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February 15, 2017

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New Record High Crude Oil Inventories Possible Today After EIA Forecast To Announce Bearish Weekly Build; Natural Gas Demand Rises With -18 BCF Daily Withdrawal Expected Today; Excessively Warm Temperatures Likely To Drive Near-Record Low Storage Draw Next Week


6:00 AM EDT, Wednesday, February 15, 2017
Natural gas extended its losing streak to three days on Tuesday as the commodity slid another 4 cents or 1.3% to close at $2.91/MMBTU, its lowest close since November 18. The commodity continues to face pressure from Mother Nature with the remainder of February looking excessively mild, especially the week of February 18-24 which looks like a downright scorcher. Ahead of today's EIA Petroleum Report, crude oil chipped away some of Monday's losses, rising 27 cents or 0.5% on Tuesday to settle at $53.20/barrel.

The EIA will release its weekly Petroleum Report this morning at 10:30 AM EDT detailing crude oil and refined product inventories, domestic oil production, imports, and demand for the week of February 4-10. Yesterday afternoon, the American Petroleum Institute (API) announced that it was forecasting a +9.9 MMbbl rise in crude oil inventories for the week. How bearish is this build? Let me count the ways. It will be the sixth straight weekly rise in inventories. Not only would such a build be well above the 5-year average (+2.2 MMbbls) and last year (+1.3 MMbbls), it would be the largest weekly build for the February 4-10 period in the 31 years of EIA reports, handily beating 2015's +6.5 MMbbl build. Further, combined with last week's +13.8 MMbbl rise in inventories, the forecast 2-week +23.7 MMbbl build would be the largest 2-week rise in storage in the past 31 years for any week, by a substantial 3 MMbbl margin. As the Figure to the right shows, with the +20.3 MMbbl build from January 21-February 3 a few weeks back, February 2017 holds 2 of the top 3 positions on this list. I'm not even going to go into the API's refined product forecasts but, needless to say, they're bearish too.


Should the +9.9 MMbbl crude oil build verify, crude oil inventories would rise to 518.5 MMbbls, which would be a new all-time record high, surpassing the 512.1 MMbbls from April 29 of 2016. And for what its worth, between February 10, 2016 and that April peak, crude oil inventories climbed another 42 MMbbls. In 2015, it was another 61 MMbbls. Thus, historically, mid-February does not typically represent a peak for inventories and I expect stocks this year to also climb further over the next few months before refineries finally kick into gear. Not only will absolute inventories reach a new record, but the storage surplus versus the 5-year average will climb to +149 MMbbls, also a new record high, topping the +147 MMbbls from last summer. Should this forecast verify, crude oil supply/demand balance will be averaging 4.0 MMbbls/week loose versus the 5-year average over the past month. Should this trend verify, even accounting for some inevitable tightening, inventories could top 600 MMbbls by late April and approach the estimated working capacity of 620 MMbbls, as shown in Figure to the right. Estimated shell capacity (the theoretical, but unproven maximum) is 716 MMbbls.


A record 2-week inventory build would likely be viewed as bearish at the best of times. But now, with inventories threatening new highs, the rig count rebounding, and domestic production already on the rise, it should spur substantial concern and a suitable correction in oil prices. It has therefore been rather surprising that prices are up around 3% since last week's 2nd highest inventory build on record. Further, after yesterday's API numbers were released, the commodity hardly moved, falling around 15 cents by the early evening. It appears that investors are placing substantial, and perhaps too much faith in OPEC's desire and ability to restore supply/demand balance. While I continue to hold a small long oil position, should the API's forecast today verify, I will likely close this position either flat or for a small profit. Should the commodity somehow rally, I will strongly consider initiating a short position above $54/barrel.


Check back at 10:30 AM EDT on my Crude Oil Page for the official EIA storage build and updated projections.


Natural gas demand will rise slightly today as temperatures temporarily cool across the Ohio Valley and Midwest. Highs will cool around 10F day-over-day in Chicago--with readings falling from the mid-40s to the low-30s--with similar drops in Indianapolis, Cincinnati, and Detroit. Temperatures in these areas will all be near or a few degrees cooler than average today. Highs across the northeast will rise 5F-10F day-over-day today as another storm system moves in. Temperatures across the northern Plains will remain more than 10 degrees warmer than average with above-freezing readings reaching all the way to the Canadian border. In fact, outside of areas immediately adjacent to the Great Lakes, the highest elevations of the Rockies, and extreme northern New England, essentially the entire nation will be above-average today. The third major storm system in a week will impact New England today. However, compared to its predecessors, this one will have even less cold air to work with and the major cities should just rain with heavy snows being relegated to Maine, New Hampshire, and Vermont. However, parts of central Maine that could see upwards a foot of snow over the next 24 hours will see weekly totals from the three storms in excess of 60 inches. Overall, the mean population-weighted nationwide temperature today will be nearly flat day-over-day at 46.8F, around 4.5F warmer than average. Nonetheless, based on this outlook and early cycle pipeline data, I am projecting that today's withdrawal will increase to -18 BCF, 4 BCF larger than yesterday but still 4 BCF smaller than the 5-year average.


While this week's withdrawal, currently projected at -92 BCF will be quite bearish, all eyes remain focused on what promises to be an exceptionally ugly draw next week. My projections continue to shrink and, as of this morning, I am currently projecting a -31 BCF withdrawal for the week of February 18-24, a whopping 101 BCF smaller than the 5-year average. This week alone has the potential to nearly double the current storage surplus which, as of this morning, stands at around +126 BCF on its way to +144 by this Friday. The -33 BCF would be the second smallest for the February 18-24 period in the last 23 years, just shy of the -24 BCF draw from 1995, as the Figure to the right shows. It is worth mentioning that over the past 24 hours, the temperature outlook for the last few days of February has trended somewhat colder. It remains to be seen whether this is a developing trend or just another false flag as we have seen throughout February.