May 1, 2019

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Natural Gas Trades Aimlessly As Investors Await Next Catalyst While Oil Moves Higher On Saudi Response To Trump & Venezuela Chaos; EIA Forecast To Announce Bearish Crude Oil Inventory Build In Today's Status Report; Natural Gas Demand To Fall For A Third Straight Day As Warmth Overspreads Ohio Valley; LNG Feedgas To Cameron Plant Rises To Record

6:00 AM EDT, Wednesday, May 1, 2019
After gapping up north of $2.60/MMBTU in early-morning electronic trade, natural gas was unable to hold onto its gains and finished the day down 0.7% at $2.58/MMBTU. It was a low-volatility trading session with no new near-term catalysts to drive prices higher or lower, besides profit-taking after the recent move higher. It seems that investors have priced in the impact of the upcoming series of bearish injections--three triple digit builds in the next four weeks according to my projections--and are waiting to see how the mid-to-late May outlook evolves before the next more significant move in the commodity takes place. For the time being, I expect moves in the sector to be driven by the temperature-independent supply/demand imbalance, itself driven largely by production, LNG exports and, as cooling demand begins to ramp up, powerburn demand. At this time, I foresee a continuation of bearish storage injections for the foreseeable future thanks to a loose imbalance, though I expect the rate of contraction of the storage deficit versus the 5-year average to slow. My sentiment towards natural gas remains cautiously bearish with a near-term price target under $2.50/MMBTU with possible further downside should powerburn disappoint.

Meanwhile, oil prices rose on Tuesday, propelled by turmoil in Venezuela and backtracking by Saudi Arabia concerning raising oil output as had been tweeted by Donald Trump. WTI traded above $64/barrel in early-morning trade but was unable to hold onto such gains, finishing the day up a modest 41 cents or 0.7% at $63.91/barrel. Brent was up a strong 76 cents to $72.80/barrel. Both price points finished April with strong gains of over 6%, their fourth straight positive month since the December bottom.

Look for volatility in the oil sector to continue today as the EIA will release its weekly Petroleum Status Report covering the week of April 20-26. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting a +6.8 MMbbl rise in crude oil inventories. Such a build would be 4.6 MMbbls bearish versus the 5-year average +2.2 MMbbl. Inventories would rise to 467.4 MMbbls--the highest since September 22, 2017--while the storage surplus versus the 5-year average would rise to +7.6 MMbbls. The bearishness of the API's forecast oil build looks to be countered somewhat by more favorable refined product draws. The API is expecting gasoline inventories fell by -1.1 MMbbls (5-year average: +1.0 MMbbls) and distillates declined by -2.1 MMbbls (5-year average: -0.8 MMbbls). This pattern suggests that refinery demand continues to lag behind seasonal averages as a prolonged period of maintenance continues. Overall, Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to rise by +3.7 MMbbls, a more manageable 1.3 MMbbls bearish versus the +2.4 MMbbl 5-year average. Nonetheless, these numbers won't do the bulls any favors as its would be the fourth crude oil build of greater than 5 MMbbls in the past 5 weeks, which could raise alarm bells among some weaker bulls. Crude oil was able to rally throughout April despite these larger builds on speculation of large draws during the summer driving season as refinery demand ramps up. So far, we have not seen that. If demand does not pick up soon, much of the bullish argument could fade. Additionally, should Venezuela see Maduro ousted, the commodity could likewise sell off on speculation that the country's exports will resume. Regardless, at this time, I remain cautiously bullish on the sector as I feel that refinery demand will spike--if not this week--and that Venezuela has a long ways to go before its civil conflict resolves, especially as the Saudis continue to push for higher prices. My upside price target is $65/barrel with potential further upside to $67.50/barrel. Check back after 10:30 AM EDT for the official EIA numbers on my crude oil inventories page HERE.

Meanwhile, natural gas demand will fall for a third straight day today as temperatures rebound across the Ohio Valley. Highs today will reach the upper 70s to lower 80s as far north as Columbus, OH and Pittsburgh, PA today with Detroit approaching 70F, 5F-10F warmer-than-normal. The Southeast and Mid-Atlantic will remain mild with highs in the 70s in Washington, DC and Baltimore while Richmond, VA and Raleigh, NC could even approach 90F. However, things will cool down further north with Philadelphia only reaching the lower 60s and New York City the lower 50s, 5F-15F below-average. Temperatures will remain unseasonably chilly across the Rockies and northern Plains with Minneapolis struggling to reach 50F and Omaha, NE the mid-50s, 10F-15F colder-than-average. Nonetheless, thanks to the warming trend across the Ohio Valley, today's forecast mean population-weighted nationwide temperature will climb 1.3F from Tuesday to 64.4F, 2.5F warmer-than-normal. Total Degree Days will inch lower to 10.2 TDDs, still 2.7 TDDs greater than normal. 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, just under 1 BCF larger than yesterday's build and 3 BCF bearish versus the 5-year average. Of note, LNG feedgas demand to Sempra Energy's new Cameron LNG export plant will rise to a new record today of 0.15 BCF/day, though this is just a fraction of the facility's current 1.4 BCF/day capacity. Total LNG feedgas demand will hold just below all-time highs at 5.3 BCF/day, up 0.3 BCF/day from Tuesday. Click HERE for more on the latest LNG export data. By tonight, I project that Realtime natural gas inventories will rise to 1515 BCF while the storage deficit versus the 5-year average will contract slightly to -315 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.

In other news, the ECMWF EPS long-term model released its latest 6-week outlook Monday afternoon. This model--the gold standard of long-term models--continues to support a seasonally cool May and early June across much of the Central US with near-average temperatures across the East. By the middle of the month, cooling degree days overtake heating degree days as the primary driver of natural gas demand and a colder-than-normal outlook such as this becomes bearish. Of note, the long-term CFSv2 model has continued to advertise generally at or above-average temperatures for May, though this model has performed poorly this Spring and even it has trended closer to the ECMWF EPS in recent days. Regardless, based on my Hybrid model that integrates both of these two models in a performance-based weighting, I am projecting a series of bearish inventory builds that could drive projected storage levels to over 2250 BCF 6 weeks from now, resulting in the storage deficit versus the 5-year average contracting from -320 BCF presently to just over -100 BCF by the second week of June, as shown in the Figure to the right. Looking even further out, my end-of-season storage maximum has continued to trend higher, standing at near 3650 BCF, 400 BCF larger than 2018 and just 90 BCF bullish versus the 5-year average. However, this anticipates a large spike in powerburn this summer as well as continued LNG export demand and, if these don't verify, this projection could wind up being too low. Click HERE for more on the long-term temperature outlook on my Advanced Modeling Page and HERE for more on long-term natural gas storage projections.