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New Premium Subscription Service For Celsius Energy Daily Commentaries & Portfolio Holdings; Natural Gas Poised For Pullback As Near-Term Models Trend Cooler & Supply/Demand Imbalance Widens; Tropical Storm Gordon Sets Its Sights On Central Gulf Coast, But Is Expected To Be Net Bearish For Natural Gas; Above-Average Gas Demand Today As Northeast Heatwave Continues

6:00 AM EDT, Tuesday, September 4, 2018
On the final day of August, natural gas extended Thursday's rally, climbing 4 cents or 1.5% to settle Friday at $2.92/MMBTU. For the month, natural gas finished up a strong 4.8%. Despite domestic production surging to a new record just under 83 BCF/day, the natural gas storage deficit versus the 5-year average grew to just under -600 BCF thanks to consistently above-average temperatures across the major demand centers of the Northeast and Ohio Valley. Despite the month's rally, natural gas prices remain 2.8% lower year-over-year, which has helped to support natural gas powerburn demand.

Natural Gas Fair Price Versus Futures Price

Figure 1: Click here for more information on on natural gas investing.

The storage deficit of -600 BCF would typically support a Fair Price of $4.26/MMBTU, a whopping 32% discount versus Friday's close. However, prices have been capped by a loosening temperature-adjusted supply/demand imbalance, which I calculate reached a new 2018-high of -5.0 BCF/day versus the 5-year average last week. Based on long-term projections integrating this imbalance, the Fair Price falls to $3.40/MMBTU by the end of 2018 and to near $3.00/MMBTU by the end of the winter heating season, as shown in the Figure to the right. While the near-term temperature outlook remains unseasonably warm for the next week and could allow prices to make another charge at $3.00/MMBTU, I feel that any move higher is dependent on continued generosity from Mother Nature which, at the risk of sounding like a broken record, will not last. At the current imbalance, natural gas is susceptible to a pullback as the storage deficit would rapidly contract under a prolonged period of even seasonal temperatures. With the near-to-medium term outlook trending cooler over the weekend, such a pullback could come sooner rather than later.

WTI crude oil, meanwhile, dropped 45 cents or 0.6% on Friday to close out August at $69.80/barrel but, after a weak July and start to the month, the commodity squeezed out a 3.2% monthly gain thanks to a late rally. Oil found strength last week after the EIA reported a larger-than-expected -2.6 MMbbl inventory drawdown as imports remained soft and exports surged by over 50% week-over-week to 1.8 MMbbls/day. Following the report, I raised my revised WTI end-of-year price target from $70/barrel to $75/barrel, primarily due to expectations for strong exports due to a widening Brent-WTI spread tightening up supply/demand balance. With Brent closing the month at $77.64/barrel, the Brent-WTI spread has more than doubled this month to $7.84/barrel, although it remains short of the June peak of over $11/barrel that drove exports to a record 3.0 MMbbls/day.

My Oil & Natural Gas Portfolio finished the week strong with a +0.5% gain on Friday on the heals of Thursday's +0.1% gain to erase early-week losses and wrap up the week with a +0.4% gain. Through the first 169 trading days of 2018, the Portfolio is up +18.1% or +27.0% annualized. I made a total of 3 trades on the week. First, on Monday's dip, I boosted by natural gas long bet by shorting additional DGAZ and building my net long position to around 9% of my portfolio. After natural gas rallied despite Thursday's so-so inventory build and rising supply/demand imbalance, I made the decision on Friday to take profits on my long trade shy of my $3.00/MMBTU price target and flip to a net short position. I completed this trade by covering a 9% stake in DGAZ for a +16% return and using some of these funds to short a 6% stake in DGAZ. As a result, my net short position stands at a net 7.6% short with a 19.8% short UGAZ stake partially offset by a 12.2% DGAZ stake, as shown in the Figure to the right. As discussed previously, the intent behind this partial offset strategy is to boost total short exposure to 3x ETFs and capitalize on long-term leverage induced decay, while reigning in directional commodity exposure in these volatile products. My downside price target is $2.75/MMBTU and I will continue adding to the net short trade on further rallies at 5 cent intervals until total exposure stands at 15%. I remain long oil via a 7.0% short position in DWT and plan to let this position ride to my $75/barrel price target with no immediate plan to add further on dips. Finally, the less that is said about my underperforming equities positions the better. Click HERE for more on my current positions and realtime trades.

Projected Natural Gas Storage Injection For August 25-31: 5-Year Historical Comparison

Figure 2: Click here for more information on natural gas inventories.

The EIA will release its weekly Natural Gas Storage Report for August 25-31 this Thursday at 10:30 AM EDT. I am projecting a preliminary +62 BCF storage injection. Such a build would be 3 BCF bullish versus the 5-year average +65 BCF. As the Figure to the right shows, such a build would be the third largest in the past 5 years, behind only +82 BCF and +86 BCF injections in 2014 and 2015. Temperatures on the week were warm at 77.9F, up 1.5F week-over-week and 3F warmer-than-normal. Natural gas demand peaked mid-week with daily injections falling to near +6 BCF while builds peaked at +11 BCF to bookend the week. Despite mean population-weighted temperatures this week up more than 4F compared to last year's 73.7F, my projected injection is actually 1 BCF larger than last year's build for the same week, highlighting the bearish impact of a loosening market as discussed above. In order just to break even, it takes a consistently favorable temperature pattern and any shortfall will result in a contraction of both deficits versus 2017 and the 5-year average. Should a +62 BCF injection verify, natural gas inventories would rise to 2567 BCF while the storage deficit versus the 5-year average would inch higher to -592 BCF. At this time, it appears that topping -600 BCF for the second time this summer will be delayed for at least a week, or perhaps even indefinitely. Click HERE for more on this week's projected injection.

Today's Forecast Departure From Average High Temperatures

Figure 3: Click here for more information on on the near-term forecast.

Over the long holiday weekend, natural gas demand began a steady rebound as temperatures began to again warm across the Northeast. By Labor Day, highs were again in the upper 80s to lower 90s across the entire I-95 corridor from Washington, DC to Boston, 10F-15F above-average. As a result, daily injections fell from nearly +12 BCF/day at the end of last week to +10 BCF/day on Monday, over 1 BCF/day bullish versus the 5-year average +11 BCF/day. Gas demand will rise further today to what is likely to be a weekly peak as record and near record warmth expands in the Northeast. Fans and players will continue to swelter at the US Open of tennis in New York City where today's forecast high of 95F is 15F above-average. The entire Eastern Seaboard will once again reach the mid-90s. Heat advisories are up from New York City through Boston, a relative rarity for September. Even westward into the Ohio Valley and eastern Midwest temperatures will be well above-average with Chicago approaching 90F, nearly 10F above-average. This magnitude of warmth across major population centers will likely drive powerburn demand above 35 BCF/day today. On the other hand, a slow-moving, Fall-like storm system across the Plains will bring below-average temperatures to a large area from the Dakotas south to Texas and eastward to Minnesota and Iowa. Departures from normal will be in the 5F-10F across most of this area. Finally, powerburn will be blunted across the Deep South from the Florida Panhandle to Louisiana today as Tropical Storm Gordon makes its final approach. More on that storm system below. Nonetheless, thanks to the building heat across the Northeast, the forecast mean population-weighted nationwide high temperature today will rise 0.5F from Monday to 78.8F today, 4.9F hotter-than-normal. Total Degree Days will increase to 14.2 TDDs today, 3.5 TDDs greater than normal and the single most for September 4 in the last 37 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 +8 BCF/day daily natural gas storage injection, 1 BCF smaller than Monday and 3 BCF bullish versus the 5-year average +11 BCF/day build. By mid-morning today, I expect Realtime natural gas inventories to top 2600 BCF. Last year, storage levels hit 2600 BCF on May 31, a whopping 96 days ahead of this year's pace. The storage deficit, meanwhile, will continue to slowly increase and should reach -595 BCF by this evening. Click HERE for more on today's projected injection and Realtime natural gas inventories.

Latest NHC Storm Track For Tropical Storm Gordon

Figure 4: Click here for more information on on the latest snowfall forecast.

The main weather story today will be focused on Tropical Storm Gordon. The storm spun up quickly Sunday morning while it was located over the far southern Everglades. By Sunday evening, it had emerged off the west coast off Marco Island and had winds of 60 mph and was steadily growing in strength. With bathtub-warm waters ahead and low windshear, the official National Weather Service forecast brings the system to minimal hurricane strength with maximum sustained winds of 75 mph immediately prior to its landfall this evening somewhere east of New Orleans over coastal Mississippi or Alabama. Small, compact storms like Gordon can sometimes strengthen (or weaken) faster than expected so there is always a chance that the system could outperform. On its current track, the system is expected to impact the eastern edge of the primary oil and natural gas-producing fields in the Gulf of Mexico. The Gulf is responsible for 5% of natural gas production and 17% of oil production, both down considerably from the early 2000's when hurricanes could materially impact supply/demand balance and drive price spikes in natural gas, as happened in 2005. For natural gas, I actually expect that Gordon will be net bearish. While there have been no official shut-in reports yet, I wouldn't be surprised to see 2-4 BCF of natural gas production temporarily shut-in. However, with the storm expected to slow down after landfall, the major demand centers of the Deep South--a primary source of natural gas cooling demand this time of year--will see a multi-day period of clouds and rain which will suppress powerburn. Additionally, while the system will make landfall well east of Cheniere Energy's Sabine Pass LNG export facility on the Texas-Louisiana border, it is certainly possible that shipping traffic to and from the plant could be disrupted, transiently reducing export demand. Stay tuned. Click HERE for more on the latest NHC forecast forecast.
Projected Daily Natural Gas Storage Projections For The Next 15 Days

Figure 5: Click here for more information on on natural gas storage.

For the remainder of the week, natural gas demand will slowly weaken through Thursday with daily injections rising to near at average at 11 BCF/day. By Friday, however, much cooler temperatures are expected to clear the Northeast with highs 5F-10F below-average across Philadelphia through Boston, which will contribute to daily builds surging to around +13 BCF/day, 3 BCF bearish versus the 5-year average. For the storage week of September 1-7, I am currently projecting a +71 BCF natural gas storage injection, still 3 BCF bullish versus the 5-year average thanks to the early-week heat wave across the Northeast. Such an injection would result in the storage deficit versus the 5-year average drifting up to -595 BCF and it appears increasingly likely that the deficit will not reach -600 BCF again, at least near-term. Longer-term, there remains some disagreement in the computer models, but it appears increasingly likely that there will be at least a period of below-average temperatures across the major population centers of the Northeast. It is likely that this potential pattern shift is contributing to today's decline in natural gas prices. As a result, I am expecting daily injections to rise consistently to above-average levels in the +10-15 BCF/day range through September 15, as shown in the Figure to the right. By the end of September, I am now projecting that natural gas inventories could be above 2900 BCF while the storage deficit versus the 5-year average may drop as low as -530 BCF. Click HERE for more on the extended temperature outlook and HERE for more on near-term natural gas storage projections.

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