6:00 AM EDT, Wednesday, October 30, 2019
Long-suffering natural gas bulls continued their assault on overly complacent short-sellers on Tuesday.
The front-month November contract--which expired at the close of Tuesday's trading--soared 15 cents or 6.2% to settle at $2.60/MMBTU, following Monday's 6.4% rally. In just the last two days alone, the November contract rose +14%. Short-sellers were completely blindsided by this rally, though the warning signs were certainly there, with an exceptionally overcrowded short trade and a much colder-than-normal forecast that had been ignored by investors...until it wasn't. The November 2019 front-month contract expired at the close of trading and will be replaced by the December 2019 contract, which rose 3.3% to $2.64/MMBTU. This will be the highest price for the front-month since September 17. Nonetheless, even with the rally, natural gas prices are still down 17% year-over-year, as shown in the Figure to the right, which the December 2018 contract was at $3.19/MMBTU. Of course, inventories were also 570 BCF lower this time last year, so this year-over-year decline is not illogical.
Meanwhile, in contrast to the very purposeful move higher in natural gas, oil prices continue to flounder. WTI finished well off the session low of $54.61/barrel, but stilled dipped 27 cents or 0.5% to close at $55.54/barrel. Brent actually managed to break into the black and was up 2 cents to $60.66/barrel.
My Oil & Natural Gas took advantage of the rally in natural gas prices to chart another strong day, finishing up +1.7% to push year-to-date gains to +16.3%, or +19.6% annualized. This is within 0.1% of year-to-date highs. As I had been discussing since last week, on the break above $2.60/MMBTU, not only did I close out of my natural as long position, but I "sold the news" and actually flipped directly to net short. This was accomplished by covering a 7% portion of my DGAZ short and adding a 9% stake to my UGAZ short. As the Figure to the right shows, I am now net short natural gas a modest 7.5% with a 14.5% UGAZ position partially offset by a 7.0% DGAZ short. As I've discussed previously, I utilize these partially offsetting short positions--rather than just shorting a 7.5% stake in UGAZ or buying a 7.5% stake in DGAZ--in order to trade directionally as well as take advantage of leverage-induced decay with a large 3X ETF position without having to overexpose the Portfolio in a certain direction.
Why did I make the move to net short even as bitterly cold temperatures lie ahead? Yes, natural gas will soar and both the year-over-year surplus and surplus versus the 5-year average will be cut down near-term. However, thanks to a bitterly cold late November last year, we will likely see some very bearish year-over-year comparisons by later next month and I would not be surprised to see the year-over-year surplus top +700 BCF> For example, I am presently projecting a -8 BCF storage withdrawal for the week ending November 15. This alone would be a massive +102 BCF bearish versus 2018. As a result, the storage surplus is not going anywhere soon. This combined with the recent rally means that the commodity is now quite overvalued according to my Fair Price Model. Based on current inventories alone, it is overvalued by +4%, which grows to as high as +15% by December thanks to the combination of expectations for a rebounding surplus and contango. Over the full 8-month period for which I make projections, the commodity is overvalued by, on average, a steep +8.3%. My advice here: Don't Be A Hero! I'm not saying to go straight to short, but at least take profits here, on what has been a 25% run-up in UGAZ since last Thursday. In my opinion, the few extra percent if this thing makes it to $2.75/MMBTU does not justify the risk of facing a whiplash pullback. Be smart. Meanwhile, I continue to hold a large long WTI position via short DWT, worth 11.1% of my holdings. I am very tempted to add to this on a move below $55/barrel, but will probably be more conservative and first see what today's EIA data shows. Click HERE for more on my current oil and natural gas holdings.
Speaking of which, the EIA will release its weekly Petroleum Status Report for October 19-25 this morning at 10:30 AM EDT detailing oil inventories and supply/demand data. After Tuesday's close, the American Petroleum Institute (API) announced that it was expecting a 2.8 MMbbl decline in crude oil inventories, a second straight weekly draw and a moderate 2.8 MMbbls bullish versus the 5-year average +1.1 MMbbls. Should it verify, inventories would fall to 431.5 MMbbls, still well above the seasonal lows of 416.1 MMbbls set on September 6. The storage surplus versus the 5-year average would inch lower to just -2.4 MMbbls while the year-over-year surplus will tumble a steep 6 MMbbls to just +5.5 MMbbls and is likely within a week or two of flipping to a deficit. The big star of the API's numbers, however, was gasoline, whose inventories are expected to have slid a huge -4.7 MMbbls, 2.3 MMbbls bullish versus its 5-year average as refinery inputs remain suppressed, which makes the crude draw all the more impressive. This bullishness is countered somewhat by an expected -1.6 MMbbl distillate draw, 1.3 MMbbls smaller than the 5-year average -2.9 MMbbl draw. Nonetheless, Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to have fallen by a total -8.0 MMbbls, a bullish doubling of the -4.1 MMbbl 5-year average draw. Check back after 10:30 AM EDT for the official EIA numbers. Overall, should these numbers verify, I would expect WTI to rebound. Regardless, I remain bullish on the sector and continue to target an upside price target of $65/barrel.
Natural gas demand will continue its swift move higher today as much below-average temperatures expand and begin to shift eastward. The core of the coldest readings will once again be across the eastern Rockies with Denver only reaching the lower 20 with snowy conditions, 35F-40F below-average. Similar anomalies will be seen across west Texas where Winter Weather Advisories are up for a freezing rain event. Further eastward, Madison, WI could see its second measureable snow event in the past three days tonight, while the suburbs of Chicago and Milwaukee could even see some accumulations. These areas will only top out near 40F today, 10F-15F colder-than-normal. The eastern warmth, which has played buffer to this arctic influx the past several days, will remain in place today, but will continue to erode. It will be another warm day for the immediate coast with Philadelphia, New York City, and Boston all reaching the mid-to-upper 60s, 10F warmer than normal. However, once you go inland as far as Detroit, MI, temperatures quickly fall below average, a trend which will continue in the days to come. Overall, today's forecast mean population-weighted nationwide temperature will be nearly flat from yesterday at 55.1F, 1.2F cooler-than-normal. However, Total Degree Days (TDDs) will rise to 12.5 TDDs, 1.4 TDDs greater than normal and the 10th most for October 30 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 +4 BCF/day daily natural gas storage injection. This would be 2 BCF smaller than Tuesday's injection and 4 BCF bullish versus the 5-year average. By tonight, Realtime natural gas inventories would rise to 3745 BCF while the storage surplus versus the 5-year average would contract to +61 BCF. The year-over-year surplus would fall by 5 BCF to +565 BCF. Click HERE for more on today's projected injection and Realtime natural gas inventories.
October 30, 2019
Home --> Daily Commentary & Archive --> October 30, 2019 Daily Commentary
Subscribe to:
Posts (Atom)