March 16, 2017

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EIA Projected To Announce Moderately Bearish -58 BCF Natural Gas Withdrawal In Today's Storage Report For March 4-10; Gas Demand Begins To Dip As Plains Moderates, But Remains Well-Above Average; Crude Oil Rebounds After Inventories Drop Following Large Decline In Imports

6:00 AM EDT, Thursday, March 16, 2017
Natural gas bit halved Tuesday's losses on Wednesday as the commodity rose 4 cents or 1.5% to close at $2.98/MMBTU ahead of today's EIA Storage Report. Gas demand likely peaked yesterday with an impressive -29 BCF storage withdrawal--more than 8 times the 5-year average--as an airmass more typical of January or February dominated the East. Thanks to the strong demand, the estimated natural gas storage surplus declined to +285 BCF versus the 5-year average, down 115 BCF over the past 6 days after the surplus peaked at +400 BCF last Thursday. As a result, the natural gas overvaluation versus its Fair Price based on current inventories alone fell to 2.2% overnight even with yesterday's rally, down from an over 8% overvaluation this time last week. Further, the long-term undervaluation stands at 3.3% versus the 8-month Average Fair Price. These two pieces of data suggest that natural gas will likely find support in the $2.90-$3.00/MMBTU range and should help establish a price floor. With temperatures expected to moderate, I expect further upside to be limited as well especially with inventories likely to finish the heating season with a modest surplus, thus favoring a period of rangebound trading that should benefit by long position via a short stake in the 3x leveraged ETF DGAZ.

Meanwhile, in its weekly Petroleum Report for March 4-10, the EIA announced on Wednesday that crude oil inventories fell by 0.5 MMbbls, in line with Tuesday's API forecast of a 0.5 MMbbl draw. The storage drawdown was more than 4 BCF bullish versus the 5-year average +3.6 MMbbl/day and, as mentioned yesterday, was only the second weekly decline in inventories for the March 4-10 period in the full 32 year history of EIA storage data. The withdrawal was driven by a sharp decline in imports which fell 800,000 barrels/day or 9.8% last week to 7.4 MMbbl/day. Imports have now trailed year-ago levels for three out the last four weeks after spending most of the winter up versus last year suggesting that perhaps OPEC's production curtailments are finally starting to have a measurable impact on domestic supply/demand balance. This data is shown in the Figure to the right. On the other hand, domestic oil production continued its slow, steady march higher with weekly supply climbing 21,000 barrels per day to 9.11 MMbbls/day, now up 41,000 barrels/day year-over-year. With the storage withdrawal, crude oil inventories fell from record highs to 528.2 MMbbls while the storage surplus versus the 5-year average dropped to 142.1 MMbbls. Inventories are still 36 MMbbls higher year-over-year. Over the last month, weekly builds and draws have averaged 1.54 MMbbls/week tight versus the 5-year average as the market shows perhaps some early signs of trying to normalize. At this rate, inventories could fall to a year-over-year storage deficit by late-August, although the storage surplus versus the 5-year average looks to remain above +100 MMbbls for the foreseeable future.

In the wake of the EIA's Report, crude oil rose $1.14 or 2.4% to settle at $48.86/barrel, snapping a 7-day losing streak. Immediately following the Report, I covered my entire short position in the 3x leveraged ETF UWT to lock in around a 20% gain. While I may have been too trigger happy, the rare withdrawal coupled with a sharp decline in imports was sufficiently concerning to drive me to protect profits in a highly volatile ETF. Even with OPEC support, inventories will be facing a strong headwind in the form of rising domestic production as the storage surplus attempts to contract. However, with oil breaking below $50/barrel, I expect the growth in domestic drilling rigs to slow or stop in coming weeks. I now have no position in oil and have no near-term plans to go now.

See my Crude Oil Inventories Page HERE for the latest storage data and projection.

The EIA will release its weekly Natural Gas Storage Report for March 4-10 this morning at 10:30 AM EDT. I am projecting a preliminary -58 BCF weekly storage withdrawal, which would be 27 BCF smaller than the 5-year average but 49 BCF larger than last year's anemic -9 BCF draw. As the Figure to the right shows, a -58 BCF withdrawal would be the 3rd most bearish withdrawal in the past 5 years, ahead of 2012's -53 BCF and 2016's -9 BCF draws. The 5-year maximum withdrawal is -132 BCF from 2014's Polar Vortex-infused winter. Over the full 22 year period for which EIA storage data is available, a -58 BCF withdrawal would be the 8th most bearish.

The bearishness of the draw was driven primarily by milder-than-average temperatures, which rose about a half degree week-over-week to a mean nationwide population-weighted temperature of 50.2F, nearly 7F warmer than average. Withdrawals started the week strong as arctic air dominated the Northeast on Saturday, March 4, with a bullish -19 BCF daily withdrawal, 7 BCF larger than the 5-year average draw. However, temperatures rapidly warmed nationwide, particularly across the Plains with readings as much as 30F warmer than average by mid-week, with daily draws of -1-2 BCF/day on Tuesday and Wednesday. While temperatures began cooling to finish the week, this weekend's arctic airmass did not begin an aggressive move southwards until Friday afternoon, leading to a -15 BCF daily draw. The week's draw was also hurt by an abrupt decline in feedgas deliveries to the Sabine Pass LNG plant, likely due to temporary maintenance as feedgas has since recovered. Deliveries dropped as low as 0.8 BCF/day on Wednesday--1.5 BCF/day below the late February highs--and while they rebounded back above 1.0 BCF/day to finish the week, total deliveries on the week were just 7.9 BCF, down 1.5 BCF from the previous week and down more than 7 BCF from recent highs. See more on LNG exports HERE.

Should a -58 BCF withdrawal verify, natural gas inventories will fall to 2237 BCF while the storage surplus versus the 5-year average will rise to +390 BCF or +21%. This is the largest surplus since August 2016 and represents a more than 450 BCF growth in the surplus since late December when inventories were at a nearly -80 BCF storage deficit. Fortunately for natural gas bulls, this will likely represent a near-term peak as the surplus will be nearly cut in half over the next month should current projections verify. See more on this week's projected withdrawal on my Natural Gas Weekly Storage Page HERE.

Barring a much larger or smaller draw than expected, this week's report will be a yawner compared to the fireworks expected with next week's data that will likely show a record bullish draw. As a result, I expect this week's data is largely priced in already and investors are already looking ahead. It would likely take a storage withdrawal of larger than -65 BCF to be considered bullish versus expectations and drive natural gas above $3.00/MMBTU on its own. Likewise, with the natural gas overvaluation collapsing, I expect it would take a withdrawal of smaller than -52 BCF to drive natural gas back down to $2.90/MMBTU, the lower end of the developing trading range. A withdrawal between -52 BCF and -65 BCF will be viewed as neutral with prices equally likely to rise or fall depending on the whims of traders and other variables.

Check back at 10:30 AM EDT on my Current Natural Gas Inventories Page HERE for the official EIA number.

After daily withdrawals peaked at -28 BCF/day yesterday, natural gas demand will slowly begin to pull back today as temperatures moderate, but remain well below average. It will be a bitterly cold morning with hard freeze warnings as far south as central Florida. The low temperature in Gainesville--the home of the University of Florida--will fall as low as 25F this morning, 25F colder than average, threatening the regions orange crop. High temperatures in the Southeast will rebound in the afternoon to the 50s and 60s, still around 15F colder than average. The Mid-Atlantic and Northeast will remain locked in the arctic chill with highs in the 30s along the coast and 20s inland, 10F to 20F colder than average. However, a pattern shift will begin to evolve across the Great Plains as the warmth across the West over the past few days begins to shift east. Across the Midwest from Minnesota to Iowa to Illinois, highs will climb 10F day-over-day into the mid-30s, around 5F warmer than average. Further west, highs across the central Plains will shoot higher into the upper 70s from west Texas as far north as South Dakota, nearly 30F warmer than normal. As a result, the forecast mean population-weighted nationwide temperature will nearly 3F day-over-day. Nonetheless, the major population centers of the East will remain well-below average and, at 43.4F, the mean nationwide temperature will still be a bullish 5.8F colder than average. Based on this outlook, I am projecting a -21 BCF daily natural gas storage withdrawal, down more than 7 BCF from yesterday, but still a massive 18 BCF larger than the 5-year average -3 BCF/day. At this rate, the storage surplus versus the 5-year average will drop to less than +270 BCF today, down 130 BCF in just 7 days. See more on today's projected daily withdrawal and live intraday storage data HERE. For the week ending tomorrow, March 17, I continue to project an exceptionally bullish -160 BCF storage withdrawal, a massive 138 BCF larger than the 5-year average and 172 BCF bullish versus last year's +12 BCF build.

In other news, thanks to the arctic entrenchment across the East, natural gas powerburn (gas burned for electricity generation) has surged this week, climbing to 24.4 BCF yesterday. It was the first time this month that powerburn topped 2016 levels as so far this month I calculate that Powerburn is trailing year ago levels by an average of 2.4 BCF/day (21.6 BCF vs 24.0 BCF). Daily powerburn statistics are shown in the Figure to the right. This week's rally in Powerburn has been due not to a rising marketshare for natural gas but rather to an increased electricity demand on account of the arctic outbreak. Total daily electricity usage yesterday climbed to 11,244 GWh which was 12% higher year-over-year. On the other hand, marketshare of natural gas yesterday was just 25.6%, down 9 percentage points year-over-year and down more than 2 percentage points since peaking at 27% on February 27, when natural gas was 30 cents cheaper and more competitive with other fuels such as coal. As a result, as temperatures moderate overt he next few days, I expect Powerburn to again retreat well-below 2016 levels. Powerburn plays a limited role in the natural gas picture presently, but its importance will increase during the shoulder season and summer cooling season and could become a liability should it continue to trail 2016 levels by current margins. See more on natural gas Powerburn HERE.