April 12, 2018

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EIA Projected To Announce Largest Natural Gas Storage Withdrawal In Last 5 Years For March 31-April 6; Storage Injections To Surge To 2018-High Today As East Warms But Another Bullish Withdrawal Still Expected This Week; Crude Oil Rises To 3-Year High Amidst Middle East Tensions Despite Rare Bearish EIA Status Report

6:00 AM EDT, Thursday, April 12, 2018
Oil rose to a three-year high on Wednesday, despite the EIA reported a larger-than-expected rise in inventories. The commodity jumped $1.31 or 2% to settle at $66.82/barrel, its highest close since December 3, 2014. Brent oil rose $1.02 or 1.4% to $72.04/barrel, also a 3+ year high. The rally was attributed to an increase in Middle Eastern tensions with Donald Trump seemingly promising a near-term Syrian missile strike Wednesday morning. The gains came despite the EIA reporting a bearish crude oil storage build for March 31-April 6 in its weekly Petroleum Status Report. The agency reported that inventories rose by +3.3 MMbbls last week, above both the 5-year average +2.6 MMbbls and Tuesday's API forecast of a +1.7 MMbbl build. As a result, crude oil inventories rose to 428.6 MMbbls while the storage deficit versus the 5-year average contracted to -11.9 MMbbls. The build was driven by bearish developments across multiple elements of the supply/demand balance. On the demand side, refinery inputs were flat, but oil exports tumbled by -970,000 barrels/day or -45% week-over-week to 1.21 MMbbls/day after the previous week's all-time high, despite the Brent-WTI spread widening even further to over $5/barrel over the past week. On the supply side, imports rose by 750,000 barrels/day to 8.65 MMbbls/day, up 750,000 barrels/day year-over-year, while, perhaps most concerning, domestic production continued its relentless march higher, gaining another 65,000 barrels/day from the previous week to a new all-time high of 10.53 MMbbls/day, up +1.290 MMbbls/day or +14% from last year. The Figure to the right plots daily oil production compared to the previous year.

Undoubtedly, this was a disappointing and bearish Petroleum Status Report on almost all fronts, which makes it somewhat surprising that oil was able to put together the run that it did. However, the build was driven primarily by a quick rise in imports and a drop in exports, most likely related to short-term tanker movements, with a bevy of new arrivals to US ports. It is likely that over the next week or two that many of the tankers that arrived last week will load up and exports will rebound back to near 2 MMbbls/day, driven by a favorable Brent-WTI spread. Additionally, many of the tankers that arrived boosting imports last week were likely directed to the US weeks ago when this spread was much narrower. With Brent oil trading at over $72/barrel, it is likely that at least some tankers that would ordinarily come to the US are now being directed to international ports where their cargoes are more profitable. As a result, I would not be surprised to see oil imports track back down in coming weeks. The rise in US production has been and remains a significant concern but, at least until this week's import/export mismatch, the year-over-year rise in demand had more than compensated for the gains in production. Thus, I am maintaining a $70/barrel 4-month price target on crude oil, although I will be keeping a close eye on future Status Reports to make sure that this week's Report was an anomaly, not the beginning of a trend. Additionally, I would not be surprised to see a near-term pullback in the commodity once geopolitical tensions abate in the wake of the Status Report. Overall, my exuberance towards the sector is tempered, but I am still expecting higher prices.

Natural gas, meanwhile, reversed early-session losses to rebound from Tuesday's 2-week low, climbing 2 cents or 0.7% to settle at $2.68/MMBTU ahead of today's EIA Storage Report. The rally was likely driven by an April forecast that continues to show generally colder-than-average temperatures through the end of the month, punctuated by only short-lived warm-ups, with storage levels likely to be nearly 850 BCF lower year-over-year by the start of May. My Oil & Natural Gas Portfolio climbed to a new 52-week high for a second straight day, gaining +1.0% on Wednesday to push returns since the portfolio's inception on May 1, 2017 to +47.5% and year-to-date returns through the first 69 trading days of 2018 to +12.7% or +46.5% annualized. 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 March 31-April 6 this morning at 10:30 AM EDT. In what is likely to be the penultimate storage withdrawal this spring, I am projecting a -15 BCF draw for the week. While this is considerably smaller than the -20 + BCF draw I was projecting this time last week as it is becoming increasingly apparent that supply/demand balance is loosening as heating demand (slowly) falls, it remains a strong 24 BCF bullish versus the 5-year average +9 BCF storage injection, typically the season's first. The bullish withdrawal was driven by consistently colder-than-average temperatures throughout the week, particularly across the major heating demand centers of the Midwest and Great Lakes. While the mean population-weighted temperature last week was only 1F colder-than-average at 53.2F, this reading was inflated by above-average warmth across the South, a region that contributes little to demand this time of year, masking the large colder-than-average anomalies across the northern tier driving strong heating demand. As the Figure to the right shows, such a withdrawal would be the largest in the last 5 years for the March 31-April 6 period, easily topping 2013's -7 BCF draw. It would also be the fourth largest for the period since 1994. Should a -15 BCF withdrawal verify, natural gas inventories would fall to 1339 BCF, the lowest since May 2014, while the storage deficit versus the 5-year average would rise to -371 BCF. The year-over-year deficit would rise to -721 BCF. Click HERE for full details on the week's projected withdrawal.

For the past three weeks, EIA-reported natural gas withdrawals have been consistently smaller than my projections, and even further behind the draws that a comparable temperature pattern would have produced last year. This suggests a loosening of supply/demand balance and I would not be terribly surprised if this is the case once again. While natural gas did recover on Wednesday, it remains just above its current 2-week support level and could breakdown quickly if today's report comes in smaller-than-expected, especially if the April outlook trends milder. On the other hand, should the reported build come in unexpectedly larger-than-expected, this could suggest that the recent loosening of supply/demand balance was transient and not indicative of a broader trend heading into the Shoulder Season. Regardless, I don't expect anything that the EIA reports today will break the commodity out of its rangebound trading pattern. It will take a large-scale change in the weather pattern to do that. I expect that a reported storage injection of -18 BCF or larger will be viewed as a bullish surprise, indicative of a tightening (or, rather, not loosening any further) market and could support a near-term rally back to $2.75/MMBTU. On the other hand, a reported withdrawal of smaller than -10 BCF would reinforce the past month's loosening trend and could prompt a breakdown under $2.60/MMBTU over the next week. A reported storage withdrawal between -10 BCF and -18 BCF would be neutral 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.

Ahead of a developing Great Plains storm system, temperatures will rise to above-average across the eastern half of the nation today, prompting a rapid weakening of natural gas demand. Highs across the major demand centers of the I-95 corridor, including Washington, DC, Baltimore, and Philadelphia, will climb into the low 70s today, 10F warmer than average, while New York City and Boston will be stuck on the wrong side of a frontal boundary with readings in the 50s for one more day. Further west, highs in the 70s will stretch as far north as Chicago, Indianapolis, and Cleveland while Kansas City and St Louis could reach into the 80s, each 15F-20F warmer-than-normal. Areas of the Texas and Oklahoma panhandles could soar into the 90s today, nearly 30F warmer-than-normal. Parts of southern Nebraska could reach 80F, areas which are also under Winter Storm Watches for Friday into Saturday when near-blizzard conditions will be possible. Welcome to Spring across the Heartland. Overall, the forecast mean population-weighted nationwide temperature today will soar 5.0F from Wednesday thanks to 59.7F, 3.1F warmer-than-normal. Total Degree Days will fall to just 7.8 TDDs, 2.6 TDDs fewer than normal and the 8th fewest for April 12 in the last 37 years. The decline in TDDs will be blunted slightly by the heat across the southern Plains, which should allow for a rise in cooling degree days and some early-season powerburn demand. Click HERE for more on today's temperature outlook and HERE for more on intraday temperature data. Based on this forecast and early-cycle pipeline data, I am projecting a nearly +9 BCF/day natural gas storage injection, the largest so far in 2018 and more than 3 BCF bearish versus the 5-year average +5 BCF/day build. Estimated natural gas inventories will have no risen for 2 straight days since bottoming very close to 1300 BCF on Tuesday, marking the end of the withdrawal season. By the end of the day today, I am projecting Realtime natural gas inventories to be near 1310 BCF with the storage deficit versus the 5-year average near -430 BCF or -25%. For more on today's projected daily storage injection and Realtime natural gas inventories, please click HERE. Natural gas demand will fall further on Friday. Even as near-blizzard conditions are pummeling the western part of Nebraska, Omaha near the Iowa border could top 80F. Washington, DC could also join the 80 degree club as a strong southerly flow brings balmy temperatures northward along the Eastern Seaboard. As a result, I am projecting a bearish +11 BCF/day daily natural gas storage injection to wrap up the week. Overall, for the storage week of April 7-13, I am projecting a -19 BCF storage withdrawal in what would typically be the second week of the injection season, thanks to exceptionally strong early-week demand. Such a withdrawal would be 57 BCF bullish versus the 5-year +36 BCF storage injection and the only storage withdrawal in the last 5 years. I will have more on this week's projected draw in Friday's commentary, but see my Weekly Storage Page HERE for more in the meantime. In other news, nuclear reactor outages have remained well below-average as we move further into the spring maintenance season, restricting an important seasonal source of natural gas demand. Through Friday, total outages tallied just 369 GWh, or 15.5% of capacity. This is down 169 GWh or -31% from 2017 and 121 GWh or -25% versus the 5-year average. As the Figure to the right shows, outages have been rising over the past 6 weeks but have remained consistently below the 5-year average since mid-February and below year-ago levels since mid-March. 12 reactors are currently reporting 100% outages while another 16 are reporting partial outages ranging from 1% to 80% of capacity. The April-to-May period is historically at time when nuclear reactors shut down for scheduled maintenance and refueling, a process that can take several weeks, during which time natural gas typically steps in to fill the lost output. This is an important source of natural gas demand during the typically weak shoulder season. As of Friday, however, natural gas substitution demand stood at just 3.1 BCF/day, a dismal 1.4 BCF/day less than last year and 1.2 BCF/day below the 5-year average. So far, Mother Nature has picked up the slack and favorable temperatures continue to drive gas demand, but weak nuclear substitution demand is yet another bearish factor driving an underlying loosening of natural gas supply/demand balance. When heating demand fades, weakness in this typically reliable source of demand will further exacerbate market looseness driven by record production.