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Natural Gas Rallies For Weekly Gain & Heads Into The New Week With Momentum After Temperature Outlook Holds Steady Over the Weekend; Natural Gas Bears Step Into The Ring But Don’t Have The Same Bite As Last Year; Gas Demand Set To Soar Today On Cold Lone Star State And Cooling East As Active Weather Pattern Gears Up

6:00 AM EDT, Monday, December 14, 2020
Natural gas wrapped up another volatile week on Friday with a small gain as the near-term temperature outlook continued a slow cooling trend. The front-month January 2020 contract gained 4 cents or 1.5% to settle at $2.59/MMBTU. Thanks to strong sessions on Thursday and Friday, the commodity finished with a 0.6% weekly gain, despite Monday’s nearly 7% setback. Natural gas prices are up +13% versus the same time last year.

Baker Hughes Oil & Natural Gas Rig Count
Figure 1: Click here for more information on on crude oil inventories.
Friday’s gains were driven by the increasing likelihood of below-average temperatures for the December 14-18 period that will drive stronger heating demand and resume a contraction of the natural gas storage surplus. Additionally, there was likely some follow-through after Thursday’s larger-than-expected -91 BCF EIA-reported natural gas storage withdrawal that mitigated some of the poor sentiment in the wake of several weeks of weaker-than-expected withdrawals.

Of note, on Friday, Baker Hughes reported that the combined Oil & Natural Gas Rig Count gained +15 rigs in its largest weekly gain since January 10, 2020, as E&Ps respond to higher oil prices. Oil rigs climbed by +12 rigs to 258 rigs, the highest mark since May 15 and 86 rigs off the August 14 lows. Gas rigs added 4 rigs to 79 rigs, the highest since May 22 and 11 off the record low from July 24. Nonetheless, the combined total of 338 active rigs is still down a steep 461 rigs or 58% year-over-year. This includes natural gas rigs that are off 50 rigs or 39% year-over-year. Thus, despite the steep recovery, oil and natural gas drilling activity is still far below year-ago levels and current levels will barely be enough to keep up with the decline curve, much less lead to a rebound in output.

CFTC-Reported Natural Gas Money Manager Holdings
Figure 2: Click here for more information on on natural gas investing.
Also on Friday, the Commodity Futures & Trading Commission (CFTC) released its weekly report detailing natural gas money manager holdings through last Tuesday, December 8. After weeks of the bears largely on the sidelines despite faltering prices and sentiment, short-sellers finally stepped in last week. While open long positions did edge up by +3,849 contracts, open shorts soared by +51,383 contracts to 211,267 open positions. It was the largest weekly gain for bearish holdings since June 16 and the 211,267 held contracts is the highest since July 28, as shown in the Figure to the right. Even with the rise in short positions, holdings are still down a massive -148,911 contracts, or more than 41% from this time last year. The bears may have had Mother Nature on their side over the past 6 weeks but, unlike 2019, don’t have fundamentals, which are quite bullish, and therefore lack that 1-2 punch. It is also worth pointing out that this weeklong period ended on Tuesday, in the wake of Monday’s sell-off and the peak of the most recent sell-off. I expect to have seen significant short-covering during the back half of the week that will be reflected in next week’s numbers. Regardless, the abrupt uptick in short interest does point towards increased volatility moving forwards—as well as the prospect of short-squeezes should these speculative positions get unwound. Click HERE for more on the latest CFTC natural gas money manager holdings.

Over the weekend, the near-term temperature outlook held largely steady, with colder-than-normal temperatures expected this week, followed by a rapid warming trend by the weekend, followed by renewed cooling around the Holidays. Consensus 14-day accumulated GWDDs held largely stable no no major pattern shifts. While this may sound like a momentum-killer, I expect that Friday’s rally may have been muted by fear of a weekend warming trend, as happened frequently last Winter and this Fall. However, since that didn’t happen, I would not be surprised to see further strength in the commodity to open the week. And should the last half of December trend colder, I could see prices make a quick run towards $3.00/MMBTU before the end of the year, especially if the EIA announces another larger-than-expected draw in this week’s Storage Report. On the other hand, I feel that a warming trend will be met with more muted selling as persistent warm weather has seemingly been largely priced in by this point. I expect a price floor of around $2.50/MMBTU heading into 2021.

Today's Forecast Departure From Normal High Temperatures
Figure 3: Click here for more information on on the near-term forecast.
Natural gas demand bottomed out on Saturday with a bearish -8 BCF/day daily storage withdrawal (5-year average: -18 BCF) as unseasonably mild conditions dominated the Eastern Seaboard. Demand rebounded on Sunday as quick-moving storm system brought heavy wet snow to Kansas, Oklahoma, and Arkansas with withdrawals jumping to -12 BCF/day. Demand will soar today as much colder temperatures overspread the Deep South and extend eastward. It will be another chilly day across Texas with highs 5F-15F below-average statewide. After seeing the lower 20s and upper 20s overnight, respectively, El Paso and Dallas, will only top out in the lower 50s today. The big cooldown, however, will come across the Mid-Atlantic today. The same storm that brought wintery weather to the Plains yesterday will primarily be a rainmaker for the big cities of the I-95 corridor, but the storm will bring highs today that are 10F-20F cooler than Sunday, a rapid reversion from the recent unseasonable warmth. Richmond, VA will only top out near 50F today while Baltimore, MD and Philadelphia, PA only se the lower 40s, with wet snow possible just north and west of town today. Warmer-than-normal temperatures will remain in place for one more day across the Southeast and New England today with Charlotte, NC reaching the lower 60s and parts of Upstate New York such as Syracuse reaching the upper 30s, each around 10F above-average.

Projected Realtime Natural Gas Inventories
Figure 4: Click here for more information on natural gas inventories.
Overall, today’s forecast mean population-weighted nationwide temperature will plunge by -5.9F from Sunday to 43.6F, still 2.3F warmer-than normal. Total Degree Days (TDDs) will rise to 21.8 TDDs, 2.4 TDDs fewer than normal but the 18th most for December 14 in the last 39 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 -23 BCF/day daily natural gas storage withdrawal for today, 11 BCF larger than Sunday’s draw and 5 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will fall to 3695 BCF while the storage surplus versus the 5-year average narrows to +265 BCF. The year-over-year surplus will hold steady at +306 BCF. Click HERE for more on today’s projected withdrawal and Realtime inventories.

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