ETFs, Leveraged ETFs, Sector Funds

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Today's update FYI -

Natural Gas Bounces On Gulf Of Mexico Production Shut-Ins, But Can’t Hold The Majority Of Its Morning Gains; Higher Prices Likely This Fall As Storage Concerns Are Overblown Amidst Tightening Supply/Demand Imbalance; Gas Demand To Trend Higher Today On Building Plains Warmth & Production Drop

6:00 AM EDT, Tuesday, September 15, 2020

Natural gas prices gapped up over 5% to $2.40/MMBTU in early-morning electronic trade on Monday, but the commodity would give up a majority of these gains during the floor session. The front-month October 2020 contract settled up a modest 4 cents or 1.8% at $2.31/MMBTU.

The commodity got an early boost after domestic production—led by shut-ins in the Gulf of Mexico ahead of Hurricane Sally—fell under 88 BCF/day over the weekend pushing year-over-year declines to 6 BCF/day and LNG export demand, despite the ongoing shut-down of the Cameron facility neared 7.5 BCF/day over the weekend. However, the rally stalled as investor sentiment soured on a bearish mid-to-late September temperature outlook and ongoing large storage surplus. Despite a widening year-over-year production decline and rebounding LNG exports during the second half of the summer, the storage surplus versus the 5-year average is still holding near +416 BCF, just 50 BCF below its June peak. It is now becoming increasingly likely that inventories will peak close to 4000 BCF, either the second or third highest total on record, as the Figure to the right shows. However, it is virtually impossible that inventories come anywhere close to threatening demonstrated natural gas storage capacity of 4261 BCF. In the broad scheme of things, whether inventories peak at 3950 BCF or 4000 BCF is largely irrelevant. Indeed, my own sentiment has improved significantly over the past week due to the improvements in production and LNG exports that will have a much more meaningful impact on longer-term fundamentals than this Fall’s peak storage levels and I feel that downside risk at these levels is low. I strongly considered initiating a long BOIL or long UNG position yesterday, but deferred as it appeared the rally was faltering. I remain on the sidelines for now, but will likely initiate a position on any further weakness. Meanwhile, I continue to hold long-term positions in COG, EQT, and SWN, all of which were in the black yesterday. These are no swing-trading positions, as will be any ETF stake I open, but are a long-term bet on a sustained bull market beginning this Fall and lasting well into 2021.

Meanwhile, oil prices ended lower Monday in a low-volatility day of trading as ongoing demand concerns were at least temporarily offset by Gulf of Mexico shut-ins. October 2020 WTI dipped 9 cents or 0.2% to $37.24/barrel while Brent fell 22 cents to $39.61/barrel. Per the BSEE, 0.4 MMbbls/day or 21% of Gulf oil production was shut-in as of Monday, a total that could potentially double over next 24-48 hours. However, following last week’s EIA-reported inventory build and refinery inputs falling to near 2020 lows, a temporary dip in production is not going to trigger a broad change in sentiment. Additionally, global supplies could be inflated in the weeks to come as there are indications that Libya’s long-running geopolitical instability that has cut that nation’s production could be coming to at least a temporary détente that could result in over 1 MMbbls/day of supply flooding the market. I am long a small position in UCO, but would not be surprised to see more near-term downside to perhaps as low as $35/barrel before prices stabilize and turn higher again.

Natural gas demand will rise slightly today as warm temperatures overspread the northern Plains—aided by a drop in early-cycle production–even as much of the Deep South and Eastern Seaboard remain seasonally cool. Minneapolis, MN will probably see its hottest remaining day of the month today with highs reaching the mid-80s, nearly 15F above-average, while Des Moines, IA, Kansas City, MO, and even Bismarck, ND reach the lower 80s, all around 10F above-average. It will be yet another scorcher across the Intermountain West with Boise, ID, Salt Lake City, UT, and Denver, CO reaching the lower-to-mid 90s, 10F-15F above-average. On the other hand, highs across Texas will average 5F cooler-than-normal with Dallas, El Paso, and San Antonio all stuck in the mid-to-upper 80s. Similar anomalies will be found across the Eastern Seaboard with Washington, DC, Philadelphia, PA and New York City all only reaching the lower 70s, decidedly demand-neutral temperatures that will generate neither significant heating nor cooling demand.

Hurricane Sally will close in on the northern Gulf Coast today, having slowed to a snail’s pace. The storm put on an impressive piece of intensification yesterday morning with winds ramping from 70 mph to 100 mph over the span of 6 hours, making the storm a Category 2 storm. Since then, however, the storm has plateaued with little further change in strength as of early this morning. Hurricane Sally will likely make landfall over Mississippi or Alabama early Wednesday morning at a similar strength, bringing with it a dangerous storm surge and flooding rains that could top 15-20 inches. Today, however, outer rainbands and cloudiness will keep highs along the immediate Gulf Coast restricted to the upper 70s from New Orleans, LA to Mobile, AL to Pensacola, FL, around 10F below-average. With the storm making landfall over the easternmost part of the Gulf of Mexico gas fields, production shut-ins will be limited, with early-cycle pipeline data suggesting that Gulf output will fall to 1.2 BCF/day, down a total of 0.8 BCF/day from pre-Sally levels, according to my latest Production Data.

Overall, today’s forecast mean population-weighted nationwide temperature will cool -2.1F from Monday to 70.4F, 0.1F below-average. Total Degree Days (TDDs) will drop to 7.5 TDDs, 0.6 TDDs fewer than normal and the 11th fewest for September 15 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 +11 BCF/day daily natural gas storage injection, around 0.5 BCF smaller than Monday’s build and very close to the 5-year average. The smaller injection will be supported by a sharp 1.7 BCF/day drop in natural gas production to 86.2 BCF/day, based on early-cycle pipeline data. However, I would not be surprised to see this revised considerably higher in late-cycle runs this evening, as is often the case. By tonight, projected Realtime natural gas inventories will rise to 3651 BCF while the storage surplus versus the 5-year average holds steady at +413 BCF. The year-over-year surplus, on the other hand, will narrow by 3 BCF to +519 BCF. Click HERE for more on today’s projected injection and Realtime inventories.