This mornings update confirms, GLTY -
October Natural Gas Plunges While November Gas Rallies In Divergent Trading Action; Ignore The Front Month: Natural Gas Fundamentals Continue To Improve & Will Fuel The Coming Bull Market; Gas Demand To Fall Today As Degree Days Sink To New Seasonal Low; LNG Feedgas Demand To See Another Sharp Drop Today, But Production To Fall Also
6:00 AM EDT, Tuesday, September 22, 2020
What a bizarre trading day, but also one that encapsulated the deep divisions in the natural gas sector. Following a 10% rout last week, the front-month October 2020 contract plunged out of the gates Monday morning and remained under constant selling pressure throughout the session, closing down a massive 21 cents or 10.4% to $1.84/MMBTU, the lowest settlement since July 31.
On the other hand, the November 2020 contract—which will become the front-month contract in less than a week—quickly reversed early-session losses and finished up +3.0% to $2.71/MMBTU, a remarkable divergence between the two nearest term futures contracts. Additionally, most of the winter 2020-21 contracts were in the black, with the January 2021 contract settling at $3.32/MMBTU, within 5 cents of 2020 highs, despite the October contract tumbling over 30% in the past two weeks. As a result, the spread between the Fall and Winter contracts is enormous, as shown in the Figure to the right, with the October-January spread a huge 80%. This will be a significant headwind for long-term natural gas ETF holders due to rollover-related losses. The divergent moves between the October contract and the November-January contracts yesterday was driven by a similar divergence in the near- and longer-term outlooks. A weekend cooling trend plus sharp cuts to LNG export demand due to the combination of Gulf of Mexico tropical activity and annual maintenance at Maryland’s Cove Point renewed fears of storage reaching capacity, especially in the South Central Region. I have discussed this concern in previous commentaries—and explained why I felt it was overblown—and won’t rehash it again. On the other hand, natural gas production continues to edge lower and has been down 4-6 BCF/day year-over-year over the past week while increasingly favorable global price spreads favor very strong, if not record setting, LNG exports in the coming months. Thus, regardless if storage levels in any of the regions approach capacity, the withdrawal season supply/demand imbalance looks to be very bullish. Additionally, the fact the November contract—which will be the front-month contract as inventories near their seasonal peak—didn’t sell-off with the October contract, suggests that investors, too, are skeptical that there will be an inventory crunch. This, in short, is why the October contract took a beating Monday, but the November and later contracts stood their ground.
As long as LNG export demand remains suppressed, it is certainly possible the October—and November—contracts could see further near-term weakness. Long-term, however, the outlook is as bullish as ever and I am making no changes to my winter price target of $4.00/MMBTU, representing +21% upside from Monday’s close of the January 2021 contract. Of note, I did take profits on my long BOIL position yesterday. With the extremely divergent moves in the October and November contracts, I wanted to avoid any near-term shenanigans and protect a profitable position. Should sentiment remain weak, the November contract could get sucked lower as well when it becomes the front-month contract next week. The high contango will weigh on ETFs long-term and I will only be using them as swing trades for the foreseeable future. The bulk of my core holdings remain long E&Ps COG, SWN, and EQT, all of which were in the black yesterday. I may add further on dips.
Meanwhile, oil prices tumbled on Monday, due to expectations of Libyan crude oil exports returning to the market, COVID and soft demand, and a 500 point loss on the Dow Jones. After last week’s +10% rally, October 2020 WTI gave up nearly half of these gains in a single session, sliding $1.80 or 4.4% to settle at $39.31/barrel. Brent lost $1.71 to $41.44/barrel. While the commodity continues to face significant headwinds, the storage picture has improved considerably—especially crude oil and gasoline inventories—since the Spring and first half of the Summer. I do not believe that sub-$40/barrel WTI is justified at this point and I am maintaining a $42.50/barrel upside price target. On a move under $39/barrel, I will be a buyer of UCO or USO.
Natural gas demand will fall today as unseasonably chilly conditions expand across the Deep South, driving total degree days to a new seasonal low. Tropical Storm Beta made landfall Monday evening across Central Texas as a 45 mph tropical storm and will bend to the north and northeast today. While the system is not impressive from a wind perspective, it will spread cloudiness and showers across much of the South. New Orleans, LA, Little Rock, AR, Birmingham, AL, and Houston, TX will all be stuck in the 70s today, 10F-15F below-average. The cool conditions will extend eastward as well with most areas from the Florida panhandle to northern New England seeing highs 5F-10F below-average. On the other hand, hot conditions will build across the northern Plains with Bismarck, ND reaching the upper 80s, Omaha, NE the lower 80s, and Minneapolis, MN the lower 80s, all 10F-20F hotter-than-normal. Unfortunately for the bulls, this time of year, these anomalies would be much better served across the Deep South where conditions can still get hot enough to generate significant cooling demand.
Overall, today’s forecast mean population-weighted nationwide temperature will warm +1.5F from Monday to 66.3F due to the warming across the Plains, but will still be 1.8F cooler-than-normal. Total Degree Days (TDDs) will slump to a very anemic 5.2 TDDs, 2.0 TDDs fewer than normal and the single fewest for September 22 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 12.5 BCF/day daily natural gas storage injection, nearly 2 BCF/day larger than Monday’s build and 1.5 BCF bearish versus the 5-year average. By tonight, projected Realtime natural gags inventories will reach 3728 BCF while the storage surplus versus the 5-year average climbs to +410 BCF. However, with daily injections of +16 BCF/day this time last year, the year-over-year surplus will still fall more than 3 BCF to +491 BCF. Click HERE for more on today’s projected injection and Realtime inventories. Per early cycle numbers, LNG feedgas demand will take another sharp dive today due to losses at Sabine Pass and Freeport, which seem likely to be storm-related. These losses will undoubtedly be temporary as neither plant will see significant damage or long-term power outages, but could again pressure the October contract lower. On the other hand, early-cycle pipeline flows are pointing to another sharp drop in production with both the Appalachian and Rockies Regions recording new 3-month lows. Production will drop by -1.9 BCF from Monday to 85.5 BCF/day, down a steep 7.9 BCF from last year. However, these sharp early-cycle drops have been revised significantly higher over the past several weeks and I expect another upward revision tonight. However, the upward revision may not be enough to keep production above 87 BCF/day as I expect Appalachian production to be suppressed given the ongoing annual maintenance at Maryland’s Cove Point plant. Regardless, the overall course of production remains lower and will be a significant tailwind this Fall.
