March 14, 2019

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Crude Oil Reaches 4-Month High After EIA Reports Larger-Than-Expected Inventory Drawdown; Natural Gas Inches Higher, But Gains To Be Curtailed As Balmy Late March & April Loom; EIA Projected To Announce Record-Setting -208 BCF Natural Gas Inventory Withdrawal--But It's All Priced In; First Daily Storage Injection Of 2019 Projected Today

6:00 AM EDT, Thursday, March 14, 2019
In its weekly Petroleum Status Report covering the week of March 2-8, the EIA announced Wednesday morning that crude oil inventories tumbled -3.8 MMbbls. This was a massive 7.8 MMbbls bullish versus the 5-year average +4.0 MMbbl build and was 1.2 MMbbls larger than Tuesday's API -2.6 MMbbl forecast. It was only the fourth draw on record for the March 2-8 period, which is typically the heart of the spring injection season, in the last 35 years since 1983, as well as the largest, topping 2003's -3.2 MMbbl draw. With the withdrawal, crude oil inventories fell to 449.1 MMbbls while the storage surplus versus the 5-year average--which last month was over +30 MMbbls--fell to a mere +8.4 MMbbl. The bullish withdrawal was driven by weak imports which fell 0.26 MMbbls/day last week to average 6.75 MMbbls, the third time in the last 4 weeks that imports have fallen below 7 MMbbls, after having only dropped below this level 3 times previously since July 2015. The drop in imports came despite oil arriving from Saudi Arabia rising to 0.947 MMbbls/day, the highest level since January 18. Instead, small 0.1-0.3 MMbbl/day drops from multiple markets, including Canada, Mexico, Ecuador, and Kuwait contributed. Imports are now a strong 0.84 MMbbl/day lower than this time last year. Still on the supply side, the bulls also benefited from news that domestic oil production dropped 0.1 MMbbls/day last week back down to 12 MMbbls/day, although this is still up a robust 1.62 MMbbls/day year-over-year. On the demand side, exports dropped 0.26 MMbbls/day week-over-week to 2.55 MMbbls/day, still up 1.06 MMbbls/day year-over-year. Crude oil inputs continue to disappoint, averaging 16.02 MMbbls/day last week, flat from the previous week and down 0.35 MMbbls/day.

Thanks to a very bullish start to the refinery maintenance season, weekly crude oil inventory changes have averaged a very bullish 4.4 MMbbls/week tight versus the 5-year average over the past month. Should this supply/demand imbalance hold steady, crude oil inventories could flip to a storage deficit by the first week of April. Even assuming some mild loosening thereafter, storage levels could fall under 425 MMbbls by the first week of May and under 400 MMbbls by the third week of June as the summer driving season kicks into gear, as shown in the Figure to the right.

Click HERE for more on the latest crude oil inventories and supply/demand data.

WTI oil had already gapped up Wednesday morning over $57/barrel, but following the bullish report, gains accelerated and the commodity settled up $1.39 or 2.6% at $58.26/barrel, a fresh 4-year high. Brent oil finished up 88 cents at $67.55/barrel. The commodity has been the beneficiary of a host of bullish news in the past two weeks. In addition to the falling domestic storage surplus, the EIA has reported that actual US production has fallen short of earlier estimates, Saudi Arabia has taken an increasingly aggressive role in cutting exports, and there has been intermittent optimism surrounding a resolution to the US-China trade war that would support global demand. Despite the fresh 4-month highs, oil is still undervalued according to my calculations. Based on my Fair Price Model that compares current inventories to historical price/storage level data, I derive a Fair Price based on current inventories of $62.70/barrel, a 6.8% discount to current prices. And because the supply/demand remain imbalanced in favor of the bulls, I project that this Fair Price will rise to over $65/barrel by late April and could even top $70/barrel over the summer, as shown in the Figure to the right. At this time, I am maintaining my target price of $65/barrel--representing 11.6% upside from current levels--though this may ultimately prove conservative.

Meanwhile, natural gas scrounged up some late-session strength, rising 1.3% to $2.82/MMBTU. In after-hours, the commodity rose even further, topping $2.85/MMBTU. The rally appears to be driven by a slight increase in 14-day forecast gas-weighted degree days (GWDDs) over the last 24 hours after several days of a moderating forecast, as shown in the Figure to the right. However, the long-term CFSv2 and ECMWF-EPS have taken an increasingly bearish stance for the last week of March and much of April, calling for consistently warmer-than-normal temperatures across most of the key population centers across the Northeast, Great Lakes, and Midwest. Should this verify, the market could realize the impact of production at record highs and the absence of both heating and cooling demand, resulting in a series of very bearish storage builds that would quickly cut into the large storage deficit. For this reason, I do not feel that Wednesday's rally will be able to see much follow through. I am maintaining a near-term price target of $2.90/MMBTU, above which I will become an aggressive short-term seller of natural gas.

My Oil & Natural Gas Portfolio continues to take advantage of rising oil prices, climbing +0.6% on Wednesday to push 2019 year-to-date gains to a new high of +9.7% or +49.7% annualized. The Portfolio was led higher by my short DWT position that provides long WTI exposure and which gained +7.6% on Wednesday. The position is worth 6.4% of my holdings and is up +19.4% from my basis. As mentioned previously, my upside price target for the sector is $65/barrel and I have no plans to take anything off the table before this level. Should oil somehow trade back under $56/barrel, I will consider adding to this position to a target level of 10%-12% of my holdings. My natural gas exposure at this time is a rather limited net 3.4% of my holdings with an 8.3% DGAZ short partially offset by a 4.9% UGAZ short. As mentioned above, my price target is $2.90/MMBTU. Above this level, I will likely close out my long trade, most likely by shorting a 10% or so position in UGAZ to push my UGAZ position to 12%-14% of my Portfolio and flipping the portfolio to 5%-7% net short. My largest holding remains my Cheniere Energy (LNG) long, worth 11.1%. This position has been an outperformer as of late and is up +14.7% from my basis. I plan to continue holding until my price target of $75/share is reached. I have yet to make any trades this week, but haven't had to, and have no desire to overtrade in this environment. Click HERE for more on my current Oil & Natural Gas Holdings.

The EIA will release its weekly Natural Gas Storage Report for March 2-8 this morning at 10:30 AM EDT. This week's report will be a doozy. I am projecting a -208 BCF storage withdrawal, a massive 109 BCF bullish versus the 5-year average. Not only will it be the largest withdrawal all-time for the March 2-8 period, as shown in the Figure to the right, it will be the only -200 BCF every recorded during the month of March, with a -198 BCF draw from 2015 just missing out. The massive draw was driven by record cold temperatures across the plains extending all the way to the Gulf Coast. The mean population-weighted nationwide temperature for the week averaged just 39.7F, a massive 7F colder-than-normal. This drove residential/commercial heating demand north of 50 BCF/day and daily draws above -40 BCF/day on at least two days. Should a -208 BCF draw verify, natural gas inventories would fall to 1182 BCF while the storage deficit versus the 5-year average would soar to -573 BCF. Click HERE for more on last week's projected withdrawal.

Unfortunately for the bulls, this massive withdrawal has been long anticipated, likely contributed to the 12% rally over the past 5 weeks, and is already priced in. For this reason, I expect the EIA's official number to have to be considerably higher than my projection in order to fuel a further rally. I feel that the EIA would need to announce a withdrawal of over -215 BCF in order for the report to be viewed as unequivocally bullish versus expectations, fueling a move above my near-term target of $2.90/MMBTU. On the other hand, should the agency announce a draw of under -200 BCF, natural gas prices could fall back towards $2.75/MMBTU in a sell-the-news pullback on a bullish, but disappointing report. A reported draw between -200 BCF and -215 BCF would be neutral versus expectations 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.

Natural gas demand will continue to slump today as unseasonably mild temperatures surge northward ahead of a massive Great Plains blizzard, resulting in the first daily storage injection of 2019. Highs could approach 70F today in Chicago, 24F warmer-than-normal. Indianapolis, IN, Louisville, KY, and St Louis, MO will all see the 70s today as well, each around 20F above-average. Further east, Raleigh, NC could near 80F while the I-95 corridor will see highs in the 60s in Washington, DC and Philadelphia to 50s in New York City and Boston, 5F-15F warmer-than-normal. Colder-than-normal temperatures will be widespread across the West but will be restricted to sparsely populated areas. One day after seeing blizzard conditions, Denver will only reach the upper 30s, 15F colder-than-normal, with comparable readings across much of the 4 Corners Region, Wyoming, Montana, and the western Dakotas. Overall, thanks to the unseasonable warmth across the Great Lakes and East, today's forecast mean population-weighted nationwide temperature will warm 4.2F from Wednesday to 56.3F, a balmy 7.6F warmer-than-normal. Total Degree Days (TDDs) will fall to just 10.2 TDDs, 6.7 TDDs fewer than normal and the 8th fewest for March 14 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 +2 BCF daily natural gas storage injection, the first of the year. Such a build would be 10 BCF bearish versus the 5-year average -8 BCF/day daily draw. By tonight, projected Realtime inventories could reclaim the 1140 BCF level while the storage deficit versus the 5-year average falls sharply to -566 BCF. Click HERE for more on today's projected daily withdrawal and Realtime natural gas inventories. Gas demand will recover tomorrow as colder temperatures overspread the Plains but it won't be enough to counter the late-week collapse in demand. I am now projecting a bearish -46 BCF storage withdrawal for March 9-15, 10 BCF smaller than the 5-year average and 41 BCF smaller than last year's draw. I will have more on this week's projection in Friday's commentary.