October 12, 2017

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Natural Gas Fades After Strong Start Wednesday Morning While Crude Oil Rises For A Third Straight Day; EIA Pitches A Doubleheader Today With A Projected Neutral-To-Bearish +89 BCF Natural Gas Storage Injection & A Neutral Petroleum Status Report; Gas Demand Falters Today But Bullish Weekly Build Expected For October 7-13

6:00 AM EDT, Thursday, October 12, 2017
Natural gas gapped up over 2% to open trading Wednesday morning, but couldn't hold its gains, fading steadily throughout the day to finish down less than a penny or 0.1% at $2.89/MMBTU. Thanks to some late-session strength, the 1x ETF UNG managed a 0.7% daily gain and the 3x product UGAZ rose 1.5%. Crude oil, meanwhile, enjoyed its third consecutive green day this week, rising 38 cents or 0.8% to settle at $51.30/barrel after OPEC revised higher its 2017 and 2018 demand outlook, even as cartel production jumped 90,000 barrels/day in September. Brent crude oil rose by 33 cents to $56.94/barrel meaning that the Brent-WTI spread remains comfortably above $5/barrel and should continue to support US exports. Oil and natural gas ETFs continue their monthly rollover from November to December contracts with USO now holding 75% December contracts amidst a 0.6% contango while UWT and UGAZ at a much steeper 6% contango hold 80% December contracts. UNG will not begin its rollover until next week and holds only November contracts. My Oil & Natural Gas portfolio climbed for a second straight day, rising 0.7% in the wake of Tuesday's nearly 3% daily gain to push the portfolio value to within 2% of 2017 highs, up +19.0% since May 1. Thank you to the new subscribers who pledged to support the site this week, thereby gaining premium access to my portfolio holdings, recent trades, and twice-weekly investing commentaries. Click HERE to learn more about signing up.

The EIA has a busy day ahead as it will be issuing both its regularly scheduled Natural Gas Storage Report as well as its weekly Petroleum Status Report, delayed one day due to the Columbus Day Holiday.

After the close of Tuesday's trading, the American Petroleum Institute (API) released its forecast for today's Petroleum Status Report covering the week of September 30-October 6. The Institute announced that it was forecasting a +3.1 MMbbl crude oil inventory build, versus an early analyst consensus of a -0.4 MMbbl drawdown. While a +3.1 MMbbl build sounds big and ugly, it would actually be nearly 2 MMbbls bullish versus the 5-year average +5.0 MMbbl build. As the Figure to the right shows, such a build would be the second smallest in the last 5-years, behind only 2012's +1.7 MMbbl build. The early-October period is among the weakest of the year for crude oil demand and over the last 33 years, only 12 years have seen storage drawdowns with only 1 exceeding -3 MMbbls. That being said, with oil exports seemingly poised to set record highs, I am a bit surprised that we would see such a substantial build and I would not be terribly surprised to see a more bullish surprise with the EIA data. However, should a +3.1 MMbbl build verify, crude oil inventories would rise to 468.1 MMbbls while the storage surplus versus the 5-year average would drop to +82.9 MMbbls, still above the pre-Harvey surplus of +75 MMbbls.

Among refined products, the API issued a split forecast. Gasoline inventories are forecast to decline by a bullish -1.6 MMbbls (5-year average: -0.7 MMbbls) but distillates are forecast to climb an ugly +2.0 MMbbls (5-year average: -2.2 MMbbls). As a result, Total Petroleum Inventories (crude oil + gasoline + distillates) are forecast to climb by +3.5 MMbbls which would be neutral-to-slightly-bearish versus the 5-year average +2.0 MMbbl build.

Overall, I consider the API forecast to be neutral given the slightly bullish oil build but net bearish refined product build which, after the long string of consistently bullish reports, can in and of itself almost be seen as disappointing. Thus, should the EIA in fact announce a net crude oil build, I would not be surprised to see the commodity pull back some in reaction. I will be most interested in assessing the reason behind this build. In particular, I will be closely monitoring US crude oil exports which, as the chart to the right shows, have been on a tear recently as the Brent-WTI spread has ballooned to as high as $7/barrel. Oil bulls need to hope that exports can stay above 1.5 MMbbls/day and even challenge 2.0 MMbbls/day in order to prompt a continued contraction of the storage surplus. Should the EIA report a crude oil build due to a drop in exports, my bullishness will be tempered slightly, compared to a more temporary event such as a jump in imports or softening of demand, possibly due to early refinery shut downs associated with Hurricane Nate late last week. Of note, I do not expect to see much of a slowdown in production in this week's report as shut-ins associated with Hurricane Nate did not begin to manifest themselves until late Friday. Next week, however, expect a substantial, if temporary, curtailing of domestic production. Regardless, I remain near- and long-term bullish on crude oil and maintain a 6-month price target of $60/barrel although, as mentioned above, I would not be surprised to see a pullback should the EIA report a sizable build today, if only because builds (even if bullish versus the 5-year average) have been such a rare thing over the past 6 months.

Check back on my Oil Inventories Page HERE at 11:00 AM EDT for the official EIA crude oil & refined product inventories as well as production, import, export, and demand data.

The EIA will release its weekly Natural Gas Storage Report, also for September 30-October 6, this morning at 10:30 AM EDT. I am projecting a +89 BCF storage injection for the week, which would be a neutral-to-slightly beaish 4 BCF larger than the 5-year average and more than double the previous week's +42 BCF build. As the Figure to the right shows, such an injection would be the 3rd largest in the past 5 years, ahead of only +100 BCF and +97 BCF injections in 2014 and 2015, respectively. Longer term it would be even more bearish, clocking in as the 5th largest in the last 23 years, during which time injections have been as low as +41 BCF in 1995. The large week-over-week increase in the projected build can be attributed to much cooler temperatures across the nation which, on a population-weighted basis, averaged 67.9F on the week, more than 5F cooler than the previous week. This resulted in a sharp decrease in natural gas powerburn to an estimated 26.1 BCF/day versus a strong 32.4 BCF/day the previous week. Natural gas production and LNG feedgas demand were essentially flat week-over-week, contributing little to the loosening of supply/demand balance. Should a +89 BCF injection verify, natural gas inventories would rise to 3597 BCF while the storage deficit versus the 5-year average would fall to -6 BCF and the year-over-year deficit would contract to -150 BCF. Click HERE for more on this week's projected injection.

Natural gas' inability to hold Wednesday morning's gains is rather disconcerting heading into today's report. Such weakness shows the rather tenuous foothold that the bulls managed to seize over the past two days and highlights that the bears likely still have the strongest position here. Should today's reported injection come in larger than expected, natural gas remains highly vulnerable to a pullback that could drop the front-month back down below $2.85/MMBTU. It is also important to remember that UGAZ now holds the majority of its holdings in the December 2017 contract now which, at $3.09/MMBTU, has considerable downside potential should the bears try to really pile it on. I feel that an injection of +93 BCF or larger will be viewed as unquestionably bearish and indicative of a loosening market and could lead to such a reversal of Tuesday's gains in the sector. On the other hand, natural gas does remain undervalued based on current inventories by a whopping 13.8%--and 9% versus the more expensive December 2017 contract--leaving considerable upside potential should today's injection come in smaller than projected. I feel that a build of +85 BCF or smaller would be viewed as unquestionably bullish with prices likely to rise with the front month contract perhaps challenging $3.00/MMBTU before its expiration. A reported injection between +85 BCF and +93 BCF would be neutral with prices equally likely to rally or pullback. Overall, I remain near-term neutral-to-slightly bearish--based on the forecast for unseasonably mild temperature into November as well as large rollover losses in coming months--but long-term bullish--based on the potential for a cooler-than-average second half of the winter and expected new LNG and traditional powerplant capacity in coming months. As I discussed in Wednesday's Investing Commentary (for Subscribers), I remain long the commodity.

Check back at 10:30 AM EDT for the official EIA storage injection 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 continue its late-week decline today as temperatures moderate across the country. For the most part, highs today across the eastern two-thirds of the nation will be within 5F of average, suppressing both heating and cooling demand. The exception might be across the Deep South with upper 80s to lower 90s--around 10F warmer than normal--across southeast Georgia, South Carolina, and northern Florida could prompt some marginal powerburn demand. Elsewhere, highs will be in the upper 70s across much of Texas to the upper 50s or lower 60s along the Canadian border from North Dakota to Maine, all around 5F warmer than normal. Across the Intermountain West and Pacific Coast, readings will be unseasonably chilly with highs in the 40s and 50s across the lower elevations of the Rockies to the lower 70s across California's Central Valley, 5F-15F cooler than normal. Unfortunately, with breezy conditions prevailing across California, these cooler temperatures will do little to stop the deadly wildfires that continue to devastate the state. Overall, the forecast mean population-weighted nationwide temperature will cool over 1F day-over-day to 65.4F today, still 3.8F warmer than normal. Total Degree days will fall to 6.9 TDDs today, which would be 1.0 TDDs fewer than normal and the 14th fewest in the 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 +11 BCF/day daily natural gas storage injection today, which would be around 0.5 BCF larger than yesterday and right at the 5-year average daily build. Click HERE for more on today's daily storage projection and intraday natural gas inventories.

For the natural gas storage week of October 7-13 that ends this Friday, I am projecting a preliminary +64 BCF build. Such an injection would be a modestly bullish 14 BCF smaller than the 5-year average +78 BCF, driven primarily by an early week storm system across the Plains that generated an impressive temperature gradient, prompting heating demand across the Rockies where Denver received 3 inches of wet snow and cooling demand across the Southeast with highs into the 90s. Additionally, this projected build has steadily declined throughout the week from as high as +70 BCF to begin the week as record LNG demand and a spike in nuclear powerplant outages prompting fuel switching have helped to bolster temperature-independent demand. Should these trends continue today and Friday, it is possible that this projection will decline even further. I will have full details in tomorrow's Daily Commentary, but, in the meantime, see my Weekly Storage Page HERE for more.