August 10, 2017

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Natural Gas Rises For A Third Straight Day To A 2-Week High As Forecast Trends Warmer; EIA Projected To Announce Modestly Bullish +39 BCF Weekly Storage Injection For July 29-August 4 In Today's Report; Oil Rises After Crude Oil Inventories Fall To A 10-Month Low Following A Bullish -6.5 MMbbl Drawdown

6:00 AM EDT, Thursday, August 10, 2017
In its weekly Petroleum Report for July 29-August 4, the EIA reported on Wednesday morning that crude oil inventories declined by -6.5 MMbbls, the sixth straight week that storage levels have dropped. While this was smaller than the API's Tuesday forecast of a -7.8 MMbbl draw, it was well above the 5-year average 1.5 MMbbl draw.

Further, as the Figure to the right shows, it was the second largest weekly storage withdrawal for the July 29-August 4 timeframe in the full 33-year history for which EIA storage data is available. The large decline in inventories was primarily driven by a -0.5 MMbbl/day week-over-week decline in crude imports, which, at 7.8 MMbbls/day, are now down 0.64 MMbbls/day year-over-year. The draw was also supported by a 170,000 barrel/day gain in refinery inputs, which are up 0.97 MMbbls/day compared to last year. Domestic crude oil production technically fell by 7,000 barrels/day week-over-week, but this drop was driven entirely by a likely temporary 22,000 barrel/day drop in Alaskan output while lower-48 production, which is a much more revealing metric of US supply, rose by 15,000 barrels/day. With the -6.5 MMbbl draw, crude oil inventories now stand at 475.4 MMbbls, the lowest since October 21, 2016 and are down a whopping 60 MMbbls since peaking at 535.5 MMbbls at the end of March. Likewise, the storage surplus versus the 5-year average continued to narrow, falling to +90 MMbbls, down from a peak of +146 MMbbls earlier this year and the year-over-year storage deficit rose to a 3-year high of -17.6 MMbbls compared to this week last year. Over the last month, crude oil inventories are averaging a strong 3.1 MMbbls/week tight versus the 5-year average, supporting this rapid contraction in the storage surplus. At this rate, the surplus versus the 5-year average could be halved by November, falling under +50 MMbbls, while the year-over-year deficit could reach -40 MMbbls.

Of some slight concern is the fact that the EIA announced that gasoline inventories climbed +3.4 MMbbls last week, 5 BCF bearish versus the 5-year average -1.6 MMbbls. This cancelled out most of the bullishness of the crude oil draw and snapped a 7-week stretch during which gasoline stocks have dropped. Weekly gasoline inventories are shown in the Figure to the right. With the storage build, the storage surplus versus the 5-year average grew sharply to +12.3 MMbbls or 5.6%, even as storage levels hang onto a small -4.7 MMbbls year-over-year deficit. Distillate inventories did provide some support, falling -1.7 MMbbls versus the 5-year average -0.2 MMbbl draw. As result, Total Petroleum Inventories--which includes oil, distillates, and gasoline--fell by -4.7 MMbbls, which is still comfortably bullish versus the 5-year average Total Petroleum Inventory -3.3 MMbbl draw. With summer driving season demand likely to wane in coming weeks, it would not be surprising to see continued weakness in gasoline supply/demand balance--no reason to panic but certainly something to keep an eye on

Click HERE for more on crude oil inventories and Here
Overall, I consider the report to be modestly bullish. Even with the rise in gasoline inventories and lower 48 domestic production, the rate at which the storage surplus has contracted and continues to do so is undeniably impressive. According to my Fair Price Model, crude oil is trading at a sharp 14% undervaluation versus a Fair Price of $57.59/barrel based on current inventories alone. With inventories expected to continue to fall in coming weeks, this undervaluation grows to average a whopping 29% over the next 8 months versus an average Fair Price of $70.67/barrel. While this is likely an exaggeration as crude oil is unlikely to maintain its present supply/demand tightness should prices rally above $55-$60/barrel, I feel that upside potential continues to outweigh downside risk. Investors apparently agree. Immediately following the EIA's report, oil prices quickly faded from a +0.5% gain to a -0.5% loss, but steadied the ship during the remainder of the trading session to finish the day up 39 cents or 0.8% at $49.56/barrel. When prices dropped to near $49/barrel immediately following the report, I stepped in and re-initiated a small long position in the commodity that I plan to hold for the foreseeable future.

Natural gas, meanwhile, extended its winning streak to 3 days with 6 cent or 2.2% daily gain to settle at $2.88/MMBTU, a much more convincing rally than the sub-1% bumps on Monday and Tuesday. It was the highest close since July 28. Gains so far this week stand at 3.6% ahead of today's Inventory Report as the temperature outlook for the next 2 weeks has trended slightly warmer over the past 3 days. Thanks to strength in the natural gas sector, my energy portfolio surged by 2.0% on the day to bring gains since May 1 to 10.6% as the portfolio is now up nearly 3% on the week. For subscribers, see more on my portfolio holdings page HERE or click HERE to learn more about subscribing and helping to support the site.

The EIA will release its weekly natural gas storage report for the week of July 29-August 4 this morning at 10:30 AM EDT. I am projecting a +39 BCF injection, which would be a modestly bullish 14 BCF smaller than the 5-year average but well-above last year's +24 BCF build. As the Figure to the right shows, it would in fact be the third smallest injection for the week in the last 5 years, behind 2016 (+24 BCF) and 2012 (+23 BCF). It would also be the 10th smallest injection in the last 23 years, which have ranged from an exceptional -12 BCF draw during the Heatwave of 2006 to an ugly +87 BCF in 2013. The projected bullish injection was driven primarily by ongoing market tightness as temperatures during the week averaged just 76.9F on a population-weighted basis, 0.5 BCF cooler than average. Thanks to the cooldown, natural gas powerburn averaged just 34.0 BCF/day, down 3 BCF week-over-week. Should the projection verify, natural gas inventories would rise to 3049 BCF while the storage surplus versus the 5-year average would continue its steady decline, dropping to +73 BCF or just +2%, the lowest since February 3, a new 6-month low. On the other hand, the year-over-year deficit will narrow as well, falling to -264 BCF or -8%, the lowest since March 10. While unspectacular, this report shows the effect a tight supply/demand balance can have on inventories, even with mediocre temperatures and should get the job done narrowing inventories closer and closer to the 5-year average. See more on this week's projection on my Weekly Storage Page HERE.

While the reported injection is likely to be bullish versus the 5-year average, natural gas will face a headwind to further gains given the 3-day rally to start the week. Next week's storage injection is likely to be near the 5-year average and subsequent injections, while looking like a return to bullishness, are uncertain, so today's report likely needs to come in below expectations to support continued near-term momentum. I expect a reported injection of smaller than +35 BCF will be viewed as bullish with prices likely to top $3.90/MMBTU while an injection of larger than +40 BCF is likely to be viewed as a disappointment (although technically bullish) with prices at least temporarily pulling back. A reported injection between +35 BCF and +40 BCF would be neutral with prices equally likely to rally or pull back. Nonetheless, with natural gas still at a strong 11% undervaluation based on current inventories alone according to my Fair Price Model and an average 14% undervaluation based on 8-month long-term storage projections, I remain long-term bullish towards the commodity.

Check back at 10:30 AM EDT for the official EIA storage injection on 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 continue to climb today as temperatures warm sharply across the eastern 2/3rds of the nation. Highs will rise around 5F-10F day-over-day across the densely-populated I-95 corridor with mid-to-upper 80s stretching from Washington, DC to Boston, near average across the south to 10F warmer than normal across the north. And across the central Plains from north Texas to Kansas, temperatures will rise into the upper-80s to mid-90s today--near average--after spending the past three days 5F-15F cooler than average. The Pacific Northwest will once again remain much warmer than normal with Portland, Or breaking 90F and Seattle, Wa reaching the upper 80s, both at least 10F hotter than average. On the other hand, the northern Plains and Ohio Valley will remain unseasonably chilly with highs generally in the mid-to-upper 70s, around 10F cooler than normal. Overall, the forecast mean population-weighted nationwide temperature will warm around 1.1F from Wednesday to 76.7F, still 0.4F cooler than normal, but much more seasonal compared to recent days. Total Degree Days will rise to 12.0 TDDs, still 1.9 TDDs fewer than normal and the 15th fewest in the last 37 years, but a market improvement from the 10.0 TDDs on Sunday and Monday. Click HERE for more on today's temperature and degree day forecast. Based on this outlook, I am projecting a +6 BCF/day daily natural gas storage injection today, 1 BCF smaller than yesterday and 1 BCF bullish versus the 5-year average +7 BCF/day injection. LNG feedgas to Sabine Pass will rise by 0.2 BCF/day to 1.9 BCF/day today while Powerburn demand will climb further into the low 30s BCF/day.

In other weather news, Franklin became the first hurricane of the 2017 Atlantic season Wednesday afternoon before landfalling across southern Mexico in the state of Veracruz overnight as a well-organized 85 mph category 1 storm. The system will quickly dissipate today with life-threatening flash flooding being the primary concern from Franklin. The storm is well-south of US oil & natural gas infrastructure in the northern Gulf and production of either commodity is unlikely to be disrupted, nor are LNG exports. Elsewhere in the tropics, a trough of low pressure over the Bahamas east of Florida is trying to organize, although the National Hurricane Center is only giving it a 10% chance to develop. Regardless, the system is likely to bring heavy rain and gusty winds to the Bahamas and Florida over the next 2 days. The NHC is giving a more well put-together system centered northeast of the Lesser Antilles a 50% chance of developing into a depression over the next 5 days, although this system is likely to recurve harmlessly out to sea. Stay tuned.

For the natural gas storage week of August 5-11 that ends on Friday, I am projecting a preliminary +48 BCF weekly storage injection. Such an injection would be a scant 2 BCF smaller than the 5-year average and an ugly 25 BCF larger than last year's 23 BCF injection for the same week. However, it would still be the third smallest build for August 5-11 in the last 5 years behind only 2016 (+23 BCF) and 2012 (+25 BCF). 2014 saw the largest injection during this period at +83 BCF. The EIA will release its official inventory report for this week on Thursday, August 17 at 10:30 AM EDT. For more details, see my Weekly Storage Page HERE.