ETFs, Leveraged ETFs, Sector Funds

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I suspect next week will be the turn around week for NatGas...

Realtime Natural Gas Inventories Projected To Eclipse 2019 End-Of-Season Peak This Morning; Gas Demand To Bottom Today With +14 BCF Daily Injection But Steady Recovery To Bullish Builds Projected By Early-October; EIA Expected To Announce Bearish Crude Oil Inventory Build But Very Bullish Gasoline Draw In Another Hurricane-Influenced Petroleum Status Report

6:00 AM EDT, Wednesday, September 23, 2020

The October 2020 front-month natural gas contract finally pulled out of its dive on Tuesday but the November 2020 contract—and subsequent Winter 2020-21 contracts—that had been spared Monday’s carnage saw strong selling pressure.

The soon-to-expire front month contract finished the session nearly flat at $1.83/MMBTU, perhaps buoyed by a near-term temperature outlook that trended somewhat more favorable over the past 48-72 hours, as shown in the Figure to the right. However, floundering LNG feedgas demand that fell to under 4 BCF/day on Tuesday bolstered storage concerns, especially in the South Central Region. November gas tumbled 11 cents or 4.2% to settle at $2.60/MMBTU, undoing Monday’s surprising rally, and then some. As a result, natural gas ETFs, which currently hold November contracts, took a hit with UNG falling 4.2% and the 2x leveraged fund BOIL sliding 8.5%. The selling was widespread throughout the Withdrawal Season contracts, with peak January 2021 prices settling down 7 cents to $3.25/MMBTU, an unusually volatile day in what had been tightly rangebound contract between $3.30-$3.35/MMBTU for the past month. This activity suggests that investors are beginning to accept that inventories will top out above 4000 BCF this November and that storage will be plentiful this winter. While the former may be true, I expect people are going to be caught off guard just how tight the market becomes, especially during quick-hitting arctic outbreaks. My sentiment remains unchanged and I remain aggressively long-term bullish. However, as I discussed in Tuesday’s Commentary, I will not be buying-and-holding natural gas ETFs this Fall due to the steep contango in the futures strip. Instead, I will hold, and potentially add to, a core portfolio of E&Ps such as EQT, COG, and SWN, and then swing in and out of the ETFs for short term positions.

Meanwhile, oil prices edged up following the prior day’s 4% sell-off, though the breadth of the rally was rather tepid. October WTI gained 29 cents or 0.7% to settle at $39.60/barrel, expiring at the close of trading. It will be replaced by the November contract, which closed up 26 cents to $39.80/barrel. The rally was likely the combination of dip buying and optimism that the EIA will show inventories declined in this week’s Petroleum Status Report, but was countered by ongoing concerns regarding domestic and global oil demand as COVID-19 continues to impact commercial and industrial economies. The EIA will release its weekly Petroleum Status Report covering September 12-18 this morning at 10:30 AM EDT, detailing crude oil and refined product inventories and supply/demand data. After the close of trading Tuesday, the American Petroleum Institute (API) announced that was expecting a +0.7 MMbbl crude oil inventory build. Such a build would be a modest 3.2 MMbbls bearish versus the 5-year average -2.5 MMbbl draw. Should it verify, inventories would rise to 496.7 MMbbls while the storage surplus versus the 5-year average would climb to +55.2 MMbbls. The year-over-year surplus would narrow slightly to +77.2 MMbbls. On the other hand, the API is expecting bullish refined drawdowns. Gasoline inventories are expected to tumble -7.7 MMbbls, a very bullish 7.3 MMbbls larger than the 5-year average -0.4 MMbbls. This will continue the Summer-long trend of consistent gasoline draws that have seen inventories tumble from over 260 MMbbls to perhaps as low as 224 MMbbls after today’s report. Should a -7.7 MMbbl draw verify, gasoline stocks would flip to a deficit versus the 5-year average for the first time since mid-March. Additionally, the API expects a -2.1 MMbbl distillate drawdown, nearly double the 5-year average -1.2 MMbbls. Overall, Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to fall by -9.1 MMbbls, a very bullish 5.1 MMbbls bullish versus the 5-year average -4.0 MMbbls. It is worth mentioning that at least some of the bullishness of this report can be attributed to Gulf of Mexico production shut-ins—and refinery closures–associated with Hurricane Sally, and even lingering effects from Laura back in August. Regardless, this overall looks to be another bullish report. While oil continues to face headwinds on the demand side, I feel that sub-$40/barrel oil is not justified based on the significant improvement in both crude and refined product inventories this summer. I will likely be a cautious buyer of any dips here via long USO and UCO.

Check back after 10:30 AM EDT on my Oil Inventories Page HERE for more on the EIA’s official storage numbers.

Natural gas demand will fall to what is likely to be a near-term bottom today as unseasonably cool conditions across the Deep South suppress powerburn while warmer-than-normal conditions across the northern tier are a bit too late in the season to have a meaningful impact on demand. The core of the largest anomalies will be across Arkansas today as the remnants of Tropical Storm Beta drift northeastwards, with Little Rock, Ar only reaching the upper 60s, 15F below-average. However, unseasonably cool conditions will persist from east Texas through South Carolina with Houston, TX only seeing the upper 70s and Columbia, SC the mid-70s, both around 10F below-average. On the other hand, it will be another unseasonably mild day across the northern Plains with Omaha, NE, Sioux Falls, SD, Bismarck, ND, and Minneapolis, MN all topping 80F, 15F above-average. Larger population centers like Chicago, Detroit, and Buffalo will generally be in the mid-to-upper 70s, 5F-10F above-average. This time of year, such anomalies just aren’t enough to generate significant cooling demand.

Overall, today’s forecast mean population-weighted nationwide temperature will warm +2.9F from Tuesday to 69.2F, 1.4F warmer-than-normal. However, Total Degree Days (TDDs) will dip to 5.2 TDDs, 1.8 TDDs fewer than normal and the fourth fewest for September 23 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 +14 BCF/day daily natural gas storage injection, 1 BCF larger than Tuesday’s injection and 3 BCF bearish versus the 5-year average +11 BCF/day. By mid-morning, projected Realtime natural gas inventories will eclipse 3732 BCF, topping last year’s end-of-season peak, reached on November 8. 2020 has already topped 18 of the previous 26 years’ end-of-season maxima, and will eclipse another 5 over the next two weeks. By tonight, projected Realtime inventories will reach 3742 BCF while the storage surplus versus the 5-year average will climb to +413 BCF. The year-over-year surplus, on the other hand, will narrow by 2 BCF to +489 BCF. Click HERE for more on today’s projected injection and Realtime inventories.

Fortunately for natural gas bulls, natural gas demand is likely to put in at least an interim bottom today. As temperature warm back up across the South—and, presumably, as LNG exports rebound—daily storage injections are projected to decline, falling to around +7 BCF/day by October 2, as shown in the Figure to the right, quite bullish versus the 5-year average +12 BCF/day injection. As a result, I expect the storage surplus versus the 5-eyar average to begin steadily contracting, falling under +400 BCF in the first few days of October while the year-over-year surplus slides more than 75 BCF to under +415 BCF. Click HERE for more on the near-term storage outlook.