April 11, 2019

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Oil Prices Rise To New 5-Month High Despite Second Straight Bearish Crude Build Thanks To Large Drawdown In Gasoline Inventories; Natural Gas Remains Tightly Rangebound Ahead Of Fourth Straight Bearish EIA Storage Report; Gas Demand To Hold Steady Today As Early-Season Cooling Demand Fades But Powerful Plains Storm Drives Heating Demand Higher & LNG Feedgas Demand Recovers

6:00 AM EDT, Thursday, April 11, 2019
In its weekly Petroleum Status Report for the week of March 30-April 5, the EIA announced Wednesday morning that crude oil inventories rose by a steep +7.1 MMbbls. The build was larger than both Tuesday's API forecast of a +4.1 MMbbl build and the 5-year average +2.3 MMbbl build. After last week's +7.2 MMbbl rise, inventories have climbed +14.3 MMbbls in the past two weeks alone. Inventories now stand at 456.6 MMbbls, the highest since November 17, 2017. And with the build, the fledgling storage deficit versus the 5-year average flipped back to a +4.1 MMbbl surplus, having spent just 3 weeks as a deficit. The bearish build was driven by continued tepid refinery demand--perhaps as a residual effect of the recent closure of Houston's shipping channel. Refinery inputs last week averaged just 16.1 MMbbls/day, down a steep 0.92 MMbbls/day from the same week in 2018. As the Figure to the right shows, this is the time of year when demand starts to rapidly rise as refineries ramp up for the driving season, something that we have not yet seen this year. Also on the demand side, crude oil exports fell by -0.37 MMbbls/day week-over-week to 2.35 BCF/day. However, exports are still up 1.14 MMbbls/day year-over-year, which cancels out the loss in refinery demand, keeping demand up +0.23 MMbbls/day from 2018. On the supply side, the EIA reported similar offsetting elements. Domestic production held flat at a record 12.2 MMbbls/day, up +1.68 MMbbls/day from 2018 while crude oil imports averaged 6.60 MMbbls/day, down 2.05 MMbbls/day. As a result, total supply is down 0.38 MMbbls/day. Based on these metrics, total supply/demand balance is up a solid 0.61 MMbbls/day year-over-year. However, we saw an "adjustment factor" of 0.65 MMbbls/day last week to account for the discrepancy between supply/demand data and the observed build, which was larger than would have been predicted by the former. This means that, most likely, either production or imports are underestimated or exports are being overestimated. As a result, I expect that the true supply/demand balance is likely very close to 2018.

Given the very weak refinery input demand, it is unsurprising that refined product inventories fell sharply, countering the steep rise in crude oil inventories. Gasoline stocks tumbled by a massive -7.7 MMbbls (5-year average: -2.2 MMbbls) while distillates inched lower by -0.1 MMbbls (-0.5 MMbbls). This does suggest that the unexpectedly large rise in crude oil inventories was due to a temporary restriction in refinery demand rather than true demand destruction due to higher oil prices over the past few weeks. At 229.1 MMbbls, gasoline inventories flipped from a storage surplus to -1.9 MMbbl deficit versus the 5-year average for the first time in a year, as shown in the Figure to the right. Stocks are down -9.8 MMbbls from the same week last year. Distillates remain at a modest -6.4 MMbbl deficit as they have much of the past year. Total Petroleum Inventories (crude oil + gasoline +distillates) fell by -0.6 MMbbls, very close to the 5-year average -0.5 MMbbls and, making this overall a rather neutral report.

Click HERE for more on the latest crude oil storage numbers as well as supply/demand data.

Oil investors shrugged off the large crude build and instead focused on the steep drop in gasoline stocks, anticipating that this will translate to large inventory draws once refining activity picks back up. WTI rose 63 cents or 1% to settle at $64.61/barrel, the highest settlement since October 31. Brent rose a steeper $1.12 to $71.73/barrel, which is very close to Goldman Sachs' $72/barrel price target for the commodity in 2019. With the rally in WTI coupled with the rise in storage, the commodity is now slightly overvalued according to my Fair Price Model, which compares current prices to historical storage/price points. As the Figure to the right shows, the commodity is trading at a 1.9% premium to a Fair Price of $63.23/barrel. However, should the market tighten up as refinery demand increases, the sector quickly reverts to a small discount as I expect inventories to flip back to a storage deficit with the Fair Price topping $66/barrel, with possible demand destruction keeping the Fair Price from rising much higher. At this time, I am maintaining my WTI price target of $65/barrel, above which I will take profits on my long trade and even consider flipping to short for a swing trade.

Meanwhile, it was a slow day in the natural gas sector on Wednesday as the commodity hovered within a penny or so of flat the entire session, ultimately settling flat at $2.70/MMBTU. 10-day average volatility has slumped in recent weeks after a relatively choppy first half of March and now stands at a tranquil +/-0.9% per day, essentially flat with year-ago levels, as shown in the figure to the right. Prices are likewise nearly flat year-over-year with the commodity up just 0.6% from last year's $2.69/MMBTU. There isn't much in the way of a sustainable bullish catalyst to get natural gas out of its funk and drive prices higher. However, despite multiple bearish driving forces, investors are also reluctant to drive prices much lower, at least right now, given the losses in the past 6 weeks. However, with the mid-April cooling trend that pushed prices back over $2.70/MMBTU on Monday now fading a bit in the near-term models and the second half of the month looking milder, these bearish influences may soon begin to gain traction, especially if the EIA reports a second straight disappointing injection this morning. My near-term sentiment towards the commodity is little changed. I hold a small short position via a net short UGAZ stake that I plan to continue holding with a downside price target of $2.60/MMBTU, at which point I will plan to re-evaluate my position and either take profits or position for another leg lower.

My Oil & Natural Gas Portfolio took advantage of the rally in oil prices on Thursday to climb to another 2019 high. The Portfolio rose +0.3% to push year-to-date gains to +12.2%, or +44.1% annualized. I made no trades on Wednesday. My Portfolio remains net short natural gas via a 12.2% short UGAZ stake, partially offset by a 7.1% DGAZ short, so as to capitalize on long-term leverage-induced decay, while I am net long WTI oil via a 5.7% DWT short. This position is up a robust +37.9% from my basis. As discussed above, my downside price target for natural gas is $2.60/MMBTU while my upside price target for WTI is $65/barrel, at which point I will close out the entirety of this position and even consider flipping to short for a period. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for March 30-April 5 this morning at 10:30 AM EDT. For the week, I am projecting a +33 BCF injection. Such a build would be 28 BCF bearish versus the 5-year average, the fourth straight bearish report. As the Figure to the right shows, it would be the single largest injection in the last 5 years, just ahead of the +29 BCF build from 2015. The bearish build was driven by exceptionally weak demand at the beginning and end of the week that easily overwhelmed the brief shot of cold air and storage withdrawals on Sunday, Monday, and Tuesday. Mean nationwide temperatures averaged a balmy 53.8F on the week, which is very close to average which is a bearish set-up this time of year. Should a +33 BCF verify, natural gas inventories would rise to 1163 BCF while the storage deficit versus the 5-year average would slip to -477 BCF. The year-over-year deficit would slump a steep 53 BCF to -175 BCF. Click HERE for more on this week's projected injection.

Last week's +23 BCF injection--the first of 2018--was larger-than-expected compared to my projection and most analysts and all eyes will be on this week's data to see if this trend continues, suggesting a looser-than-expected supply/demand imbalance. With bearish and bullish driving forces locked in a standoff as discussed above, a reported injection that diverges significantly from expectations one way or another could break this deadlock and result in an oversized move higher or lower, at least temporarily, before rangebound trading reasserts itself. I expect a reported injection of +40 BCF or larger to be viewed as an unequivocal disappointment and cold lead to prices breaking below $2.65/MMBBTU near-term. On the other hand, a reported injection of +30 BCF or smaller, while still bearish, could suggest a slightly tighter-than-expected market and provide some near-term support for a move north of $2.75/MMBTU. A reported injection between +30 BCF and +40 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 hold nearly steady today as nationwide temperatures fall, resulting in an increase in late-season heating demand but a concurrent loss in the strong early-season cooling demand we saw in Texas on Wednesday. An historic late-season winter storm across the Heartland will keep temperatures unseasonably chilly today. Minneapolis will only reach 35F today with heavy, wet snow, 20F colder-than-normal while Bismarck, ND only sees the low 30 and Denver, CO the lower 40s, both more than 20F colder-than-normal. Temperatures will plunge across west Texas as the system shifts eastward. After reaching 96F on Wednesday, Midland, Tx, will only see 70F today, very close to average. In the warm sector on the storm's eastern side, highs will reach the low 80s as far north as Louisville, KY and the upper 70s in Indianapolis, both nearly 20F warmer-than-normal. Chicago will be caught between airmasses with a high very close to normal in the upper 50s. Across the Megalopolis, highs will be more seasonable with Washington, DC and Philadelphia reaching the upper 50s to lower 60s and New York City and Boston both near 50F, generally within 5F of seasonal normals. Overall, today's forecast mean population-weighted mean nationwide temperature will cool by 1.6F to 58.1F, still 1.8F warmer-than-normal. However, Total Degree Days will hold nearly flat at 11.4 TDDs, 0.9 TDDs greater than normal and the 17th most for April 11 in the last 31 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 +9 BCF/day daily natural gas storage injection today, almost identical to yesterday's build and 6 BCF bearish versus the 5-year average +3 BCF/day. Demand will get some support today from LNG feedgas demand as flows to Sabine Pass look to reclaim the 2 BCF/day level, boosting nationwide demand to 3.45 BCF/day based on early-cycle numbers, a 5-day high. This suggests that Sabine Pass could be finally wrapping up maintenance that has cut demand to that facility by half over the past two weeks. By tonight, projected Realtime inventories will be near 1250 BCF while the storage deficit versus the 5-year average falls to -410 BCF. The year-over-year deficit will continue to tumble, sliding 14 BCF to just -60 BCF and is poised to flip to a surplus within the week. Click HERE for more on today's projected daily injection and Realtime natural gas inventories. Look for demand to weaken further on Friday with a near +11 BCF/day daily injection expected, pushing the projected weekly build to an eye-popping +96 BCF, 75 BCF bearish versus the 5-year average and the largest injection on record for the second week of April by a 16 BCF margin. I will have much more on this week's projected build in Friday's Commentary, but in the meantime, click HERE for more.