June 13, 2019

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Crude Oil Plunges To New 5-Month Low After Another Bearish Inventory Build, But The Signs Are There This Nightmare Could Soon Come To An End; EIA Projected To Report A 13th Straight Bearish Natural Gas Injection Today, But Commodity Looks To Establish A Bottom As Powerburn Stays Strong & Late June Temperature Outlook Warms; Realtime Year-Over-Year Surplus To Top +200 BCF Today

6:00 AM EDT, Thursday, June 13, 2019
Yesterday was Wednesday which meant it was time for the scheduled weekly bear raid in the oil patch. And the bears didn't disappoint. Once again, the sell-off was triggered by a bearish EIA-reported crude oil inventory build. In its weekly Petroleum Status Report covering June 1-7, the EIA announced that storage levels rose by +2.2 MMbbls. On the one hand, the build was less than half Tuesday's American Petroleum Institute (API) forecast of a +4.8 MMbbl rise and considerably smaller than the previous week's +6.8 MMbbl build, but it was still more than 5 MMbbls bearish versus the 5-year average -3.4 MMbbl draw. With the build, inventories rose to 485.5 MMbbls--the highest since July 14, 2017--while the storage surplus versus the 5-year average jumped to an ugly +37.6 MMbbls. Inventories are up a huge +53.1 MMbbls compared to 2018. Of note, storage is now within 50 MMbbls of the all-time high 535.5 MMbbls set in March 2017.

Reviewing the individual components of supply and demand, the most disappointing element continues to be refinery demand. While demand climbed 0.2 MMbbls/day week over week to top 17 MMbbls/day for the first time since January, refinery input still trails 2018 by a steep 0.44 MMbbls/day, or 3.1 MMbbls over the full week. Also on the demand side, exports averaged a strong 3.12 MMbbls/day, up 1.1 MMbbls/day year-over-year--that is, if you trust this data (more on that below). On the supply side, calculated production actually dropped by 0.1 MMbbls/day from the previous week's all-time high to 12.3 MMbbls/day, but is still up +1.4 MMbbls/day from 2018. Imports dipped slightly to 7.6 MMbbls/day, down 0.32 MMbbls/day from the previous week and down 0.49 MMbbls/day from 2018. Nonetheless, imports remain towards the upper limit of the 2019 range. Click HERE for more on the latest crude oil inventories and supply/demand data. Of note, subtracting these demand numbers from supply would predict a -1.9 MMbbl weekly drawdown compared to the reported +2.2 MMbbl build. This resulted in another large 0.590 MMbbl/day adjustment factor, utilized by the EIA to square reported inventories and those predicted by the supply/demand imbalance and typically run either side of 0.2 MMbbls/day. Those who have been following the sector know that this disconnect has been a major issue over the past month, with the supply/demand balance seemingly predicting inventory drawdowns compared to the reported bearish builds. A most concerning explanation for this large adjustment is that production is being consistently underestimated. However, given flat natural gas production growth during the same period, this fortunately seems less likely to justify the majority of the gap. A more optimistic scenario would be that exports were over-counted on the supply/demand component last week with true exports closer to 2.7 MMbbl/day than the reported 3.1 MMbbl/day. This could mean that the entirety of this mis-counted demand will be instead reflected in storage levels in next week's report, increasing the likelihood of a large draw.

In the end, however, all investors saw was another bearish build. After chopping around immediately following the report, traders seemingly came to a consensus that this was bad news all around and oil promptly sold off late in the morning. The July 2019 front-month contract plunged $2.13 or 4% to $51.14/barrel, a fresh 5-month low, and even traded briefly below $51/barrel before the close of equity markets. Brent oil fell $2.32 or 3.7% to $59.97/barrel, the lowest close since January 28. WTI prices are down a steep 23% year-over-year when the commodity was trading north of $66/barrel. On the one hand, with inventories up more than 50 MMbbls year-over-year, a large year-over-year price decline seems plausible. However, according to my Fair Price model, which looks at 3 years worth of price/storage data points, the commodity has fallen too far, too fast even with the surplus versus 2018. Instead, as the Figure to the right shows, WTI is fairly valued closer to $59.12/barrel, a 13.5% discount from current values. While it's true that should oil inventories hold at the 5.4 MMbbls/week loose versus the 5-year mean that they have averaged over the past month, this Fair Price falls under $50/barrel by August. Nonetheless, for better or worse, I saw enough glimmers of hope in this report--smaller-than-expected build, rising refinery inputs, and potentially overstated exports--that I am not abandoning the long trade. While downward momentum could certainly continue near-term in the wake of this report, I am maintaining my $60/barrel price target at this time, acknowledging that this is a long-term and higher-than-usual risk trade.

Meanwhile, natural gas slipped back slightly following Tuesday's strong showing, dipping 0.5% to $2.39/MMBTU. The commodity is 6 cents off last week's 3-year low, but is still trailing 2018 prices by a steep 20%. Over the last 72 hours or so, my near-term sentiment towards natural gas has improved. As the Figure to the right shows, the 14-day accumulated gas-weighted degree day (GWDD) outlook has steadily risen with the GFS ENS forecast above-average GWDDs for the upcoming 2-week period and the ECMWF ENS getting very close. Additionally, cheap natural gas has resulted in temperature-independent growth of powerburn electricity demand, averaging 32 BCF/day this week and up 2 BCF/day year-over-year despite mediocre temperatures across much of the nation this week. Once temperatures warm up, I expect powerburn demand to quickly top 40 BCF/day should prices remain cheap. And finally, longer term, the continued slump in oil prices should further contribute to lackluster natural gas production over the next several months. For these reasons, I am maintaining my price target of $2.60/MMBTU.

Unsurprisingly given the steep decline in oil prices, my Oil & Natural Gas Portfolio suffered one of its worst days of 2019 so far on Wednesday, slumping 2.4%. This reduced 2019 year-to-date gains to +7.2% or a mere +16.2% annualized. I made no trades yesterday. With my oil long position via short DWT standing at a dangerous 13.5% of my holdings, I have no plans to further add to this position. Should the trade top 15%, I will likely covering at least 1/3rd of this position and transfer the funds into a long UWT trade, sacrificing long-term leverage-induced decay profits for a safer trade. However, my net long natural gas trade via partially offsetting positions in UGAZ and DGAZ stands at a softer 7.8%, I will strongly consider adding to my long trade should the commodity fall back under $2.35/MMBTU. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for June 1-7 this morning at 10:30 AM ED. I am projecting a +103 BCF natural gas storage injection for the week. Such a build would be a slight 11 BCF bearish versus the 5-year average--the 13th straight bearish build--and 8 BCF larger than last year's injection. As the Figure to the right shows, such a build would be the third largest in the last 5 years, behind only a +109 BCF injection in 2014 and a +105 BCF build a year later. Should a +103 BCF injection verify, natural gas inventories would rise to 2089 BCF while the storage deficit versus the 5-year average falls again to -229 BCF. Inventories will finish the week up +190 BCF over 2018. The EIA will release its official storage numbers for the week next Thursday, June 13, at 10:30 AM EDD. Click HERE for more on this week's projected injection.

The EIA has missed badly with each of its past two reports, announcing bearish and larger-than-expected builds. For this reason, investors seem to be going into this report with very soft expectations. Should today's reported injection come in smaller-than-expected--and I feel there is a better-than-average chance it could--the commodity could find a near-term catalyst and move higher. On the other hand, with 59% of money manager holdings already on the short side according to last week's CFTC data, the bearish trade is very crowded right now and it would take an exceptionally bad miss for investors to put even more money on the short side at these levels. I feel that a reported injection under +100 BCF would be viewed as a better-than-expected result and the commodity could move back above $2.40/MMBTU. On the other hand, I feel that it would take a reported injection of +110 BCF or higher to be considered unequivocally bearish with prices dropping to a new 3-year low under $2.33/MMBTU. A reported injection between +100 BCF and +110 BCF would be neutral versus expectations 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 hold steady today well below-average as unseasonably chilly temperatures dominate the major population centers of the Eastern Seaboard and Ohio Valley. Highs from New York City to Boston will only reach the low-to-mid 60s today, 15F-20F cooler than normal as a cold rain overspreads the region. Further west, similar anomalies will be found across the Ohio Valley with highs only in the 60s to lower 70s from Columbus, Oh to Pittsburgh to Indianapolis and Chicago. Across the far northern Plains frost advisories are even in effect for parts of Minnesota, including Duluth, which could see some very late-season heating demand. The hot spot will once again be the West Coast, though, particularly the Desert Southwest. Excessive Heat Warnings are in effect for Phoenix, Az where readings will likely top 110 BCF. California will begin to slowly cool but highs will still top 90F across much of the state's Central Valley. Overall, today's forecast population-weighted nationwide mean temperature will fall 2.6F from yesterday to just 69.0F, 4.0F cooler-than-normal. Total Degree Days, on the other hand, will hold roughly unchanged at 7.2 TDDs, 3.0 TDDs fewer than normal and the 4th fewest for June 13 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 +16 BCF/day daily natural gas storage injection, less than 1 BCF smaller than Wednesday's build and an ugly 4 BCF bearish versus the 5-year average +12 BCF/day build. By tonight, projected Realtime natural gas inventories will top 2180 BCF while the storage deficit versus the 5-year average will contract to -209 BCF. The year-over-year surplus will finally top +200 BCF by late this morning. Click HERE for more on today's projected injection and Realtime natural gas inventories. Look for gas demand to fall further on Friday with a +17 BCF/day daily injection as the West moderates while the East remains unseasonably cool. However, right now, it looks as though Friday will be peak bearishness with demand set to begin slowly rising this weekend into next week.