October 8, 2019

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Natural Gas Pulls Back As Optimism Regarding Near-Term Arctic Insurgency Fades While Oil Can't Hold Onto Its Gains; Shoulder Season Doldrums To Drive Largest Daily Natural Gas Storage Injection Since May Today As New Storage Surplus Nearly Doubles; This Is Why Oil Is A Better Investment Than Natural Gas--For Now

6:00 AM EDT, Tuesday, October 8, 2019
Natural gas was unable to hold last week's late gains and pulled back on Monday as hopes for a significant weather-driven boost in demand faded. The front-month November 2019 contract fell 5 cents or 2.1% to settle at $2.30/MMBTU. While the first short of arctic air of the season is still likely to overspread the Central US later this week into the following week, for much of the nation it will be too early in the season to drive significant heating demand and for those areas that will see sufficiently cold temperatures to boost demand, population densities are very low. For this reason, I am still projecting triple digit storage injections for at least the next two weeks and expect inventories to peak over 3850 BCF in early November, the fourth highest on record. As tempting as prices may seem at these levels--down 30% from a year ago and discounted by 10% according to my Fair Price Model--I still feel that natural gas could have further to fall before it is worth jumping into the trade. The latest long term models--including Monday's run of the gold-standard 6-week ECMWF-EPS--continue to suggest a rapid transition back to above-average temperatures by mid-October, as shown in the Figure to the right which plots forecast departure-from-normal daily gas-weighted degree days (GWDDs) based on my Hybrid Model. This could bolster bearish sentiment and drive prices under $2.25/MMBTU near-term, or even lower, should the warmest iterations of the models verify. For this reason, I would hold off going long for all but the most aggressive of traders until prices drop under $2.25/MMBTU and, even then, would do so cautiously. This all being said, I would also advise against holding a large short position here either. With a very overcrowded short trade--67% of money manager positions are short per the latest CFTC data--the commodity is at risk for a sudden short-covering spike should the forecast abruptly change, though there is currently no evidence of this.

Meanwhile, crude oil was once again unable to hold onto early-session gains. After trading above $53.50/barrel at the open, WTI ultimately settled down 6 cents or 0.1% at $52.75/barel while Brent finished with a similar tiny loss of 2 cents at $58.35/barrel. Unlike natural gas, however, I feel that oil is a strong investment at current levels. With domestic production plateauing and exports likely to ramp up into the fourth quarter, I expect to see sustained weekly inventory draws beginning later this month. The commodity continues to be held back by global demand concerns spearheaded by the US-China trade war. But with Donald Trump looking for a win amidst an increasingly embattled presidency, I would not be surprised to see at least a short-term deal worked out soon that could improve sentiment. In the end, unlike natural gas, the oil supply/demand imbalance is tight versus 2019 while that of natural gas is quickly loosening as Powerburn demand fades. While both are undervalued right now, oil will maintain this undervaluation moving forward, even as natural gas quickly becomes overvalued as the heating season begins. According to my Fair Price model, WTI is trading at a steep 16% discount versus a Fair Price of $63.23/barrel and this discount holds flat or even grows as inventories are likely to continue to fall. For this reason, I am maintaining my aggressive upside price target of $65/barrel and feel anything under $52/barrel--or even at current levels for the aggressive trader--represents a good entrypoint.

Natural gas demand will fall to a weekly low today as there just isn't much in the way of hot or cold temperatures to support Shoulder Season demand. East of the Mississippi River, highs will generally be within 5F of normal, with one exception being the Mid-Atlantic where rain-cooling will keep highs in Richmond, VA in the low 60s, around 10F cooler-than-normal. Further north along I-95, highs will be in the upper-60s to near 70F from Washington, DC to Boston, MA, very close to long-term averages and insufficient to generate significant cooling demand. Even across the Deep South, 80F readings will be restricted to Florida, far southern Georgia and Alabama, and parts of South Texas. Across the Northern Plains, temperatures will surge ahead of the season's first arctic cold front with Bismarck, ND reaching the mid-70s, 15F warmer-than-normal, suppressing early-season heating demand, for now. Overall, today's forecast mean population-weighted nationwide temperature will cool 1.6F from Monday to 64.9F today, 2.0F warmer-than-normal. Total Degree Days (TDDs) will fall to a new seasonal low of 5.6 TDDs, 2.0 TDDs fewer than normal and the 9th fewest for October 8 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 +19 BCF/day daily natural gas storage injection, the highest daily build since May. This would be around 1.5 BCF larger than Monday's injection and a whopping 7 BCF bearish versus the 5-year average. By tonight, projected Realtime natural gas inventories will 3486 BCF while the 2-day old storage surplus versus the 5-year average will nearly double to +16 BCF. THe year-over-year surplus, meanwhile, will surpass +495 BCF ahead of topping +500 BCF on Wednesday afternoon. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.