Cycle Trading

[No-Quarter]

NatGas continues to move against my position... GLTY.

http://celsiusenergy.co/p/daily-commentary.html

Natural Gas Rallies To 2-Week Highs On Prospect For Strong Mid-May Cooling Demand; WTI Oil Prices Pull Back On Possible Venezuela Negotiations, But Close Above Brent For The First Time Since 2020; EIA Expected To Announce Bullish Crude Oil & Refined Product Inventory Drawdowns In Today’s Status Report; Gas Demand To Rise Again Today With Bullish Injection Expected As Southern Heat Builds

6:00 AM EDT, Wednesday, May 18, 2022

Despite production climbing back above 95 BCF/day, natural gas prices rallied for a second straight session on Tuesday. The June 2022 front-month contract gained 35 cents or 4.3% to settle at $8.30/MMBTU. It was the highest settlement since May 5.

Investors chose to overlook some modest strength in production and instead focus on a largely favorable temperature outlook. Both the GFS and ECMWF models are calling for a cooldown for the May 23-27 period with temperatures returning close to average. However, thanks to hot conditions for both the next five days and the last few days of the month, my Consensus Model—which integrates a performance-based average of GFS OP, GFS ENS, and ECWMF ENS data—is still calling for 133 GWDDs for May 18-31, the single most for the period in the last 5 years, as of Tuesday evening, just topping 2018’s 128 GWDDs. As a result, powerburn demand will remain strong and daily storage injections are likely to hold close to the 5-year average, with the storage deficit versus the 5-year average expected to hold above -300 BCF into the first week of June.

Heading into the Summer, I expected production to be the big story, and primary determinant of natural gas price. So far, output is starting to respond to higher prices and increased drilling activity with output now consistently topping 95 BCF/day and briefly rising above 96 BCF/day earlier this month. There is still an outside chance that production could reach new highs above 97.5 BCF/day before the end of the second quarter, which I had previously written was necessary for supply/demand imbalances to rebalance. However, so far, the shining star of the natural gas sector has been the somewhat surprising performance of powerburn demand. Sure, temperatures have been hot the past two weeks with total generation demand up more than 10% versus 2021. However, not only that, but, despite much higher prices, the natural gas share of the fuel stack is now averaging 3.2% higher year-over-year over the past week, the most of any component that makes up the stack. By comparison, headline-stealer wind is up “only” +2.3% while chief competitor coal is down -2.0%. As a result, natural gas powerburn is now averaging 34.4 BCF/day over the past week, up a massive +7.2 BCF/day versus last year. While these anomalies won’t last indefinitely as temperature warm and cool, if the natural gas can hang onto its lofty share of the fuel stack, it will remain strong all Summer. In this scenario, natural gas production may need to rise to over 98 BCF/day or even 99 BCF/day just to begin eating into the storage deficit. As a result, natural gas prices have rebounded sharply over the past week. I do feel that the commodity is probably approaching some sort of ceiling—assuming gas production continues to edge upwards—but $8.50/MMBTU is certainly a possibility. Long-term, I do expect imbalances to flip to bearish, but that timeframe continues to get pushed further out due to strong powerburn and a hot temperature outlook.

Meanwhile, one day after hitting 7-week highs, oil prices dipped on Tuesday. The front-month June 2022 WTI contract dropped $1.80 or 1.6% to settle at $112.40/barrel. Interestingly, Brent fell a steeper $2.31 to $111.93/barrel, the first time it has traded at a discount to WTI since May 2020. The drop was driven by the combination of profit-taking after the recent move higher, but also by news that the US was authorizing Chevron to negotiate with Venezuela, which could potentially ease some sanctions on the nation. Meanwhile, the EIA will release its weekly Petroleum Status Report for May 7-13 this morning at 10:30 AM EDT detailing crude oil and refined product inventories as well as supply/demand data. After the close of trading on Tuesday, the American Petroleum Institute (API) announced that it was expecting a -2.4 MMbbl crude oil storage drawdown, 2.0 MMbbls bullish versus the 5-year average. Should this verify, crude stocks would fall to 421.8 MMbbls while the deficit versus the 5-year average would widen to -66.7 MMbbls. The API expects and even more bullish -5.1 MMbbl gasoline inventory draw, a steep 4.2 MMbbls larger than the 5-year average -0.9 MMbbls. And, after storage levels fell to fresh multi-decade lows last week, the API expects distillates to have risen by +1.1 MMbbls, a slight +1.2 MMbbls bearish versus the 5-year average -0.1 MMbbls. Overall, Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to have declined by -6.5 MMbbls, a strong 5.1 MMbbls bullish versus the 5-year average. With both crude oil and refined product storage already at hefty deficits that are expected to grow further—despite consistent releases from the Strategic Petroleum Reserve (SPR)—WTI is likely appropriately priced at current levels. Should the EIA’s numbers verify in-line with the API’s I will likely need to revise my current $100/barrel price target higher to the $100-$110/ barrel range. Check back after 10:30 AM EDT on my Oil Inventories Page HERE for the latest EIA storage data.

Natural gas demand will rise again today as heat builds across the Deep South. The core of the largest anomalies will again be found across Texas with Dallas and San Antonio both challenging 100F and Houston the upper 90s, each 10F-15F above-average. Further north, Oklahoma City, OK will also be toasty in the lower 90s while Omaha, NE reaches the lower 80s, also around 10F warmer-than-normal. Elsewhere across the Southeast, highs will broadly be 5F-10F above-average with Little Rock, AR, Birmingham, AL, and Jackson, MS all reaching 90F. Further east, Nashville, TN, Raleigh, NC, and Atlanta, GA will see the upper 80s. On the other hand, temperatures will again be cooler across the Great Lakes region, with Chicago, IL, Detroit, MI, and Buffalo, NY all stuck in the 60s, generally 5F-10F cooler-than-normal. The major cities of the I-95 corridor will remain comfortable again, with Washington, DC and Philadelphia, PA in the lower 70s and New York City and Boston, MA in the upper 60s, 0F-5F below-average.

Overall, today’s forecast mean population-weighted nationwide temperature will cool by -0.4F to 68.1F due to milder readings across the North, though this is still +1.7F above-average. However, because of the building heat across the Deep South, Total Degree Days (TDDs) will again rise to 8.5 TDDs, the 9th most for May 18 in the last 41 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 +13 BCF/day daily natural gas storage injection, 1.5 BCF smaller than yesterday’s build and 1 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will rise to 1805 BCF while the storage deficit versus the 5-year average will widen to -306 BCF. The year-over-year deficit will grow by 3 BCF to -361 BCF. Click HERE for more on today’s projected injection and Realtime inventories.