October 25, 2019

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Natural Gas Continues Oversold Bounce After The EIA Announces Slightly Smaller-Than-Expected Storage Injection; Domestic Production Sets New Record High While Total Supply Could Reach 100 BCF/Day Before The End Of 2019; Today's Daily Injection To Fall To 5-Year Average As Cold Air Settles South, But Record-Setting Bearish Build Still Expected For The Week

6:00 AM EDT, Friday, October 25, 2019
In its weekly Natural Gas Storage Report for October 12-18, the EIA announced Thursday morning that inventories rose by +87 BCF. This was 2 BCF smaller than my projected +89 BCF build, but was still a modestly bearish 14 BCF larger than the 5-year average +73 BCF injection. The vast majority of the bearish build came via the South Central Region which saw a +41 BCF injection, 13 BCF larger than its 5-year average. As a result, this region flipped from a long-standing storage deficit versus the 5-year-average to a +5 BCF surplus. It also boosted the region's year-over-year surplus to a massive +238 BCF, the largest of any region by over 100 BCF. The other four regions all saw injections within 3 BCF of their respective 5-year averages. The East Region (+18 BCF versus +15 BCF) and Mountain Region (+3 BCF versus +2 BCF) saw slightly bearish injections while the Midwest Region (+25 BCF versus +27 BCF) and Pacific Region (+1 BCF versus +2 BCF) were slightly bullish. Overall, nationwide inventories rose to 3606 BCF while the storage surplus versus the 5-year average grew to +28 BCF or 1% while the year-over-year surplus grew to a massive +519 BCF surplus. Click HERE for more on the latest EIA-reported inventories.

After its morning storage data, the EIA also released is weekly supply/demand data just before the close of trading. While the storage data covered October 12-18, this data was for the period October 17-23. Natural gas production continues to soar and, for the fourth time in five weeks, set a new all-time high at 94.8 BCF/day, up 0.6 BCF/day. Over the past 5 weeks alone, production is up a huge 2.6 BCF/day. And over the past year, output is up a huge 8 BCF/day compared to just 86.8 BCF/day--the largest year-over-year gain so far this year. The reason for the sharp gains in production over the past several weeks can be attributed to new takeaway capacity coming online out of the Permian Basin via the Gulf Coast Express Pipeline. The gains in production are being very slightly buffered by weaker imports from Canada which stood at 4.1 BCF/day last week, down 0.5 BCF/day year-over-year. Nonetheless, total supply rose to 99.0 BCF/day--up 7.6 BCF/day from 2018--and could very well top 100 BCF/day before the end of the year. One the demand side, year-over-year gains in Powerburn demand (30.6 BCF/day versus 27.3 BCF/day) driven by late-season cooling demand were offset by losses in residential/commercial heating demand (13.3 BCF/day versus 17.6 BCF/day) due to much warmer temperatures this year. On the other hand, natural gas demand demand is being supported by booming exports with LNG exports (6.9 BCF/day versus 3.6 BCF/day) and gaseous exports to Mexico (5.3 BCF/day versus 4.9 BCF/day) both up solidly from 2018 and near all-time highs. When all is said and done, total demand averaged 82.9 BCF/day, up 1.9 BCF/day from 2018.

Now, total supply was up 7.6 BCF/day year-over-year while demand was up just 1.9 BCF/day, which would suggest that the market is 5.7 BCF/day loose versus 2018--which would be disastrous. However, this is a spot weekly imbalance and can be overly influenced by week-to-week variations in temperature. It is also possible that the EIA is overestimating or underestimating certain elements of supply and demand in these preliminary weekly numbers. When eliminating the effect of temperature as a variable, I calculate that the year-over-year imbalance is a more modest--but still quite bearish--2.0 BCF/day loose versus 2018, 0.5 BCF/day looser than the previous week. This means that, for any given temperature, that day's storage injection would be 2.0 BCF/day larger than it would have been last year under the same temperature conditions. This is a superior way to estimate the imbalance in the market and to project long-term inventories. As shown in the Figure to the right, the year-over-year imbalance has loosened steadily each of the last 3 weeks as production has soared and powerburn has seasonally declined and I would not be surprised to see it top 3.0 BCF/day near-term. Click HERE for more on the latest EIA supply/demand data and market imbalance.

Overall, I considered this to be a neutral to slightly bullish report given that it came in slightly below expectations. Investors tended to agree. The front-month November contract jumped 1.5% to settle at $2.32/MTBU after spending much of the morning either side of breakeven. And for the first day in 3, the natural gas ETFs kept pace with UGAZ up +4.6% and UNG up +1.4% since the December 2019 contract was also up 1.5% to $2.47/MMBTU. With little overall change in the near-term temperature outlook, I feel that Thursday's move was an oversold bounce triggered by the better-than-expected inventory build. While temperatures will be exceptionally cold net week and daily storage withdrawals are possible, long term models continue to suggest that the pattern will quickly moderate in early November. With record production and a weakening supply/demand imbalance, I still continue to expect the bears to begin aggressively selling should December prices top $2.50/MMBTU. This is further supported by my Fair Price model. As the Figure to the right shows, natural gas may be undervalued right now ($2.32/MMBTU versus a Fair Price of $2.51/MMBTU), it quickly becomes overvalued during the winter and for the full 8-month period, the commodity is overvalued by a modest 4%. Should December natural gas top $2.50/MMBTU, I will consider exiting the long trade and, should it reach $2.60/MMBTU, plan to even switch to net short.

Natural gas demand will rise slightly today as unseasonably chilly temperatures sink southward into Texas and the Deep South. Dallas and Houston will both struggle to top 60F today while Oklahoma City will struggle into the mid-40s, all 20F-25F colder-than-normal. Further north, it will be a frosty morning in Kansas City with lows falling into the low 30s and only peaking in the lower 50s this afternoon. Temperatures will moderate further north with Minneapolis and Chicago both reaching the lower 50s and Detroit the upper 50s, all within 5F of normal. It will be yet another blistering day across the West Coast with Los Angeles again topping 90F and Fresno and Sacramento the upper 80s across the Central Valley, all 15F-20F above-average and more than sufficient to drive late-season cooling demand. Overall, today's forecast mean population-weighted nationwide temperature will dip 0.4F from Thursday to 58.1F, a new Shoulder Season low and just 0.4F warmer-than-normal, thanks to above-average readings across the densely-populated East and West Coasts. Total Degree Days (TDDs) will hold nearly steady at 11.0 TDDs, 0.8 TDDs greater than normal and the 11th most for October 25 in the last 30 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 +9 BCF/day daily natural gas storage injection, about 0.5 BCF smaller than Thursday's build and right at the 5-year average. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. For the full week of October 19-25, I am projecting a +92 BCF injection, an ugly 27 BCF bearish versus the 5-year average and a massive 43 BCF larger than last year's +49 BCF injection. As the Figure to the right shows, it would be the single largest injection for the week all-time since 1994, topping 2014's +88 BCF build. Injections for the week have been as low as a -1 BCF withdrawal back in 2006. Should a +92 BCF build verify, inventories would rise to 3698 BCF while the storage surplus versus the 5-year average would rise to +55 BCF. The year-over-year surplus, meanwhile, would reach an enormous +562 BCF or +18%. The EIA will release its official storage numbers for the week next Thursday, October 31, at 10:30 AM EDT. Click HERE for more on this week's projected injection.