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June 15, 2017

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EIA Projected To Announce Slightly Bullish +82 BCF Natural Gas Inventory Build For June 3-9 In Today's Storage Report; Oil Falls To 6-Month Low After EIA Reports Large Gasoline Build; Gas Demand Holds Above-Average Today With +8 BCF Daily Storage Injection; Record-Setting Heatwave Across Southwest This Weekend To Drive Powerburn


6:00 AM EDT, Thursday, June 15, 2017
In its weekly Petroleum Report, the EIA announced on Wednesday that crude oil inventories for the week of June 3-9 declined by -1.7 MMbbls. This was considerably more bullish than Tuesday evening's API forecast of what would have been a record-setting +2.8 MMbbl storage build and it was even around 0.7 MMbbls bullish versus the 5-year average -1.0 MMbbl draw. With the draw, crude oil inventories fell to 511.5 MMbbls and the storage surplus versus the 5-year average fell slightly to +108.6 MMbbls. Inventories remained just above year-ago levels, +10.6 MMbbls. With the withdrawal, crude oil inventories have averaged 0.8 MMbbls tight versus the 5-year average over the past month, which does represent a loosening from the 2-3 MMbbl/week tight average we've seen for the past 6 weeks or so. See more on the latest Crude Oil Inventories HERE.


While the crude oil draw was considerably better than expected and was bullish versus historical data for the period, this, unfortunately for the bulls, was not enough to translate to a bullish Petroleum Report. The EIA also reported that gasoline inventories grew by +2.1 MMbbls, bearish versus both the API forecast +1.8 MMbbls and the 5-year average -0.15 MMbbl draw. Likewise, distillate stocks grew by +0.3 MMbbls week-over-week, bearish versus the API forecast of a -1.5 MMbbl draw and the 5-year average +0.2 MMbbl build. Overall, Total Petroleum Inventories--equal to crude oil plus gasoline plus distillate stocks--increased by +0.7 MMbbls last week, better than the API's +3.1 MMbbl forecast but bearish versus the 5-year average -0.9 MMbbl draw. This data suggests that, despite the drawdown in crude oil, there is just not that much in the way of gasoline or refined product demand to justify refinery inputs. Given that we are in the heart of the summer driving season, this is particularly disheartening for oil bulls.


After a 1-week blip the previous week, domestic oil production resumed its rebound last week, climbing 12,000 barrels per day to 9.33 MMbbls/day, just shy of the 2017 high of 9.34 MMbbls/day set three weeks ago. Domestic production is up a massive 0.614 MMbbls/day or 7% year-over-year. Crude oil imports fell by 0.320 MMbbls/day last week, but remain a bearish 0.84 MMbbls or 11% higher year over year, despite attempts by OPEC to quash the worldwide crude surplus. Total US supply (imports + domestic production) fell by 0.300 MMbbls/day week-over-week, but remain a bearish 1.04 MMbbls/day or 6.4% higher year-over-year. See more on crude oil supply here. Turning to oil demand, refinery inputs inched higher by 30,000 barrels/day last week to 17.26 MMbbls/day which is up 0.96 MMbbls/day year-over-year. However, this doesn't mean too much if distillate and gasoline demand remains soft, which it seems to be given the bearish builds in refined product builds, as discussed above. Crude oil exports rose by 170,000 barrels/day to 0.72 MMbbls/day last week, up 230,000 barrels/day or 47% year-over-year, although exports remain well-below the 52-week highs this spring which have reached 1.3 MMbbls/day. Total demand was up 190,000 barrels week-over-week and 1.19 MMbb/day or 7.1% year-over-year. See more on Crude Oil Demand HERE.


While the crude oil drawdown was encouraging, the report overall, with its weak gasoline and distillate demand, strong imports, and rising domestic production, was undoubtedly net bearish. It did little to assuage investor concern that the previous week's exceptionally bearish EIA report was a 1-week anomaly. Unsurprisingly, crude oil fell following the report, dropping from 1% pre-report to down $1.73/barrel or 3.7% by the end of the day to settle at $44.73/barrel. This is a new 6-month low and the lowest crude has settled since November 14. Immediately following the report, as discussed in yesterday's trading commentary, I immediately halved my long crude oil position, realizing a 13% loss on the small position, but reducing risk. At this juncture, I consider oil to be a somewhat toxic investment, either long or short. There are few fundamental reasons to be long here, but the commodity is quite cheap. According to my Fair Price model, oil is discounted by 8.5% versus its Fair Price based on current inventories alone and by an average of 12% over the full 8-month for which I issue projections (average futures price:$45.50/barrel, average Fair Price: $51.69/barrel). For this reason I am a long term bull, but do not see any near term catalysts for a rebound, besides an oversold technical bounce and cannot recommend instituting an aggressive long position here. Overall, my Oil & Natural Gas portfolio fell an ugly 1.8% on Wednesday, driven by losses in crude oil. This is the lowest that the portfolio has been since May 16, but it remains up a solid 8.8% since May 1 and I am comfortable with my current holdings, having limited losses and mitigated risk. See more HERE or click to subscribe and support the site.


Turning to natural gas, despite an otherwise favorable near- and medium-term temperature forecast, gas slid for a third consecutive day on Wednesday ahead of today's Storage Report, dipping 3 cents or 1.1% to $2.93/MMBTU, the lowest close since March 16. I expect that these losses were in large part due to drag from crude oil and the Fed's interest rate hike, rather than bearishness towards natural gas fundamentals. The EIA will release its weekly natural gas storage report for the week of June 3-9 this morning at 10:30 AM EDT. I am projecting a +82 BCF storage build for the week, which would be a slight 5 BCF bullish versus the 5-year average +87 BCF. However, it would be 14 BCF larger than last year's +68 BCF build. As the Figure to the right shows, it would be the third smallest injection in the past 5 years, behind 2012's +66 BCF injection and last year's build. The slightly bullish injection was driven by a continued relatively tight market in the setting of seasonal temperatures, which averaged 70.8F, 0.6F warmer than the previous week and around 1F cooler-than-average. The rise in demand was driven by powerburn which I estimate averaged 25.9 BCF/day, which was a new 2017 high. See more on Powerburn HERE. Demand was also supported by LNG feedgas to Sabine Pass which, after two softer weeks, returned to near its 3-month baseline last week at 15.5 BCF total deliveries, up nearly 2 BCF week-over-week. See more on LNG feedgas deliveries and tanker movements on my LNG Exports Page HERE.


Should a +82 BCF storage injection verify, natural gas inventories will increase to 2713 BCF. The storage surplus versus the 5-year average will inch lower to +231 BCF or +9%, largely flat over the past month, while the year-over-year storage deficit will continue to contract down to -318 BCF, after exceeding -400 BCF as recently as April 7. With the exception of the upcoming week, I expect that this slow contraction of the year-over-year surplus will be something of a trend thanks to last summer's bullish combination of cheap natural gas prices boosting marginal demand and persistently hotter-than-average temperatures. For more on this week's projected injection, please see my weekly storage page HERE.


Following yesterday's decline, natural gas now sits at a 2.5% undervaluation versus its Fair Price based on current inventories alone and a 4.8% 8-month average undervaluation based on projected inventories. For this reason couple with the favorable temperature pattern, I expect there will be upward pressure on natural gas should today's injection come in smaller than expected. I expect that an injection in the +70s will be viewed as bullish, indicative of a tightening market with prices likely to push back towards $3.00/MMBTU. An injection of larger than +86 BCF would likely be viewed as bearish with prices likely to take out another 3-month low. An injection between +79 BCF and +86 BCF would be neutral with prices equally likely to rally or pullback. At these prices, I am increasingly bullish on natural gas.


Check back at 10:30 AM EDT for the official EIA injection numbers.


Natural gas demand will rise slightly today as increased warmth across the Great Plains, Midwest and Southwest cancel out continued cooling across the Northeast. Highs from St Louis to Kansas City to Des Moines will rise into the low-to-mid 90s today, around 10F warmer than average, while Chicago, Minneapolis, and Milwaukee all reach the upper 80s, 5F-10F above average. Temperatures across the Southwest will begin to warm as well with California's Central Valley seeing 90s from Fresno to Sacramento--5F warmer than average--while Phoenix, Az rises to 107F, 3F hotter than average, but downright mild compared to what the city can expect early next week. Across the densely-populated Northeast, temperatures will be seasonally cool with areas from Richmond to Philadelphia in the low 80s and New York City to Boston only in the mid-70s, 0F-5F cooler than average regionwide. Overall, the forecast population-weighted mean nationwide temperature today will be nearly unchanged at 76.0F, 2.6F warmer than average. Forecast Total Degree Days today will rise slightly to 12.0 TDDs, 1.5 TDDs greater than normal and the 8th most for June 15 in the last 37 years. See more on today's temperature and degree day outlook HERE. Based on this outlook and early-cycle pipeline data, I am projecting a +8 BCF/day daily storage injection, which would be a bullish 4 BCF smaller than the 5-year average +12 BCF/day build. See more on today's projection and intraday inventory levels HERE.


As the East cools back off the big story over the next week will be the brutal and prolonged heat wave that will grip the Desert Southwest. Forecast temperatures in Phoenix, Az will rise to 110F by Friday, the mid-110s by Sunday, and by Monday or Tuesday, potentially reaching 120F. For what its worth, the top 3 warmest temperatures ever recorded in Phoenix are: 122F in 1990, 121F in 1995, and 120F also in 1990. It is certainly possible that Phoenix will challenge these records on multiple days next week. Further, as the Figure to the right shows, this will not be a one-and-done event as >115F temperatures are expected to last nearly the entire week. Further west into the Mojave Desert, even hotter temperatures are likely with Death Valley, Ca approaching 125F. The major cities of California will get involved as well with Fresno, Sacramento, and Redding all seeing triple-digit heat for 3+ days and even the suburbs of San Francisco rising into the 90s. Excessive Heat Watches and Warnings are hoisted for this entire region. While hydroelectric and solar demand typically meets a large portion of electricity demand in this region, I expect that natural gas powerburn across the West will spike next week, countering losses across the East Coast to keep total gas demand well-above average heading into the last week of June.