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Monday premarket update. I added bold and red text for emphasis -

A Change Is In The Air: Gas Demand To Rise Today As Record Cold & Snow Replace Heat & Wildfires Across The Rockies; Oil Prices Fall To Their Lowest Levels Since July On Demand Fears & Market Turmoil; Natural Gas Still Overvalued, But Downside Is Limited & Health Pullback Will Be Short-Lived; LNG Feedgas Demand To Move Sharply Higher Today Back To Pre-Laura Summertime Highs

6:00 AM EDT, Tuesday, September 8, 2020

Natural gas prices unexpectedly turned sharply higher in Friday afternoon trade to drive a surprise +4.1% rally to finish up the week. The front-month October 2020 contract settled at $2.59/MMBTU but, despite the Friday move higher, prices finished the week with a -2.6% loss to start September. The pull back came in the wake of a 50% rally during the month of August. While markets were closed on Monday, limited electronic trading continued and natural gas gave up nearly half of Friday’s gains to finish the day near $2.54/MMBTU.

It is somewhat unclear as to what drove Friday’s rally as there was no dramatic shift in the temperature outlook nor the supply/demand balance. It may be that investors on the sidelines looked at August’s outsized gains and then the nearly 7% weekly pullback and jumped in. However, more clear were the near-term bearish driving forces. The early-to-mid September temperature outlook continues to look underwhelming as summer transitions to Fall. Even if we do see some late-summer heat, higher natural gas prices have driven gas-to-coal switching such that powerburn demand will be lower on a per degree day basis. Additionally, natural gas production has trended steadily higher, reaching 90 BCF/day over the weekend according to my projections as shown in the Figure to the right. Much of this more than 2 BCF/day gain over the past two weeks has come from rebounding Gulf Of Mexico production after Hurricane Laura, cutting year-over-year deficits to under 3 BCF/day. Finally, LNG export demand has ground slowly higher over the past several days as volumes to Sabine Pass have inched back and Corpus Christi and Freeport remain near all-time highs. However, the Cameron plant, which was near the landfall location of Hurricane Laura, remains shut-down due to widespread electricity outages in the area, which had kept nationwide LNG exports under 4 BCF/day throughout last week, or around 1.2 BCF/day below pre-Laura levels, suppressing a key source of temperature-independent demand. However, that will change today (more on that below).

Overall, according to my Fair Price Model, natural gas is overvalued by +18% versus its Fair Price based on current inventories alone. While I expect natural gas to maintain some level of overvaluation due to the much-improved sentiment and bullish long-term outlook for the commodity, I continue to feel that prices have risen too high, too fast. I remain mildly bearish near-term and see a pullback to the $2.25-$2.50/MMBTU range. I would be surprised to see prices fall much below this as rebounding exports will likely put in place a firm price floor. And again, any pullback would only be a temporary and healthy cooldown of the sector’s suddenly red-hot sentiment as the winter outlook continues to look very bullish with natural gas production still likely to fall further and LNG exports to near all-time highs. I am making no changes to my $4.00/MMBTU heating season upside price target.

Meanwhile, oil prices fell on Friday—and Monday—to extend a steep weekly decline. WTI tumbled $1.60 or 3.9% on Friday to settle at $39.77/MMBTU. This was the lowest close since June 30 and pushed weekly losses to -7.5%. The decline came despite a very bullish EIA-reported Petroleum Status Report on Wednesday with an exceptionally strong -9.4 MMbbl storage drawdown. However, this was likely a one-off event due to Hurricane Laura-induced Gulf of Mexico shut-ins. Investors continue to fret over a slow recovery in crude demand and ballooning distillate inventories, even as the gasoline storage surplus has improved dramatically over the past 6 weeks. Thursday’s -800 point loss on the Dow Jones and re-emerging concerns about the state of the economy probably didn’t help either. On Monday, oil prices extended their losses with WTI trading as low as $38.70/barrel before recovering to near $39.25/barrel by Monday evening. Overall, I feel that oil is a bit overextended to the downside here, especially in light of the strong gasoline demand. I continue to see prices relatively rangebound and am maintaining a $42.50/barrel upside price target. Oil’s sell-off will likely benefit natural gas in the long-term as it will suppress a rebound in drilling activity that could bolster associated gas production. We are already seeing this, to an extent. On Friday, Baker Hughes reported that the combined oil and natural gas rig count climbed by 2 rigs to 256 rigs. However, this is still with 9 rigs of all-time lows and is down a massive -642 rigs year-over-year, as shown in the Figure to the right. However, the rig count tends to rise in the Fall historically and this drop in oil could suppress any such rebound.

Over the long holiday weekend, natural gas demand dropped to multi-week lows as seasonal temperatures everywhere except the West plus rising production and soft LNG exports acted to drive daily storage injections into the double digits. Daily powerburn demand didn’t make it above 33 BCF/day either day. As a result, I projected daily injections of +12 BCF/day on Saturday, +11 BCF/day on Sunday, and +10 BCF/day yesterday, versus the 5-year average +11 BCF/day. Gas demand will rebound today as a dramatic pattern shift takes place across the Central US and Rockies while the Eastern Seaboard sees unseasonably hot late-summer temperatures. After reach 100F on Saturday and the low 90s yesterday, temperatures in Denver, CO tumbled by over 50 degrees overnight and are still falling through the upper 30s this morning after an arctic cold front blew through. A cold rain will change to snow today and, remarkably, the city could see 3-5 inches, mainly on grassy surfaces. Highs today will be only in the 30s, an incredible 45F below average and more than sufficient to drive early-season heating demand. While the core of this early-season arctic airmass will be over Colorado, highs region-wide will be much below-average. This includes Omaha, NE which will only see the upper 40s (35F below-average), Minneapolis, MN in the mid-50s (25F below-average), and Topeka, KS in the lower 60s (20F below-average). Just look at that map! However, only the coldest areas will generate any significant heating demand. Areas whose highs are “only” 20F-30F below-average will be a net negative on gas demand via cooling demand suppression. On the other hand, the Eastern Seaboard will see maybe one final shot of summer-like temperatures ahead of the cold front. Washington, DC and Philadelphia, PA will both reach the upper 80s while New York City and Boston, MA could see the lower to mid 80s, each 5F-10F above-average.

Overall, today’s forecast mean population-weighted nationwide temperature will tumble 2.5F from Monday to 73.0F today, though this is still 0.3F warmer-than-normal due to the heat across the densely-populated Northeast. The combination of extreme cold and warmth across different parts of the nation is favorable for gas demand and Total Degree Days (TDDs) will rise to 12.1 TDDs, 2.2 TDDs greater than normal and the 5th most for September 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 +9 BCF/day daily natural gas storage injection, 1 BCF smaller than Monday’s build and 2 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will rise to 3564 BCF, while the storage surplus versus the 5-year average will narrow to +405 BCF. The year-over-year surplus will drop by 3 BCF to +521 BCF. Click HERE for more on today’s projected injection and Realtime inventories.

Per early cycle pipeline numbers, LNG feedgas demand will surge today as, after more than a week near zero, volumes to Sabine Pass will abruptly return to their pre-Laura levels. Feedgas to the plant will jump by 1.2 BCF/day today to 1.4 BCF/d, boosting total LNG export demand to 4.99 BCF/day. Despite flows to Cameron still at zero today, this is back at the pre-Laura highs as well, thanks to continued strong volumes to Corpus Christi and Freeport. It is also a mere 0.4 BCF/d below year-ago levels. If Cameron were operating at its pre-Laura near 1.7 BCF/day, total LNG feedgas demand would be upwards of 6.7 BCF/day. In the days ahead, it will key to monitor volumes to Freeport and Corpus Christi since these plants having been acting as a pop-off valve for stranded tankers that couldn’t load up at Cameron or Sabine Pass. Continued strong flows to these sites even as Sabine Pass comes back online would suggest favorable demand ahead this Fall. Click HERE for more on the latest daily LNG export demand.