July 13, 2017

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EIA Projected To Announce Slightly Bullish +57 BCF Weekly Natural Gas Storage Injection For July 1-7 In Today's Report; Natural Gas Demand Holds Well Above-Average On East Coast Heat With Projected Storage Surplus To Fall Under +150 BCF This Evening For The First Time Since February

6:00 AM EDT, Thursday, July 13, 2017
Natural gas took a breather Wednesday after 2 straight days of strong gains, pulling back to the tune of 6 cents or 2% and settling back under $3.00/MMBTU at $2.99/MMBTU. The down day was most likely in response to profit-taking following the recent rally since forecasts continue to show above-average temperatures across much of the nation through the last week of July with my storage model now projecting 3 straight bullish sub-+40 BCF weekly injections for the weeks ending July 14, 21, and 28. After the pullback, natural gas is now undervalued by 3.3% based on current inventories alone and by 5.0% averaged over the next 8 months according to my Fair Price Model. While this is not a dramatic undervaluation, at minimum it should limit further downside from current levels and, should the warmer-than-average forecast verify and the natural gas market remain tight, the commodity could easily trade to $3.15/MMBTU in the near-to-medium term.

Crude oil, meanwhile, extended its winning streak this week to three straight days after Wednesday's EIA storage report was in-line with API forecasts, even as production rose to new 2017 highs. For the week of July 1-7, the EIA announced that crude oil stocks fell by -7.5 MMbbls which, while shy of the API's forecast of a -8.1 MMbbl draw, was 3 MMbbls larger than the 5-year average -4.5 MMbbl decline and was the second largest draw for the July 1-7 period in the last 33 years behind only 2013's -9.0 MMbbls. At 495.4 MMbbls, crude oil inventories are below the 500 MMbbl threshold for the first time since January 27, 2017. Storage levels are also now just barely above last year by +4.2 MMbbls. Should this surplus flip to a deficit in coming weeks, it will be the first time in 2 years. On the less bullish side of things, domestic production rose by 59,000 barrels/day to 9.397 MMbbls/day. The 147,000 barrel/day two-week rise in production is the largest since December 30 to January 13 and pushed production to a new 2017 high of 9.397 MMbbl/day, just over 200,000 barrels/day from new all-time highs. It is important to remember that these production numbers are just estimates with final tallies not to be released for July for several months. After the report, crude oil quickly reversed its 2% early-session gains to near break even on the day as investors balked at the large production number before trending back higher on the back of the large draw to finish up 45 cents or 1% to settle at $45.49/barrel, the highest close since July 3. According to my Fair Price model, crude oil is now trading at a large 13% discount to its Fair Price of $52.12/barrel based on current inventories alone which builds to an 18% discount averaged over the next 8 months as inventories appear poised to continue to contract under a tight market. Overall, despite the strong bullish signal from my Fair Price model, I remain only neutral to slightly bullish on the commodity at this time as I, too, am concerned about rising domestic production. So far, the rise in US supply has been mitigated by year-over-year gains in exports, demand, and a decline in imports. However, should supply continue to climb, supply/demand balance could reach a tipping point leading to a regrowth of inventories driven by US production. While I continue to hold a crude oil long position, it is my smallest position at this time. For subscribers, see more on my portfolio holdings and trading discussion HERE. For those thinking about subscribing, please click HERE to learn more.

See more on the latest crude oil and storage projections HERE.

The EIA will release its weekly natural gas storage report for the week of July 1-7 this morning at 10:30 AM EDT. For the week, I am projecting a +57 BCF storage injection, which would be 15 BCF bullish versus the 5-year average +72 BCF. It would also be 3 BCF smaller than last year's +60 BCF injection, which is a rare thing this summer due to last year's incredible market tightness. As the Figure to the right shows, such an injection would be the second smallest in the last 5 years, behind only 2012's +32 BCF injection. It would also be the second smallest in the full 23 year period for which EIA storage data is available dating back to 1994, behind only 2012. It is less than half the 23 year maximum, 2003's ugly +125 BCF injection. Despite cooler temperatures and demand suppression associated with the mid-week 4th of July holiday, natural gas powerburn still averaged a respectable 30.0 BCF/day according to my estimates. Demand was also supported by LNG feedgas demand to Sabine Pass which rose 3 BCF on the week to 14.84 BCF, or 2.1 BCF/day, back to near its multi-month average following shipping disruptions associated with Tropical Storm Cindy 2 weeks ago. Should a +57 BCF injection verify, natural gas inventories would rise to 2945 BCF while the storage surplus versus the 5-year average would dip to +172 BCF, the lowest since February 10. The year-over-year deficit will halt its recent contraction and increase slightly to -289 BCF or -9%. This week's projection does carry increased uncertainty due to the Fourth of July holiday which suppresses industrial and commercial demand to a sometimes unpredictable degree. For more on this week's projected injection, see my Weekly Storage Page HERE.

With natural gas at a <5% undervaluation according to my Fair Price model and some of the bullish pressure being taken out of natural gas' sails with Wednesday's pullback, I am not expecting a huge move on today's storage numbers unless the injection comes in dramatically larger than expected. I expect that a storage injection of under +54 BCF will be viewed as bullish versus expectations with the commodity likely to trade back above $3.00/MMBTU while a storage injection of +62 BCF or higher is likely to be viewed as undoubtedly bearish versus expectations and suggestive of a loosening market with prices likely to pullback further.

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 fall slightly today as cooler temperatures reach the upper Midwest but will remain well above-average as heat persists across the densely-populated Southeast and Mid-Atlantic. Heat advisories are in effect from Norfolk, Va to New York City today including Washington, DC while Philadelphia, PA scored an Excessive Heat Warning where highs are expected to reach the upper 90s with heat indices well over 105F. Highs across this region will be around 10F warmer than average. Readings will remain toasty across the Deep South into the Southern Plains with mid-to-upper 90s from Texas to North Carolina while parts of Oklahoma and Kansas could even reach triple digits, 5F-10F warmer than average. On the other hand, behind a cold front, highs from North Dakota to Wisconsin will only be in the upper 60s to lower 70s, 10F-15F cooler than average and upwards of 25F cooler than just 3 days ago when much of this region was into the 90s. However, with the possible exception of Minneapolis with a forecast high of 73F, this region is rather sparsely-populated and should not play a huge role in the nationwide natural gas demand picture. Nonetheless, the forecast mean population-weighted nationwide temperature today will fall around 0.3F day-over-day to 80.1F, still 2.6F warmer than normal. Total Degree Days will hold near 15.4 TDDs, 1.1 TDDs greater than normal and the third most for July 13 in the last 37 years. See more on today's temperature and degree day outlook HERE. Based on this forecast, I am projecting a very bullish +4 BCF/day daily storage injection for today, just under 1 BCF larger than yesterday, and 4 BCF smaller than the 5-year average +8 BCF/day. I am expecting natural gas powerburn demand to reach 35 BCF/day for a second straight day today. By the end of the day, I project that the natural gas storage surplus versus the 5-year average will have dropped under +150 BCF for the first time since February. See more on today's daily storage projection and intraday inventories HERE.