October 7, 2019

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Natural Gas Catches A Short Squeeze On Prospect For Early-Season Arctic Outbreak--But Don't Expect This Rally To Last; Oil & Natural Gas Long Positions Both See Significant Efflux Of Bullish Holdings; Natural Gas Demand To Dip Today As New Storage Surplus Grows

6:00 AM EDT, Monday, October 7, 2019
Natural gas extended Thursday's squeeze higher on Friday, rising another 2 cents or 1% to $2.35/MMBTU after nearly topping $2.40/MMbTU intra-session. Nonetheless, the commodity still finished the week down 2.2% thanks to early-week selling. The late-week gains were driven by the prospect of an early-season shot of arctic air late this week and into early next week. A powerful storm system could bring heavy snow to low elevations across Nebraska, the Dakotas, and Minnesota, even the major population center of Minneapolis-St Paul. The system would be accompanied by unseasonably chilly temperatures 15F-25F cooler-than-normal across large tracts of the Plains and Great Lakes. With prices heavily discounted year-over-year and the short trade exceptionally crowded (more on that below), investors were quick to either cover risky shorts or add on a few "Hail, Mary" longs on anticipation of a spike in heating demand. However, I feel that it is unlikely this rally will be sustainable. For starters, even though temperatures will be unseasonably chilly, those anomalies actually large enough to drive heating demand will be occurring across a relatively sparsely populated region and, combined with record domestic production, will barely be able to even drop daily storage injections to near-normal levels. Additionally, it appears that at least this initial push of arctic air will be short-lived, lasting 5-7 days and then rapidly retreating. As the Figure to the right shows, my Hybrid Model--integrating short-term GFS and ECMWF ENS and long-term ECWMF-EPS and CFSv2 forecasts--continues to project above-average gas-weighted degree days (GWDDs) for the second half of October and into November. While projected End-Of-Season natural gas inventory projections have come down slightly, I am still projecting peak storage near 3860 BCF, 615 BCF higher than last year and the fourth highest on record. Such an environment is not conducive for a sustained rally. I feel this one will be no different and will again fall victim to the short-sellers. I see a near-term pullback to near $2.25/MMBTU and, should some of the warmest iterations of the late October and early November outlooks verify, the $2.00/MMBTU level is not out of the question. I feel that a move back below $2.25/MMBTU could represent a good long-term opportunity to go long for the aggressive trader, but I am definitely not buying at current levels.

Meanwhile, crude oil inched higher on Friday but still finished with a robust weekly loss. WTI rose 36 cents or 0.7% to $52.81/barrel while WTI gained 66 cents to $58.37/barrel. On the week, WTI finished with a rough 5.5% loss that was fueled by a much larger-than-expected +3.1 MMbbl EIA-reported inventory build on Wednesday and ongoing concerns about a global demand slowdown. On the other hand, on Friday, Baker Hughes reported that oil rigs fell another 3 to 710 active rigs, the seventh straight weekly decline in the rig count. Since the beginning of 2019, the oil rig count is down a massive 175 rigs or 20% and is at its lowest since May 5, 2017, seemingly pointing to a future slowdown in production growth. Despite the selling, inventory builds, and bearish headlines, I remain optimistic on oil's near- and long-term prospects. The fourth quarter will likely see record-setting oil exports that will drive a bullish inventory drawdown that will take storage levels under 400 MMbbls by the end of the season. Even at current levels, that commodity is significantly underpriced, trading at a 16% discount versus its Fair Price of $63.23/barrel. Should storage fall under 400 MMbbls as expected, this Fair Price tops $65/barrel. At this time, I am an cautious buyer under $52.00/barrel. My hesitation stems from the combination of surprising inventory builds each of the past two weeks and the apparent significant outflow of money manager funds from the long trade, as detailed below.

On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly data detailing NYMEX natural gas and oil investor positioning through Tuesday, October 1. Following a major late August and early-September short-covering rally--albeit one with a lack of significant buying--the Commission announced that short-sellers have begun to reload while buyers are still unable to be found. Open shorts surged 24,601 contracts to 232,736 positions, well below the late-August 52-week high of 367,343 but more than double this time last year. Further, long holdings tumbled by 20,909 contracts to just 112,405 positions, a new 52-week low. As the Figure to the right shows, while short positions remain well below their highs--though it appears the bears are gearing up again--there just aren't any buyers out there as even during last month's rally, long positions bearing budged. Overall, the Bullish Sentiment--the percentage of open positions held long--tumbled 6% to 33%, barely half the 52-week average of 60% and less than 6% from the 52-week low. Even though the excess of shorts does set-up the potential for a short squeeze--which we likely saw a small sampling of on Thursday and Friday--the absence of any concerted effort from the bulls to get into the trade argues against the sustainability of a rally, at least for now. Click HERE for more on the latest natural gas money manager holdings. Meanwhile, oil positions, too, took a major hit, though Sentiment was starting from a much strong position. Long positions tumbled by 44,012 contracts to 217,764 holdings while shorts jumped 23,477 contracts to 76,541 positions. Bullish Sentiment plunged 9% to 74%, down 18% versus 2018 and down a slight 4% from the 52 week average. For the first time in several months, there is now a slight excess of short positions in the trade. Should bullish draws during the fourth quarter verify as I expect, shorts abandoning this position could very well exaggerate any rally. Click HERE for more on oil investor positioning.

The EIA will release its weekly Natural Gas Storage report for September 28-October 4 this Thursday at 10:30 AM EDT. At this time, I am projecting a +104 BCF natural gas storage injection, a third straight triple digit build despite record-setting heat throughout the week. Such an injection would be 15 BCF bearish versus the 5-year average and 13 BCF larger than last year's injection. As the Figure to the right shows, it would be tied with 2014 for the single largest injection for the September 28-October 4 period in the last 5 years. It would also be tied for the second largest injection all-time for the week, behind only 2011's +106 BCF build. Over the past 25 days for which I have been making projections for the week, this is near the top of the range of projections which have been as low as +82 BCF back on September 20--before the recent spike in Permian takeaway send production to record highs--and +106 BCF late last week. Should a +104 BCF injection verify, natural gas inventories would rise to 3421 BCF while the long-standing storage surplus versus the 5-year average would slump to just -3 BCF. Click HERE for more on last week's projected injection.

Over the weekend, natural gas demand rose slightly with projected daily natural gas storage injections of +13 BCF/day and +16 BCF/day on Saturday and Sunday, respectively, still above the 5-year average +12 BCF/day. And on Sunday, the natural gas storage deficit versus the 5-year average which had been in place for a whopping 741 days since September 25, 2017, finally flipped to a storage surplus. This surplus will only rise to start the week as natural gas demand falls amidst generally seasonal temperatures. Along the immediate Eastern Seaboard, temperatures will be mild with New York City and Boston both reaching the mid-70s, 5F-10F warmer-than-normal, but insufficient to generate much in the way of cooling demand. Across the Appalachians and into the Deep South, rainy conditions will keep temperatures cool. Pittsburgh, PA will only see the upper 50s, Nashville, TN the mid-60s, and Dallas the mid-to-upper 70s, all 5F-10F below-average. Otherwise, across the Plains and Great Lakes, highs will generally be within 5F of normal, 60s to 70s south and upper 50s north. Overall, today's forecast mean population-weighted nationwide temperature will rise by 0.2F from Sunday to 66.5F, 3.2F warmer-than-normal. Total Degree Days (TDDs) will fall to 7.1 TDDs today, 0.3 TDDs fewer than normal and the 14th fewest for October 7 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day data.

Based on this forecast and early-cycle pipeline data, I am projecting a +18 BCF/day daily natural gas storage injection, 1 BCF larger than Sunday's build and an ugly 6 BCF bearish versus the 5-year average. By tonight, projected Realtime natural gas inventories will reach 3468 BCF while the fresh storage surplus versus the 5-year average will jump to +9 BCF. The year-over-year surplus, meanwhile, will top +489 BCF on its way to +500 BCF by Wednesday. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. For the remainder of the week, projected daily storage injections will peak tomorrow at +19 BCF before falling for the remainder of the week as warmth returns to the Southeast and an early-season arctic intrusion expands across the northern Plains. More on that in Tuesday's Commentary.