrel, a tiny 20 cent contango. The sell-off in natural gas can be attributed to the combination of record production and a loosening supply/demand imbalance--the same old story I've been recapping for the past two weeks--as well as a moderation in the November temperature outlook. The near-term GFS and ECMWF models held roughly unchanged over the weekend, pointing to much colder-than-average temperatures for much over the Lower 48 for early November, though the absence of FURTHER cooling may alone have been sufficient to prompt further selling with sentiment as bearish as it is. However, Monday's run of the gold standard long-term ECMWF EPS model trended much warmer for mid-November compared to last Thursday's run. For over a week, there has been significant divergence amongst the long-term models with the CFSv2 much warmer and the ECMWF prolonging the early-November cooldown past mid-month. Over the weekend, the CFSv2 cooled somewhat and, with Monday's warm-up in the ECMWF-EPS, these two models have converged, as shown in the Figure to the right, perhaps increasing confidence in the long-term outlook.

The Figure to the right plots forecast daily departure-from-normal gas-weighted degree days (GWDDs) for the next 6 weeks according to my Hybrid Model, which integrates GFS ENS, ECMWF ENS, ECMWF-EPS, and CFSv2 data, weighted by historical performance. This model shows that, after a period of above-average GWDDs to start November, GWDDs rapidly fall below-average by around November 9--and stay there. This is right around the time that natural gas storage withdrawals would begin and such an outlook could prolong the Shoulder Season for another week. This potential is reflected in my End-of-Season storage projection which has risen by around 20 BCF over the past two days and stands just under 3790 BCF, 540 BCF higher than last year. Should such a temperature outlook verify, it could be disastrous for natural gas and it is likely this fear that prompted Monday's selling.

The fear trade could certainly maintain pressure on the sector. But at some point, it is inevitable that buyers will step in and natural gas will bounce. According to my Fair Price model, the commodity is trading at a steep 11.3% undervaluation versus a Fair Price of $2.53/MMBTU based on current inventories alone. Such a bounce could be as small as the December 2019 contract reaching this Fair Price--around 3% of upside--to as high as $2.60/MMBTU, approaching 7% of upside. While it is difficult to argue that natural gas is a strong near-term buy even at such discounted levels, it is becoming easier to argue that it is too dangerous a short to continue holding. For the bears, I feel that the risk/reward potential here is rapidly becoming unappealing. Were I short, I would have a low threshold to take profits here and wait for a better entrypoint, either long or short.

Looking more near-term, natural gas demand will rise today as below-average temperatures expand across the northern Plains and Great Lakes. Minneapolis, MN will only reach the upper 40s today while Chicago, IL will only see the lower 50s, each nearly 10F cooler-than-normal. Elsewhere across the Heartland, highs will be generally up to 5F cooler than normal with 50s in Des Moines, IA, 60s in St Louis, MO, and low 70s Birmingham, Al. Across the Eastern Seaboard, milder readings will persist with Washington, DC, Philadelphia, New York City, and Boston all topping 60F and 70s reaching as far north as Norfolk, VA, all 5F-10F warmer-than-normal. Overall, today's forecast mean population-weighted nationwide temperature will fall 1.5F from Monday to 61.6F, still 2.9F warmer-than-normal. Total Degree Days (TDDs) will rise to 8.6 TDDs, still 1.0 TDDs fewer than normal and the 13th fewest for October 22 in the last 38 years since 1981. 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 +14 BCF/day daily natural gas storage injection today, 3 BCF smaller than Monday's build but still 5 BCF bearish versus the 5-year average +9 BCF/day. By tonight, Realtime natural gas inventories will top 3664 BCF while the storage surplus versus the 5-year average reaches +48 BCF. Year-over-year inventories will be just under +550 BCF higher. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.