September 5, 2019

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Natural Gas Surges To 1-Month High On Hot September Temperature Outlook While Crude Oil Jumps 4% On Economic Optimism; Natural Gas Approaches Fair Value While Oil Remains Steeply Undervalued; Busy EIA Projected To Announce Slightly Bearish Natural Gas Storage Injection But Slightly Bullish Crude Oil Inventory Build In Today's Storage Reports

6:00 AM EDT, Thursday, September 5, 2019
Natural gas continued its sharp rally on Wednesday, climbing another 9 cents or 3.7% to settle at $2.45/MMBTU. With the move, natural gas finally eclipsed my summer 2019 upside price target. The close was the highest since July 12 and, after bottoming at $2.07/MMBTU on August 7, the commodity is now up +18.3% in less than a month. The rally has cut the year-over-year decline by more than half in the past two weeks to just 12.5% versus 2018, when the commodity was trading at $2.80/MMBTU, as the Figure to the right shows. The rally continues to be driven by rising expectations of a very hot start to September, particularly across the late-summer demand centers of Texas, the southern Plains and the Southeast. On the other hand, with the rally, the long-standing undervaluation as calculated by my Fair Price Model has shrunk from over 25% to just 6%. And with the storage deficit versus the 5-year average likely to continue contracting, this Fair Price undervaluation actually flips to a premium by November. Averaged over the next 8 months for which I make projections, the commodity is undervalued by just 3.6%, with a Fair Price of $2.54/MMBTU versus a Futures Price of $2.63/MMBTU. For this reason, I feel that the natural gas rally has gotten a bit overextended. I would not be surprised to see a near-term pullback to as low as $2.25/MMBTU, which is why I have reluctantly maintained my ill-timed short position. However, with the hot September outlook likely to rule out any shot that end-of-season inventories top 3800 BCF and LNG export demand regularly topping new highs, it seems almost certain that futures prices do not drop below $2.00/MMBTU.

Meanwhile, ahead of today's EIA Petroleum Status Report, crude oil surged as global markets rallied. WTI finished up $2.32 or 4.3% to $56.23/barrel while Brent climbed $2.44 to $60.72/barrel. It was the largest single-session gain for both contracts since July 10. Even with the rally, I remain aggressively bullish on crude oil, as directed by my Fair Price Model, which is calculating a Fair Price of $62.89/barrel based on current inventories alone and $65.46/barrel averaged over the next 8 months. For this reason, I remain aggressively long the sector and am maintaining a $65/barrel 2019 price target on the sector.

Thanks to the Labor Day holiday, it will be a busy day for the EIA. The agency will release its Natural Gas Storage Report at its usual time at 10:30 AM EDT followed by its Petroleum Status Report at 11:00 AM EDT.

Starting with the former, today's Natural Gas Storage Report will cover the August 24-30 period. For the week, I am projecting a +78 BCF natural gas storage injection. Thanks to persistently below-average temperatures across the Central US throughout the week, such a build would be a modestly bearish 12 BCF larger than the 5-year average and 14 BCF larger than last year's injection. As the Figure to the right shows, it would be the third largest injection for the week in the last 38 years, behind 2014's +80 BCF and 2015's +89 BCF injections. It would nearly than double 2016's tiny +42 BCF injection. The bearish build was driven by persistently cool temperatures across the Central US throughout the week. This suppressed cooling demand with Powerburn averaging just 36.4 BCF/day on the week, up 1.0 BCF/day year-over-year. But with domestic production up nearly 7 BCF/day year-over-year, this small yearly gain in powreburn is insufficient, even with LNG feedgas demand recording a new weekly high. Should a +78 BCF injection verify, natural gas inventories would rise to 2935 BCF while the storage deficit versus the 5-year average would contract to -88 BCF and the year-over-year surplus would rise to +377 BCF. Click HERE for more on last week's projected injection.

With momentum quickly swinging in the bull's favor, it would take a bad miss for today's injection to stop the natural gas rally in his steps. On the other hand, I don't expect the temperature outlook, not today's report, to be the primary driver of price in the week to come. I feel that a reported injection of +75 BCF or smaller to be viewed as unequivocally bullish versus expectations with prices likely to make a move on $2.50/MMBTU. On the other hand, a reported injection of +85 BCF or larger would be a significant disappointment versus expectations with prices likely to pull back to under $2.40/MMBTU. A reported injection between +75 BCF and +85 BCF would be neutral versus exxpectations with prices equally likely to rally or pullback.

Check back at 10:30 AM EDT for the official EIA storage withdrawal on my Current Natural Gas Inventories Page HERE. Also, I now have weekly natural gas supply and demand statistics on my Natural Gas Supply & Demand Page HERE that should be updated between 3 pm and 4 pm EDT.

Turning now to oil, today's Petroleum Status Report will cover the same August 24-30 period when it is released at 11:00 AM EDT. After Tuesday's close, the American Petroleum Institute (API) announced that it was expecting a +0.4 MMbbl crude oil inventory build. Despite the fact that oil prices dropped by nearly 1% immediately following the report--likely thanks to a disappointing comparison following last week's -10 MMbbl draw--a +0.4 MMbbl rise in inventories would actually be 0.9 MMbbls bullish versus the 5-year average +1.3 MMbbl. Should it verify, oil inventories would rise to 428.8 MMbbls while the storage surplus versus the 5-yr avg would contract slightly to +6.0 MMbbls. Additionally, the EIA is expected to announce that distillate stocks fell by -1.2 MMbbls, which would be 2.4 MMbbls bullish versus the 5-year average +1.2 MMbbl build. This is countered slightly by an expected -0.9 MMbbl declines in gasoline stocks, 0.8 MMbbls bearish versus the 5-year average -0.9 MMbbl draw. Overall, Total Petroleum Inventories--crude oil plus gasoline plus distillates--are expected to fall by -1.7 MMbbls, a slight 2.5 MMbbls bullish versus the 5-year average. While certainly not on the same level as some of the huge draws that we have seen in recent weeks, these expected numbers are decent and indicative of a relatively tight market. Should they verify, I will be maintaining my current upside price target and would be a buyer on a dip under $55/barrel. Check back on my Crude Oil Inventory Page HERE after 11:00 AM EDT for today's official EIA numbers.