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October 28, 2019

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Natural Gas Set To Rally As Temperature Outlook Trends Colder-For-Long & Shorts Push Their Luck--But Is This The Beginning Of A Sustained Move Higher Or Just Another Entrypoint For The Bears? Gas Demand To Begin Ramping Up Today As Unseasonably Chilly Temperatures Build Across The Heartland; Oil Looks Ready To Run


6:00 AM EDT, Monday, October 28, 2019
Natural gas continued its slow drift lower Friday to wrap up a low-volatility week as bullish drivers--a smaller-than-expected inventory build and an early-season shot of arctic air--were countered by a loosening supply/demand imbalance, record domestic production, and a massive, and growing, year-over-year surplus. The front-month November 2019 contract dipped 2 cents or 0.7% to settle at $2.30/MMBTU, booking a 0.9% weekly loss. The November contract will expire at the close of trading on Tuesday and will be replaced by the December 2019 contract which settled down 1 cent at $2.46/MMBTU. On Friday afternoon, the Commodity Futures Trading Commission (CFTC) released its weekly data detailing natural gas money manager holdings on the NYMEX. And once again, natural gas investor sentiment set a new multi-year bearish low. On the one hand, long positions did rise slightly from the previous week's 52-week low, gaining 1,459 contracts to 106,700 contracts, though this is still down a massive 205,098 from the same time last year. Additionally, open short positions jumped by 19,250 contracts--more than 10x the "rise" in longs--to boost total holdings to 320,829 contracts. This is up a massive 256,313 positions or 397% from last year. As a result of the much larger increase in bearish bets than bullish bets, the Bullish Sentiment--or the percentage of holdings held long--fell another 1% to a mere 25%. This is down an incredible 58% compared to this time last year when the Sentiment was at multi-year highs over 80% and is less than half the 52-week average of 57%. Further, it is the lowest Bullish Sentiment since at least 2013, which includes the winter of 2016 when prices dropped under $2.00/MMBTU. Obviously, this data indicates that the short trade is incredibly overcrowded with such a skewed ratio of shorts and longs. Near-term, natural gas investors are effectively all-in on continued weakness in the sector--which could be a problem if something fundamentally changes. As I have discussed previously, this is a prime set-up for a short squeeze. All that is missing right now is the catalyst to kick start it. Unfortunately for the bulls, there just isn't such a catalyst to support a sustained move higher. Click HERE for more on the latest natural gas money manager holdings.


Over the weekend, the near-term temperature outlook trended steadily colder. Near-term, unseasonably chilly temperatures will advance eastward this week reaching the Eastern Seaboard by the weekend. Two significant early-season winter storms are possible across the Midwest in association with the advancing arctic airmass. There is nothing new to this forecast--it is largely unchanged from last week's model runs that seemed to spur little interest from sidelined bulls. However, over the weekend, both the GFS ENS and ECMWF ENS short-term models trended towards a scenario with a reinforcing shot of arctic air during the second week of November, whereas last week's forecast and suggested a rapid return to warmer-than-normal readings within the next 10 days or so. This is highlighted in the Figure to the right showing 14-day accumulated gas-weighted degree days (GWDDs) as forecast by the GFS and ECWMF ENS. This colder-for-longer trend is also supported by the long-term CFSv2 model which has cooled considerably in its Week 3 forecast. Such a forecast would result in a prolonged period of above-average heating demand and, even with production at record levels, would drive a strong start to the withdrawal season. This evolution of the near-term temperature outlook coupled with an exceptionally overcrowded short trade as discussed above drove a 3.5% rally in November 2019 natural gas to as high as $2.38/MMBTU in Sunday evening electronic trading. I would not be surprised to see natural gas rally here, with December 2019 natural gas--as the Front Month Contract by tomorrow night--potentially reaching $2.60/MMBTU over the next few days. Should any trapped shorts really start to panic, I would not be surprised to see prices even squeeze as high as $2.75/MMBTU in a best-case scenario for the bulls. However, with production rising over 95 BCF/day over the weekend driving temperature-adjusted supply/demand imbalance, I still expect over $2.50/MMBTU, any short-sellers still on the sidelines will jump back in, capping any rallies and setting up for future weakness once temperatures moderate. Unfortunately for the bulls, with the market as loose as it is, as soon as the cold air fades, withdrawals are going to collapse and, with ugly year-over-year comparisons likely by late November and early December, prices will likely drop as fast as they rose. This is a good opportunity for the nimble swing trader and a potential reprieve and exit for long-suffering bulls--but it should not be viewed as the ultimate bottom or the beginning of a multi-week rally.


Meanwhile, oil prices rose again on Friday to cap off a strong week thanks to the combination of bullish domestic and global headlines. WTI rose 43 cents or 0.8% to settle at $56.66/barrel, its highest close since September 24. On the week, the commodity notched a 5.2% weekly gain. Brent rose 35 cents to settle at $62.02/barrel, up 4.4% on the week. On Wednesday, the EIA announced that oil inventories unexpectedly dropped by -1.7 MMbbls, a very bullish draw, as imports fell to a 23-year low, snapping a streak of 5 straight weekly builds. Additionally, US trade representatives announced that the US and China were in the process of finalizing a trade agreement which investors speculate could bolster global demand. Finally, on Friday, Baker Hughes announced that, after two small weekly rises, the rig count resumed its downtrend, falling 17 rigs WoW to just 696 rigs, the largest drop since April 26. At 696 rigs, the count is down 189 rigs or 27% since the beginning of 2019 & is the lowest since Apr 2017. With a string of large builds likely over the next several weeks and oil still undervalued by more than 10%, I am bullish on the oil sector. At this time, I am maintaining a $65/barrel upside price target and feel a pullback under $55/barrel would be a good buying opportunity.


My Oil & Natural Gas Portfolio rose +0.7% on Friday to cap off a +2.2% weekly gain. The week continued a strong run for the Fund, which is now up +13.6% year-to-date after having been rangebound between +8%-12% for the past month. After having traded sparingly since early September, I finally made a trade on Friday, shorting DWT after the sharp drop in the Baker Hughes Rig Count to boost exposure to 10.6% of my holdings. As discussed above, my upside price target is $65/barrel and I will consider adding further on a break below $55/barrel. Meanwhile, my net long natural gas position stands at a robust 13.6% with an 18.5% short DGAZ position partially offset by a 4.9% UGAZ short. My upside price target is $2.60/MMBTU on the December 2019 contract, above which I will have a low threshold to flip directly to a net short position. Click HERE for more on my current oil and natural gas holdings.


Over the weekend, natural gas demand fell as unseasonably mild temperatures dominated the Eastern Seaboard. Driven by highs approaching 70F as far north as New York City, daily injections topped out at +15 BCF/day on Sunday nearly double the 5-year average +8 BCF/day. However, gas demand will begin a long-anticipated rally today as much colder temperatures amplify across the central US. After receiving 5 inches of snow yesterday, Denver, CO will only reach the upper 28s today, a massive 30F colder than normal, while Omaha, NE will struggle to 40F and Kansas City, MO into the low 40s, 20F-25F below-average. Northeastward, Minneapolis, MN will reach the low 40s while Green Bay, WI will see the mid-40s, around 10F below-average ahead of a fast-moving system that could drop 2-4 inches of snow across the area overnight tonight. On the other hand, it will be another mild day for the East Coast as a warm, southerly flow remains in place. Highs will reach the mid-to-upper 60s as far north as New York City, a few degrees cooler than Sunday but still around 10F warmer-than-normal and not doing much at all for heating demand. Overall, thanks to the expansion of the chill across the Central US, today's forecast mean population-weighted nationwide temperature will fall 2.9F from Sunday to 57.7F, still 0.9F warmer-than-normal. Total Degree Days (TDDs) will rise to 9.5 TDDs, 1.2 TDDs fewer than normal and the 12th fewest for October 28 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 +11 BCF/day daily natural gas storage injection, 4 BCF smaller than Sunday's build but still 3 BCF bearish versus the 5-year average +8 BCF. By tonight, projected Realtime natural gas inventories will reach 3736 BCF while the storage surplus versus the 5-year average reaches +67 BCF. The year-over-year surplus will inch higher by 2 BCF to +575 BCF. Today's injection is likely to be the largest for the rest of 2019 while inventories are likely within 10-14 days of peaking for the year. Click HERE for more on today's projected daily injection and Realtime natural gas inventories.


For the remainder of the week, natural gas demand will steadily rise as the cold building across the Rockies and Plains today builds and expands eastward. As the Figure to the right shows, daily storage injections will fall below the 5-year average on Tuesday with a +7 BCF/day build expected. Injections will continue to fall and could reach as low as +2 BCF/day on Friday, the most bullish build since mid-summer. As a result, the weekend bearishness will be largely cancelled out and, at this time, I am projecting a +57 BCF injection, right at the 5-year average. Should it verify, inventories would rise to 3755 BCF while the storage surplus versus the 5-year average would hold at +52 BCF after nearing +70 BCF intra-week as discussed above. It would still be the third largest injection for the week, behind 2014's +84 BCF injection and last year's +63 BCF build. Click HERE for more on this week's projected storage injection.