May 15, 2019

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Natural Gas Rises To One-Month High On Stronger Near-Term Demand Outlook While Oil Reverses Monday's Losses On Saudi Oil Attack; EIA Forecast To Announce Exceptionally Bearish Inventory Build In Today's Petroleum Status Report, Driving Inventories To A Nearly 2-Year High; Gas Demand To Fall For Second Straight Day Today

6:00 AM EDT, Wednesday, May 15, 2019
Natural gas continued its strong run of late on Tuesday, rallying another 1.5% to $2.66/MMBTU, the highest close since April 12. Since bottoming at $2.46/MMBTU on April 24, the commodity is up 8.1%. The rally in natural gas continues to be driven by an improved near-term temperature outlook with forecast 14-day total degree days 20% above-normal according to the ECMWF-ENS and more than 25% above-normal according to the GFS-ENS with a trend towards larger departures over the past two days, as shown in the Figure to the right. While the seasonal demand minimum and a very loose supply/demand imbalance means that near-term storage injections will still likely be slightly bearish, projected builds for the net several weeks have drifted closer to their respective 5-year averages--+100 BCF injections rather than +110-120 BCF this time last week. Additionally, the early June temperature forecast according to last night's 46-day ECMWF-EPS forecast has trended warmer, adding cooling degree days across major demand centers of the Southeast. This has driven dip buying. However, while it now appears less likely that prices will fall below $2.50/MMBTU, my sentiment is still cautiously bearish. Inventories are at a nearly +130 BCF year-over-year surplus and prices are down a rather modest 6% from 2018 when they were $2.84/MMBTU. I view this as an absolute price ceiling as the market is still loose year-over-year with this surplus expected to rise further in the weeks to come. Should prices top $2.70/MMBTU, I will add to my fledgling net short position, barring a change in fundamentals. See more on the near- and long-term temperature outlook on my Advanced Modeling Page HERE.

Meanwhile, crude oil bounced back from Monday's weakness as global markets rebounded and Saudi Arabia reported that drones packed with explosives attacked to state-owned oil refineries. WTI rose 74 cents or 1.2% to $61.78/barrel while Brent rose $1.01 to $71.24/barrel, both essentially erasing the previous day's losses. As previously discussed, the sector is caught between opposing geopolitical factions with sanctions on Iran and Venezuela and unrest in the Middle East favoring higher prices and continuing fears over global demand in the wake of a prolonged US-China trade war favoring lower prices. This has resulted in choppy trading with rangebound prices between $60/barrel and $62.50/barrel for the past several weeks. Domestically, it may be up to inventory levels to break the deadlock.

Speaking of which, the EIA will release its weekly Petroleum Status Report for May 4-10 this morning at 10:30 AM EDT. It appears that last week's surprise inventory drawdown may have been a headfake. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting a +8.6 MMbbl build, a massive 10.2 MMbbls bearish versus the 5-year average. This is the largest weekly build on record for the May 4-10 timeframe, easily topping 1997's +6.4 MMbbl build. Should such a rise verify, crude oil inventories would top 475.2 MMbbls, the highest since August 4, 2017. The storage surplus versus the 5-year average would rise to +19.1 MMbbls while the year-over-year surplus would reach 42.9 MMbbls. Additionally, the API is also forecasting bearish builds in refined products with gasoline stocks rising +0.6 MMbbls (5-year average: -1.7 MMbbls) and distillates gaining +2.2 MMbbls (5-year average: -1.8 MMbbls). All told, Total Petroleum Inventories (crude oil + gasoline + distillates) ware forecast to rise +11.4 MMbbls, an exceptionally bearish +16.5 MMbbls versus the 5-year average. For oil bulls, there is not much to like about this outlook. Should the EIA's official numbers mirror the API's, I expect a swift downward response with WTI potentially taking out the $60/barrel near-term, unless something dramatic takes place geopolitically. At this time, I am hoping that this large build is the result of import/export timing mismatch and a large build this week will be countered by large draws in subsequent weeks. For the time being, I am maintaining a tiny 3% long oil position via short DWT and will consider cautiously adding to this long-term position on a move under $60/barrel. Check back after 10:30 AM EDT on my Crude Oil Inventory Page HERE for the official EIA storage numbers.

My Oil & Natural Gas Portfolio erased Monday's losses yesterday, gaining +0.5% to climb back to 2019 highs. The Portfolio is up 13.6% year-to-date, or +37.4% annualized. Leading the way was my new purchase of CHK with 2-day gains topping +8.9%. I made no trades on Tuesday. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand losses will accelerate today as temperatures across the Northeast and Mid-Atlantic rapidly rebound. Two days removed from only limping into the mid-40s, New York City will reach the mid-to-upper 60s today, back to within 5F of normal. The rest of the region will see comparable anomalies with 50s and low 60s inland and low 70s along the I-95 corridor from Philadelphia to Washington, DC. Highs across Texas--the nation's largest natural gas-consuming state will remain seasonably cool 0F-5F below-average, particularly across the southern part of the state, suppressing early-season cooling demand. After an unseasonably chilly April and early May, Spring will finally arrive across the Rockies and northern Plains with highs in the low 80s as far north as the Montana- and North Dakota-Canada borders, 15F warmer-than-normal, albeit across a sparsely-populated area. Overall, today's forecast mean population-weighted nationwide temperature will rise 2.4F from Tuesday to 64.8F today, though this is still 0.8F cooler-than-normal. However, Total Degree Days (TDDs) will fall to 6.3 TDDs, 0.6 TDDs fewer than normal and the 8th fewest for May 15 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, 3 BCF larger than Tuesday's build and 4 BCF bearish versus the 5-year average. By tonight, projected Realtime natural gas inventories will reach 1718 BCF while the storage deficit versus the 5-year average will contract to -283 BCF. The year-over-year surplus will rise by 3 BCF to just under +130 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. Gas demand will fall for a third straight day on Thursday as the Northeast warms further with a projected weekly high +18 BCF/day. For the week of May 11-17, I am projecting a +102 BCF natural gas storage injection, the 10th straight bearish storage injection, but only 14 BCF larger than the 5-year average.