October 1, 2018

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Natural Gas Rallies After Wednesday Computer Models Turn Sharply Colder, But Overnight Warming Trend Could Lead To Near-Term Retreat; Oil Falls Again To Cap Off A 10% Monthly Loss Despite Modestly Bullish EIA Status Report; EIA Projected To Announce Bullish +53 BCF Storage Injection In Today's Report; Unseasonable Eastern Warmth To (Finally) Drive Realtime Inventories Above 3200 BCF Today

6:00 AM EDT, Thursday, November 1, 2018
In its weekly Petroleum Status Report for October 20-26, the EIA reported Wednesday morning that crude oil inventories rose by +3.2 MMbbls. On the one hand, this was the sixth straight weekly storage injection, which was alarming to some investors. On the other hand, we are in the shoulder season for crude oil demand and such a build was actually 1.1 MMbbl bullish versus the 5-year average +4.3 MMbbls. Admittedly, that +4.3 MMbbls is considerably skewed by a record +14.4 MMbbl injection in 2016 and the longer term 5-year average over the past 15 years or so is closer to +2.0 MMbbls. Nonetheless, it is still technically bullish and, more so, it was 2.5 MMbbls smaller than Tuesday's American Petroleum Institute (API) forecast of a +5.7 MMbbl build. Additionally, nearly half of the build can be attributable to oil flowing onto the market due to a release from the Strategic Petroleum Reserve, which fell by 1.5 MMbbls to 654.9 MMbbls. With the +3.2 MMbbl injection, crude oil inventories rose to 426 MMbbls--the highest since June 15--while the storage surplus versus the 5-year average inched lower to +8.2 MMbbls.

The reported build was exactly half of last week's +6.4 MMbbl build and was the smallest since the +1.9 MMbbl injection the week ending September 1. The driving forces for the slightly bullish injection was largely on the demand side. Exports have seemingly finally responded to the Brent-WTI spread of around $10/barrel, rising 0.31 MMbbl/day week-over-week to 2.49 MMbbls/day, the second highest weekly average since July and up 0.35 MMbbls/day year-over-year. The Figure to the right plots daily crude oil exports over the past year, showing the initial rise through late June to as high as 3.0 MMbbl/day as the Brent-WTI spread peaked at over $11/barrel, before slumping to 1.2 MMbbl/day in mid-August as the spread contracted under $5/barrel, followed by the current rally. Crude oil refinery demand rose slightly week-over-week as well, gaining 0.15 MMbbls/day to 16.42 MMbbls/day, up a solid 0.4 MMbbls/day year-over-year. Total demand stands at 18.9 MMbbls/day, up 0.75 MMbbls/day or 4.2% year-over-year. On the supply side, a 0.33 MMbbl decline in imports was largely offset by a 0.3 MMbbl rise in domestic production back to all-time highs of 11.2 MMbbls/day as Gulf output has finally recovered from a glancing blow from Hurricane Michael 3 weeks ago. Production is up a whopping 1.647 MMbbls/day or 17.2% year-over-year, driving year-over-year total supply gains to 1.42 MMbbls, more than offsetting the 0.75 MMbbls/day year-over-year gain in demand.

The EIA will release its weekly Natural Gas Storage Report for October 20-26 this morning at 10:30 AM EDT. I am projecting a +53 BCF storage injection for the week which would be a modest 9 BCF bullish versus the 5-year average and 12 BCF smaller than last year's injection. As the Figure to the right shows, a +35 BCF injection would be the second smallest injection for the October 20-26 period in the last 5 years, behind only 2013's +38 BCF injection. The bullish injection was driven by consistently below-average temperatures driving increased heating demand. On the week, the mean population-weighted nationwide temperature averaged 56.8F, 1.5F cooler than the previous week and around 1F below-average. Demand was also supported by nuclear reactor outages that remained well above the 5-year averages and LNG export demand that rose to new highs, with substitution demand averaging over 4 BCF/day and LNG feedgas demand approaching 4 BCF/day. However, supply/demand balance took a hit with domestic production surging by 1 BCF/day week-over-week to over 86 BCF/day. Should a +53 BCF storage injection verify, natural gas inventories will rise to 3148 BCF while the storage deficit versus the 5-year average will climb to -633 BCF, a new 4-year high and likely a near-term peak with a series of bearish builds expected for at least the next two weeks.. The year-over-year deficit will rise to -619 BCF. Click HERE for more on this week's projected storage injection.

Once again, I expect that most investors will be more focused today on computer model volatility than they will the actual storage build unless it is either really good or really bad. I expect that it would take a reported build of under +45 BCF to be considered unequivocally bullish and sufficient to on its own fuel a rally back above $3.30/MMBTU. On the other hand, I would view a reported +60 BCF or larger storage injection as unequivocally bearish versus expectations and consistent with a loosening supply/demand balance and enough to knock prices back below $3.20/MMBTU near-term. A reported build between +45 BCF and +60 BCF would be neutral versus expectations with prices equally likely to rally or pullback.

Check back at 10:30 AM EDT for the official EIA storage withdrawal on my Current Natural Gas Inventories Page HERE. Also, I now have weekly natural gas supply and demand statistics on my Natural Gas Supply & Demand Page HERE that should be updated between 3 pm and 4 pm EDT.

Natural gas demand will fall further today as above-average temperatures dominate the Eastern Seaboard in the southerly flow ahead of a strong storm system. Highs will be 10F-15F above-average regionwide. After temperatures only drop into the mid-to-upper 50s overnight, 70s will be widespread as far north as New York City while a few spotty 80s will even be possible from Richmond to Raleigh. Highs will be seasonally mild across the northern Plains with Minneapolis, Des Moines, and Bismarck all rising into the low 50s, 0F-5F warmer-than-normal. The largest below-average anomalies will be across soggy Texas and the Deep South with Dallas, Oklahoma, and Little Rock only reaching the upper 50s to lower 60s, 10F-15F below-average, not enough to drive significant heating demand. Overall, the forecast mean population-weighted nationwide temperature today will rise around 0.2F from Wednesday to 59.9F, a bearish 4.3F warmer-than-normal. Total Degree Days will fall to just 7.5 TDDs today, a steep 4.1 TDDs fewer than normal and the 9th fewest for November 1 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.

Based on this outlook and early-cycle pipeline data, I am projecting a +12 BCF/day daily natural gas storage injection today, around 1.5 BCF/day larger than Wednesday's injection and 5 BCF bearish versus the 5-year average +7 BCF/day build. It will also be 10 BCF larger than last year's daily injection for November 1. As a result, I expect natural gas inventories to break the 3200 BCF mark by early afternoon today while the storage deficit versus the 5-year average will slide to -618 BCF, down roughly 15 BCF from last week's 4-year peak. Natural gas inventories topped 3200 BCF last year way back on August 30. It will likely be the last major threshold that inventories will hit this season with storage expected to peak somewhere around 3250-3275 BCF in the next 2 weeks. Click HERE for more on today's projected storage injection. Natural gas demand will rebound slightly on Friday with a +10 BCF/day daily injection expected as temperatures cool some across the Plains and Ohio Valley even as the Eastern Seaboard remains unseasonably mild. For the storage week of October 27-November 2, I am currently projecting a +65 BCF weekly natural gas inventory build, 17 BCF bearish versus the 5-year average and massive 42 BCF larger than last year's injection. I will have much more on the projected injection in Friday's Commentary, but in the meantime, click HERE for more.