December Natural Gas Rallies Ahead Of November Expiration As Investors Eye Volatile November Temperature Outlook; Consolidation Continues In The Natural Gas Sector As EQT Buys Chevron’s Gas Assets To Boost Its Status As Leading Producer; EIA Expected To Announce Bearish Crude Oil Inventory Build In This Week’s Petroleum Status Report; Gas Demand To Rebound Today As Central US Warms & Zeta Makes Landfall
6:00 AM EDT, Wednesday, October 28, 2020
Front-month natural gas prices settled Tuesday nearly flat ahead of Wednesday’s expiration while the most-active December contract saw modest gains. November 2020 gas finished down less than a penny to $3.02/MMBTU. Meanwhile, the December 2020 contract—which will become the front-month contract after the close of today’s trading—continued its recent bullish run, gaining 6 cents to $3.31/MMBTU. As a result, the 1X ETF UNG, which holds December contracts, gained +1.9% while the 2x ETF BOIL, which holds January 2021 contracts, was up+2.9%. Fundamentally, there was no significant change to explain the session’s rally, with the near-term temperature outlook still pointing towards a milder start to November—though the model trends have been inconsistent and volatile over the past 36 hours–and LNG exports and production seeing offsetting declines. Despite the gains in the winter contracts, it was another rough day for E&Ps with two of my larger holdings, COG and SWN, seeing declines with additional losses in RRC, CNX, and AR. The exception to the sell-off was EQT which gained +3.0%, although the stock gave back all of these gains after-hours after news broke that the company would be buying Chevron’s natural gas assets, partially financed by a public offering of 20,000,000 shares at $15.50/share, 4% below Tuesday’s close.
While the long-term fundamental picture for natural gas remains very bullish, the commodity is getting a bit ahead of itself at the moment and given the potential for warmer temperatures in early November, I would not be surprised to see some profit-taking and for prices to pull back over the next week or so. I would view any retreat as a buying opportunity given the highly favorable supply/demand imbalance and I will consider boosting my long BOIL stake. Additionally, I am also considering adding to my EQT long position. The acquisition of Chevron’s assets will boost EQT’s natural gas production capacity to nearly 6 BCF/day, by far the largest of any domestic producer and allowing it to dictate supply across the Eastern US. My price target on this company is $25/share, although this may wind up being conservative given its recent moves.
Figure 1: Click here for more information on on oil storage.
Meanwhile, oil prices reversed some of Monday’s losses ahead of today’s EIA Petroleum Status Report as Hurricane Zeta forced yet another shut-in of Gulf of Mexico production platforms. The front-month December 2020 contract settled at $39.57/barrel, up $1.01/barrel or 2.6%. As of Tuesday afternoon, the BSEE reported that 49.5% or 0.9 MMbbls/day of Gulf production had been shut-in, temporarily tightening the supply/demand imbalance. By the time production ramps back up by the weekend, a total of 3-5 MMbbls of supply will have likely been lost. Meanwhile, the EIA will release is weekly Petroleum Status Report for October 17-23 this morning at 10:30 AM EDT. After the close of trading on Tuesday, the American Petroleum Institute (API) announced that it was expecting a +4.6 MMbbl crude oil inventory build, a moderate 3.4 MMbbls bearish versus the 5-year average. Should it verify, storage levels would climb back to 492.8 MMbbls while the storage surplus versus the 5-year average would climb to +40.2 MMbbls. Additionally, the API is also expecting a that gasoline inventories rose by +0.1 MMbbls, a similarly moderately bearish 3.1 MMbbls above the 5-year average -3.0 MMbbl draw. On the other hand, distillate stocks are expected to slide by -5.3 MMbbls, 3.0 MMbbls bullish versus the 5-year average. Overall, Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to fall by -0.6 MMbbls, a moderate +3.5 MMbbls bearish versus the 5-year average. Following the release of the API data, natural gas gave up the majority of Tuesday’s gains after hours, sliding to around $38.70/barrel by late evening. Already facing headwinds of anemic demand due to COIVD-19, rising inventories could put further bearish pressure on the sector. However, with prices already sub-$40/barrel, near-term downside should be limited. I am neutral to cautiously bullish longer term and am maintaining a $42.50/barrel upside price target. Should WTI drop under $37.50/barrel, I will have a low threshold to add to my long UCO position.
Check back after 10:30 AM EDT on my Oil Inventories Page HERE for the latest on the EIA’s official storage numbers.
Today’s Forecast Departure From Normal High Temperatures
Figure 2: Click here for more information on on the near-term forecast.
Natural gas demand will fall today as temperatures finally begin to moderate across the central US. The core of the chill will persist across west Texas where a rare October snow storm could bring a half foot of snow to areas from Lubbock, TX to Amarillo, TX. Highs in these areas will be stuck in the low-to-mid 30s, upwards of 40F below-average. But while the entire Central Plains will remain well below-average, the magnitude of the anomalies will be considerably smaller. Omaha, NE will “warm” into the upper 40s while Minneapolis, MN will see the lower 40s and Chicago, IL near 50F, each around 10F below-average, but 10F-15 warmer than 24-48 hours ago. Additionally, it will be another warm day across the Eastern Seaboard with Richmond, VA nearing 80F, Washington, DC the lower 70s and Philadelphia, PA the upper 60s, 5F-10F warmer-than-normal. Across the Deep South, all eyes will be on Hurricane Zeta, which will make landfall this evening near the mouth of the Mississippi River, likely as a Category 1 storm. The storm will be moving quickly and will bring strong winds and heavy rain from New Orleans well inland to Birmingham, AL to Atlanta, GA and eventually into the Carolinas. Temperatures will be seasonally mild across this region today with highs in the 70s to near 80F. Overall, today’s forecast mean population-weighted nationwide temperature will warm by +2.3F from Tuesday to 56.2F, still -0.3F below-average. Total Degree Days (TDDs) will fall to 11.8 TDDs today, still 1.2 TDDs greater than normal and the 11th most for October 28. Click HERE for more on today’s temperature and degree day outlook.
Projected Realtime Natural Gas Inventories
Figure 3: Click here for more information on natural gas inventories.
Based on this forecast and early-cycle pipeline data, I am projecting a +0.5 BCF/day daily natural gas storage injection, a nearly 5 BCF gain from yesterday’s-4 BCF/day draw but still 7 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will hold nearly steady at 3954 BCF. The storage surplus versus the 5-year average will narrow to +251 BCF while the year-over-year surplus will fall by -4 BCF to +245 BCF. Click HERE for more on today’s projected injection and Realtime inventories. Per early-cycle numbers, LNG export demand will inch slightly higher to 9.0 BCF/day today, up 0.1 BCF from Tuesday and up 1.7 BCF from 2019. The gains will be driven by Sabine Pass which will climb back above 4.0 BCF/day, offset by Cameron which will see its volumes slip back under 1.0 BCF/day as the Calcasieu Shipping Channel continues to face restrictions due to a sunken barge from Hurricane Delta. Click HERE for more on today’s LNG export demand. Meanwhile, natural gas production will hold at 86.7 BCF/day, unchanged from Tuesday and down a steep 8.4 BCF/day from 2019. Production is down around 2.3 BCF/day from last weekend’s highs. More than half of these declines are driven by Gulf of Mexico shut-ins associated with Hurricane Zeta with Gulf production holding at 0.7 BCF/day for today. As a result, by this weekend, I expect production to rebound back towards the 88 BCF/day level, or slightly under. Click HERE for more on daily natural gas production.
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