March 1, 2018

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Oil & Natural Gas Tumble As US Equity Markets Routed; EIA Announces Modestly Bullish Storage Build As Longstanding Storage Surplus Nearly Erased; EIA Projected To Announce Second Straight Bearish Natural Gas Storage Withdrawal In Today's Report On Record Northeast Warmth; Gas Demand To Bottom Today As Nor'Easter Targets New England

6:00 AM EDT, Thursday, March 1, 2018
In its Weekly Petroleum Status Report for February 17-23, the EIA announced that crude oil inventories rose by +3.0 MMbbls. On the one hand, this was well above Tuesday's API forecast of a +0.9 MMbbl, but it was still modestly bullish versus the 5-year average +4.2 MMbbl build. It was the third largest storage injection in the last 5 years behind last year's +1.5 MMbbl build, 2013's +1.1 MMbbl and 2014's +0.5 MMbbls, but is a considerable improvement over the +9.2 MMbbl and +7.4 MMbbl builds of 2014 and 2015. With the build, crude oil inventories rose to 423.5 MMbbls, but the storage deficit versus the 5-year average contracted to a mere +5.4 MMbbls, the lowest in 4 years and down over 140 MMbbls from last year's all-time-high surplus.

In the week's Status Report, the EIA also announced that domestic oil production rose by 13,000 barrel/day for the week, rising to a new record of 10.28 MMbbls/day. Production is now up a massive 1.251 MMbbls/day year-over-year However, coupled with last week's rare 1,000 barrel/day decline in production, US supply is averaging only +6,000 barrels/day per week growth over the past two weeks, a considerable improvement over the 70,000 barrel/day per week growth so far in 2018. Daily production growth in the US is shown in the Figure to the right, highlighting the surge in growth during the first 6 weeks of 2018 followed by an apparent plateau over the past 2-3 weeks. Crude oil imports rose by 0.26 MMbbls/day last week to 7.28 MMbbls/day, but still trail year-ago imports by 0.320 MMbbls/day meaning that total supply is "only" up 0.93 MMbbls/day. On the demand side, refinery inputs averaged 15.88 MMbbls/day last week, up 0.18 MMbbls/day year-over-year while crude oil exports remained near the top of the 2018 range at 1.45 MMbbls/day, despite falling 0.6 MMbbls/day week-over-week, and are up a strong 0.72 MMbbls/day year-over-year. The recent contraction in the Brent-WTI spread has so far had no impact on US exports. Total US demand stands at 17.33 MMbbls/day, up 0.91 MMbbls/day year-over-year. With total supply up 0.93 MMbbls/day from 2017 as noted above, this means that US supply/demand balance is only a negligible 2,000 barrels/day loose year-over-year. Given that the period from March 2017 through the end of the year saw over 100 MMbbls shaved off the storage surplus, if 2018 can merely keep pace with the 2017 supply/demand balance, the residual storage surplus versus the 5-year average will likely flip to a storage deficit within the next 2-3 weeks and could grow to quite a significant deficit later this summer, should gains in exports and refinery inputs match continued growth in production.

Due to what investors perceived to be disappointing numbers in light of the API forecast, and coupled with weak domestic markets and a strong dollar, crude oil extended Tuesday's losses, falling $1.37 or 2.2% to settle at $61.64/barrel. As a result, the commodity lost 4.8% on the month, its first negative month since August 2017. Despite the downside reaction, I feel that the week's report was neutral to even slightly bullish. Inventories saw a small build in the heart of the oil shoulder season. The storage surplus versus the 5-year average has been nearly erased. Supply/demand balance remains nearly flat versus last year. For this reason, I remain optimistic on oil's prospects, provided that US markets and the dollar stabilize, and I maintain a 4-month $70/barrel price target on the commodity.

Click HERE for more on the latest EIA-reported crude oil inventories, production, and demand numbers.

Natural gas, meanwhile, fell 0.3% to $2.67/MMBTU on Wednesday, holding its ground ahead of today's EIA Storage Report despite an increasingly prolonged period of seasonally mild temperatures expected during the middle and second half of March. For the month, the front-month natural gas contract lost 6.5%. The EIA will issue its weekly Storage Report, also for February 17-23, this morning at 10:30 AM EDT. I am projecting a -76 BCF storage withdrawal, which would be a bearish 42 BCF smaller than the 5-year average -116 BCF draw. It would be the smallest weekly withdrawal since December 8, 2017. The weak draw was driven by record setting warmth across the Northeast with multiple stations recording monthly record high temperatures on Wednesday and Thursday. LaGuardia airport in New York City reached 79F, which was not only a daily or monthly record, but the warmest temperature ever recorded in New York state during the month of February, dating back to the late 1800s. 80F warmth reached as far north as Massachusetts and upper 70s were found as far north as central Maine. All told, it was among the most spectacular winter heat events to affect the Northeast in the past 200 years. As a result, the mean nationwide population-weighted temperature for the week averaged 50.4F, more than 7F warmer than normal. The anomaly would have been even larger had the Pacific, Rockies, and Northern Plains not been much colder than normal. Demand also suffered from weak LNG export demand with total weekly flows to Sabine Pass and Cove Point falling to 16.2 BCF, down 4.5 BCF from the previous week . Fortunately for bulls, natural gas supply remained nearly flat with domestic production hovering near a record of 78.0 BCF/day. As the Figure to the right shows, a -76 BCF withdrawal would be the second smallest in the last 5 years, behind only last year's record bearish -7 BCF withdrawal (the EIA-reported draw for the storage week of February 18-24, 2017 was actually a +7 BCF build, but the adjusted February 17-23 period saw a -7 BCF draw). Should a -76 BCF withdrawal verify, natural gas inventories would fall to 1684 BCF while the storage deficit versus the 5-year average would contract for the second straight week, falling to -370 BCF. Meanwhile, the year-over-year storage surplus would climb to -678 BCF and will likely top -700 BCF in the next 2 weeks. Click HERE for more on last week's projected natural gas storage withdrawal.

With natural gas holding up reasonably well despite a March forecast trending towards a milder pattern and at least 2 more bearish weekly storage withdrawals expected (including today), there is added pressure on the EIA today to report a larger-than-expected withdrawal. The Agency does have recent history on its side as reported withdrawals for the past two weeks have both been more than 5 BCF/week larger than analyst expectations. However, I expect that it will take a reported withdrawal of -85 BCF to be viewed as a bullish surprise--despite still being bearish versus the 5-year average--and to drive natural gas prices back above $3.75/MMBTU. On the other hand, I feel that a -75 BCF withdrawal or smaller will be viewed as a bearish disappointment suggestive of a loosening market, and could fuel a near-term pullback towards $2.50/MMBTU. A reported withdrawal between -75 BCF and -85 BCF would be neutral with prices equally likely to rally or pull back.

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 likely bottom out today as unseasonably mild temperatures dominate the major demand centers of the Northeast, Great Plains, and Southeast. Highs along the I-95 corridor will generally be 10F-20F warmer than normal with Washington, DC through Boston all reaching the upper 60s. Further south, readings will reach the 70s from Jackson, Ms through Birmingham, Al to Atlanta, Ga, all around 10F warmer than normal. New Orleans could even reach 80F, nearly 15F warmer than normal. Finally across the Great Lakes, highs will be a modest 5F-10F above-average with Chicago, Cleveland, and Buffalo all reaching the upper 40s. While these anomalies pale in comparison to the record warmth across New England from late last week, the warmth today is also far more widespread, impacting multiple large population and natural gas demand centers. Below-average temperatures will again be restricted to the Rockies and West Coast although even here readings will be warmer than in recent days as a powerful Pacific storm system plows ashore bringing a moderating influence. In the High Sierras, this means extremely heavy snow--upwards of 6 feet of it over the next 3-4 days--with rare blizzard warnings up including Lake Tahoe. Across the lowlands, however, readings will generally be in the 40s to 60s from north to south across the Pacific Northwest through California's Central Valley. Overall, the forecast mean population-weighted nationwide temperature today will rise 0.8F from Wednesday thanks to the mild temperatures across the East to 53.6F, 8.2F warmer-than-normal. Total Degree Days will fall to 13.5 TDDs, 6.6 TDDs fewer than normal and the 5th fewest for March 1 in the last 37 years dating back to 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 -5 BCF/day daily natural gas storage withdrawal, just under 1 BCF/day smaller than yesterday's draw but a massive 13 BCF bearish versus the 5-year average -18 BCF/day withdrawal. Click HERE for more on today's temperature and degree day data.

Fortunately for natural gas bulls, today's very soft withdrawal will likely represent a near-term nadir with colder temperatures set to arrive beginning on Friday. A powerful Nor'Easter will pummel the Northeast and Mid-Atlantic with tropical storm force winds, coastal downpours, and heavy inland snow pushing daily natural gas storage withdrawals back into the double digits. Nonetheless, it won't be enough to prevent a third straight bearish weekly withdrawal for the week of February 24-March 2 of -58 BCF, 71 BCF smaller than the 5-year average. Should it verify, projected natural gas inventories would fall to 1625 BCF while the storage deficit versus the 5-year average would fall to an even -300 BCF, down 186 BCF from January's peak -486 BCF deficit. Click HERE for more on this week's projected storage withdrawal. Looking ahead to next week, in the wake of the aforementioned Nor'Easter, much cooler temperatures will be swept down across the Mid-Atlantic and Northeast, extending south towards the Gulf of Mexico. As a result, I am expecting much stronger natural gas demand next week with daily withdrawals in the double digits each day of the week, ranging from -11 BCF/day to -15 BCF/day, at or just slightly below average as above-average temperatures will persist across the nation's Heartland. The Figure to the right plots projected daily storage withdrawals next week for the March 3-9 period. For the week, I am projecting a -85 BCF withdrawal, still around 12 BCF bearish versus the 5-year average, but 30 BCF larger than last year's withdrawal, which should be sufficient to boost the year-over-year deficit to above -700 BCF. Click HERE for more on next week's projected withdrawal.