July 12, 2018

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Natural Gas Rebounds Ahead Of Projected Bullish +52 BCF EIA Storage Injection Today, But Upward Momentum Kept In Check By Cool Late-July Outlook; EIA Reports Historic Crude Oil Drawdown In Status Report, But Oil Pummeled Amidst International Supply/Demand Fears

6:00 AM EDT, Thursday, July 12, 2018
In its weekly Petroleum Status Report for June 30-July 6, the EIA announced Wednesday morning that crude oil inventories plunged by -12.6 MMbbls to 405.2 MMbbls. The draw was nearly double the API's Tuesday afternoon forecast of -6.8 MMbbls and nearly 8 MMbbls larger than the 5-year average -5.1 MMbbl. As the Figure to the right shows, it was the fifth largest weekly withdrawal all-time for any week in the full 36-year period of record dating back to 1983. Inventories are now at their lowest since February 27, 2015. The storage deficit versus the 5-year average rose to -17.3 MMbbls, a four-year high, while the year-over-year deficit climbed to 90.2 MMbbls.

The significant bullish reversion following last week's disappointing +1.3 MMbbl build was driven almost entirely by imports which tumbled 1.62 MMbbls/day week-over-week to just 7.43 MMbbls/day, the lowest mark since May 4. The drop in imports was primarily due to week-over-week declines from Nigeria (-550,000 barrels/day), Canada (-287,000 barrels/day), Mexico (-223,000 barrels/day), and Colombia (-296,000 barrels/day), even as imports from Saudi Arabia topped 1 MMbbls/day for only the fourth time this year. On the demand side, refinery inputs remained unchanged just below all-time highs at 17.65 MMbbls/day, up 410,000 barrels or 2.4% year-over-year, while exports responded to a narrowing of the Brent-WTI spread by sliding 310,000 barrels/day to 2.03 MMbbls/day, down 1 MMbbls/day from the record peak of 3.0 MMbbls/day from 2 weeks ago, but still up 1.11 MMbbls/day or 121% year-over-year. All-told, demand is up a strong 1.52 MMbbls/day or +8.4% year-over-year. Production remained flat for a fourth straight week at 10.9 MMbbls/day, up 1.503 MMbbls/day or 16% year-over-year. Distillate inventories rose a bearish +4.1 MMbbls, but gasoline stocks slid -0.7 MMbbls.

Despite the historic withdrawal, WTI crude oil was pummeled to the tune of -$3.73 or 5%, its largest daily decline since September 1, 2015, to settle at $70.38/barrel, its lowest close since June 25. Brent oil fell an even steeper $5.46/barrel to $73.40/barrel. The Brent-WTI spread finished at $3.02/barrel, down 74% since peaking at $11.55/barrel in mid-June. Why the sell-off after such a bullish withdrawal? Aside from the EIA data, it was a very bearish day in the oil pits. First, Libya announced that exports would soon resume in full, adding a potential 700,000 barrels/day to world supply in the near-term. Additionally, investors speculated that the US-China trade dispute would negatively impact worldwide demand and that the US would pressure Russia to increase its output. And domestically, the EIA announced that it expected domestic production to average 11.8 MMbbls/day in 2019, up nearly 1 MMbbl/day from current levels, enough to unbalance supply and demand. Despite these negative headlines, most are speculative and will not materially impact the near-term supply/demand balance. While it is likely that imports will recover in the weeks to come, there is no doubt that domestic supply/demand balance remains tight and I expect inventories to fall below 400 MMbbls within the next two weeks. If there is one thing that does concern me, it is the Brent-WTI spread which has contracted back down to near its 3-year average and could negatively impact exports near-term, contributing to a loosening of supply/demand balance. Nonetheless, with inventories at 3-year lows, a tight supply/demand balance, and the host of bearish headlines on Wednesday being speculative in nature and unlikely to impact US market tightness near-term, I feel that the sell-off was overdone. Additionally, WTI futures prices are locked in a steep backwardation. Oil ETFs are currently rotating into the September contract, which closed Wednesday at $68.86/barrel, a nearly $2/barrel backwardation to the Front-Month August contract, a structure which is very favorable for long holders of these ETFs. And October prices are another $1.70/barrel lower at $67.10/barrel and prices one year from now--the August 2019 contract--stand at just $62.55/barrel. For these reasons, I remain long oil and, as detailed to subscribers, increased my exposure on Wednesday's sell-off.

Meanwhile, as oil was crashing, natural gas recovered from its own pullback, gaining back 4 cents or 1.5% to settle at $2.83/MMBTU ahead of today's EIA Storage Report. This seems to be mostly an over-sold bounce as the near- and long-term temperature was largely unchanged. The near-term outlook for the commodity will depend largely on the expected late July/early August cooldown. Should this evolve into a prolonged spell of below-average temperatures, expect prices to break through recent lows as the loss of powerburn demand amidst record production will quickly cut into the long-standing storage deficit, sending weaker hands running for the exits. But if the cooldown trends more transient with hotter temperatures returning for early August as some models suggest, expect natural gas prices to stabilize and potentially trade back towards the top of the 3-month range near $3.00/MMBTU as investors begin looking towards a 5-year low peak inventory level.

My Oil & Natural Gas Portfolio slumped -0.6% on Wednesday, reducing 2018 year-to-date gains to +18% through the first 132 trading days of 2018, or +34.3% annualized. I made a single trade on Wednesday, my second of the week. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

The EIA will release its weekly Natural Gas Storage Report for June 30-July 6 this morning at 10:30 AM EDT. I am projecting a +52 BCF storage injection, which would be 25 BCF bullish versus the 5-year average and 7 BCF smaller than last year's injection, a rarity this summer. The below-average projected build was driven by unseasonably to record hot weather across much of the eastern half of the United States with triple digit heat reaching as far north as New England and mean population-weighted nationwide temperatures averaging 80.7F last week, nearly 4F warmer than average, an impressive anomaly during the summer. This being said, such a temperature pattern this time last year would have likely driven a storage build near +35 BCF and, should the demand-suppression associated with the 4th of July holiday not have been present AND the pattern had occurred last year, the injection would have been closer to +20 BCF. Thus, once again, despite such an injection being bullish versus the 5-year average, it would typically have resulted in an even more bullish injection were underlying supply/demand balance not as loose as it current is. Nonetheless, a +52 BCF injection would still be the single smallest injection for the June 30-July 6 period in the last 5 years, just topping the +57 BCF build from 2016, as shown in the Figure to the right. It would also be the second smallest injection for the period in the full 24-year period of record for which storage data is available, behind only 2012's +33 BCF injection. In contrast, 2003 saw an ugly +132 BCF injection, the largest build on record for the period. Should a +52 BCF injection verify, natural gas inventories would climb to 2204 BCF while the storage deficit versus the 5-year average would widen to -518 BCF or -19%, the largest since May 4 and the fourth largest of the year. The year-over-year deficit would hold nearly steady at -724 BCF or -25%. Click HERE for more on last week's injection.

This week's storage injection carries greater than usual uncertainty due to its inclusion of the 4th of July holiday and its variable impact on residential and industrial demand. Regardless, it is likely to be the most bullish storage injection for at least the next 4 weeks and the EIA needs to report a strong build in order to support Wednesday's burgeoning rally or the commodity is likely to roll over with the temperature outlook looking increasingly less favorable for late July. I expect that a reported injection of under +50 BCF will be viewed as unquestionably bullish with prices likely to top $2.85/MMBTU near-term. On the other hand, I expect that a reported build of larger that +58 BCF will be viewed as unquestionably bearish and suggestive of a looser than-expected market with prices likely to trend towards $2.75/MMBTU near-term. A reported injection between +50 BCF and +58 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 dip today as cooler temperatures overspread the Mid-Atlantic and the Desert Southwest with generally seasonal temperatures elsewhere, with the sole exception of the scorching Pacific Northwest. Highs along the densely-populated I-95 corridor today will generally be within 5F of average with Washington, DC through New York City rising into the mid-80s and Boston topping out in the upper 70s. There will be a small bubble of warmth across the central and northern Plains with Topeka, Ks reaching the upper 90s and Minneapolis, Mn the low 90s, each around 5F warmer-than-average with Heat Advisories in effect. The real heat will be across the Northwest where Portland, Or will reach 95F and Seattle, Wa 90F, each around 15F hotter-than-normal. However, thanks to the cooling trend across the more densely-populated East, the forecast mean population-weighted nationwide temperature today will cool by 0.8F from Thursday to 78.5F, still 1F warmer-than-average. Total Degree Days today will be 13.9 TDDs, the 8th most for July 12 in the last 37 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 natural gas storage injection, just under 1 BCF/day larger than Wednesday and very near the 5-year average. Click HERE for more on today's temperature and degree day outlook. Natural gas demand will rise on Friday with the daily injection likely falling towards +6 BCF/day to wrap up the storage week. For the period of July 7-13, I am projecting a preliminary +66 BCF natural gas storage injection, 4 BCF bearish versus the 5-year average thanks largely to an early-week cooldown. More on this projection in Friday's commentary, but in the meantime, see more on the projected injection HERE.