July 10, 2019

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Oil & Natural Gas Stage Tepid Rallies Ahead Of Weekly Inventory Data; EIA Forecast To Announce Huge -8.1 MMbbl Crude Oil Storage Draw In Today's Status Report, Though Bullishness Blunted By Expected Gain In Distillate Stocks; All Eyes On The Gulf Of Mexico As "Proto-Barry" Likely To Negatively Impact Oil & Natural Gas Demand

6:00 AM EDT, Wednesday, July 10, 2019
Natural gas price rallied into the close on Tuesday to settle up 2 cents or 0.9% at $2.43/MMBTU, reversing Monday's losses. The settlement was the highest since May 31 and represents a nearly 13% rally from June 20th's intra-session 3-year low. The rally was likely driven by a near- and extended-term temperature outlook that trended hotter over the previous 24 hours. Monday's run of the 6-week ECMWF EPS, in particular, looked particularly toasty for the Great Lakes and Northeast through July and into August. With natural gas powerburn already averaging 2.2 BCF/day higher versus 2018 over the last 30 days despite cooler year-over-year temperatures, investors anticipate that this spike in cooling demand could result in record powerburn demand. Nonetheless, despite the nearly 6-week high, natural is still trading at a steep 14% discount versus 2018, when prices were trading at $2.83/MMBTU, as shown in the Figure to the right. It is this discount that is likely driving interval gains in powerburn demand. For these reasons, my sentiment towards natural gas remains unchanged and I continue to target a summer price target of $2.60/MMBTU and have no interest in closing my long positions until this threshold is reached.

Meanwhile, crude oil rose for a fourth straight session on Tuesday, with WTI gaining 17 cents or 0.3% to $57.83/barrel, although the bigger move would happen after the close (more on that below). Brent rose 5 cents to $64.16/barrel. It was business as usual on Tuesday with ongoing tension in the Middle East and anticipation of a third straight domestic inventory draw more than offsetting the usual bearish drivers: ongoing concern over a global demand slowdown and rising domestic production. Pending today's storage numbers, my sentiment is unchanged and I continue to feel that the commodity is undervalued. I am maintaining a 2019 Price Target of $65/barrel, which is aggressively above my Fair Price Model, which peaks at near $62.50/barrel, on anticipation that supply/demand balance will tighten more than this model is projecting.

My Oil & Natural Gas Portfolio rose +0.2% on Tuesday, more than canceling out Monday's losses, to reach a new 2019 high. The Portfolio is up +14.4% year-to-date through the first 130 trading days of 2019, or +27.9% annualized. I made zero trades on Tuesday. My largest single position, at 13.0%, is short SVXY, which provides long volatility exposure as hedge against my oil and equities holdings. However, despite its name, this position has a relatively low day-to-day volatility and, so far, has not contributed significantly to day-to-day gains and losses, which is what I would have hoped for in a hedge. My net long natural gas long position stands at 6.7% of my holdings via partially offsetting short UGAZ and DGAZ positions while my oil long via short DWT stands at 4.1%. My largest equity holding is CHK at 5.8% and .my cash position is a modest 49%. At this time I am satisfied with my current holdings and have no plans to rock the boat. I will await my price targets and not make impulse trades. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Petroleum Status Report for the week of June 29-July 5 this morning at 10:30 AM EDT, detailing crude oil and refined product inventories as well as supply/demand fundamentals. After Tuesday's close, the American Petroleum Institute (API) announced that it was calling for a huge -8.1 MMbbl draw. This is nearly 8x last week's -1.1 MMbbl draw and would be nearly twice the -4.9 MMbbl 5-year average. It would be the third largest draw all time for the June 29-July 5 period, but would be well behind last year's massive -12.7 MMbbl drawdown, the largest on record for the week. Should such a draw verify, crude oil inventories would fall to 460.4 MMbbls, which would be the lowest since April 12. As bullish as such as draw would be, it would be largely offset by an expected gain in refined product stocks. While gasoline inventories are forecast to decline by -0.3 MMbbls, 0.4 MMbbls bullish versus the 5-year average, distillates are forecast to jump +3.7 MMbbls, quite bearish versus the 5-year average, which is a less than 0.1 MMbbl rise. Overall, the API is forecasting Total Petroleum Inventories (crude oil + gasoline + distillates) to fall -4.7 MMbbls, flat versus the 5-year average. Nonetheless, investors typically focus more on the crude oil inventories than refined products and this was no different. Immediately after the release of the API numbers, WTI jumped over 1% to $58.50/barrel, where it held overnight. Check back after 10:30 AM EDT for the official EIA storage numbers on my Crude Oil Inventories Page HERE.

Natural gas demand will rise today as warmer-than-normal temperatures expand across the Eastern Seaboard and west towards Texas. Highs will be 5F-10F hotter than normal regionwide with 90F readings reaching as far north as Philadelphia. Across the Southeast, mid-90s will be common while across Texas, the nation's largest natural gas-consuming state, multiple spots could reach triple digits. Heat Advisories are up throughout this region, from central Texas eastward to Mississippi and northward to southern Missouri. On the other hand, as a large mid-latitude storm system slowly spins down across the Great Plains, areas from Minnesota to the Dakotas to Omaha will be unseasonably chilly. Highs across this relatively un-populated region will be 5F-15F cooler-than-normal, generally in the 60s and 70s. Nonetheless, thanks to the warming trend across the major population centers of the East, today's forecast mean population-weighted nationwide temperature will rise 1.8F from Tuesday to 78.9F, 1.6F warmer-than-normal. Total Degree Days (TDDs) will rise to 14.2 TDDs, 0.1 TDDs greater than normal and the 12th most for July 10 in the last 38-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 +7 BCF/day daily natural gas storage injection, 1 BCF smaller than Tuesday's build and 2 BCF bullish versus the 5-year average. With projected daily powerburn nearing 39 BCF/day yesterday, I expect powerburn to reach a new 2019 high today, topping last week's 40.3 BCF/day. By this afternoon, look for projected Realtime natural gas inventories to top 2500 BCF, more than 6 weeks earlier than 2018, when that level wasn't breached until August 24. However, it is still 2 weeks behind the 5-year average when 2500 BCF would have be eclipsed on June 24. By tonight, the storage deficit versus the 5-year average will reach -153 BCF while the year-over-year surplus will hit +280 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.

One of the major stories in the energy sector over the next 5-7 days will be the expected tropical development over the northern Gulf of Mexico. A frontal boundary drifted south over open water yesterday and has spawned an area of low pressure. The NHC gives this system a 90% chance of developing into a tropical storm and most near-term computer models are on board. Should it become a named system, it would be called "Barry," which could happen as early as tonight. Over the past 72 hours, the forecast track has shifted westward with an expected landfall over western Louisiana or eastern Texas late this week or over the weekend. With favorable atmospheric conditions and warm water beneath it, Proto-Barry's strength will be determined by the length of time it spends over water. Should it take a more westward track, it could spend in excess of 3 days over water and could reach Category 1 strength, or even stronger, while if it takes a sharper right turn into Louisiana, it is more likely to be a strong tropical storm. Regardless of its intensity, the storm will not be moving quickly and is likely to drop in excess of 10 inches of rain across a wide swath. It now appears that the system will have a direct impact on oil and natural gas. As recently as 10 years ago, hurricanes in the Gulf of Mexico were short-term bullish catalysts for both oil and natural gas due to disruptions in production. Not so anymore. With LNG exports at record highs near 6 BCF/day and powerburn likely to hit record highs this summer, tanker disruptions, power outages, and rain-cooled temperatures will curb natural gas demand more than any supply disruptions. This forecast has already resulted in an upward revision of my projected storage injections for the next 2 weeks. The same goes for oil. Oil exports have surged in recent years and a storm in the Gulf will likely interfere with tanker traffic out of major export facilities. However, any such disruptions are likely to be temporary and, should oil or natural gas sell off on the news, it would be reasonable to buy the blood. Keep up to date on proto-Barry on the National Hurricane Center's website HERE.