May 16, 2019

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Natural Gas Slumps On Cooler June Temperature Outlook While Oil Reverses Early Losses After EIA Reports Better-Than-Expected--But Still Bearish--Inventory Build; EIA Projected To Announce 9th Straight Bearish Natural Gas Storage Injection In Today's Report; Gas Demand To Fall To Weekly Low Today As Seasonal Temperatures Return To The Northeast

6:00 AM EDT, Thursday, May 16, 2019
In its weekly Petroleum Status Report for May 4-10, the EIA announced Wednesday morning that crude oil inventories rose by +5.4 MMbbls. While this was considerably better than the American Petroleum Institute's (API's) Tuesday forecast of a record-setting +8.6 MMbbl build, it was still an ugly 7 MMbbls bearish versus the 5-year average -1.6 MMbbl drawdown. With the build, crude oil inventories rose to 472 MMbbls, the highest since September 15, 2017. The storage surplus versus the 5-year average rose to +15.9 MMbbls while the year-over-year surplus jumped to +39.6 MMbbls.

The bearish build was driven by an abrupt rise in crude oil imports which jumped 0.9 MMbbls/day from the previous week to 7.61 MMbbls/day. This was the highest level since the week ending January 18, 2019. Imports were up 10,000 barrels/day from 2018, the first year-over-year import surplus since February 15. More than a third of the rise in imports came from Iraq, which saw its exports to the US rise by +0.35 MMbbls/day from the previous week to 0.52 MMbbls/day. Saudi Arabia (+0.22 MMbbls/day), Brazil (+0.28 MMbbls/day), and Colombia (+0.19 MMbbls/day) also saw robust weekly gains. Imports from Venezuela remained at 0 MMbbls/day for a second straight week as strict sanctions on the country continue to restrict the country's petroleum industry. Mitigating the jump in demand slightly was domestic production which fell for a second straight week, declining 0.1 MMbbls/day to 12.1 MMbbls/day

On the demand side, exports soared by 1.0 MMbbls/day from a week earlier to 3.35 MMbbls/day, the highest since March 15, as shown in the Figure to the right. However, I do wonder if these were overestimated. By subtracting supply (production & domestic production) and demand (exports + refinery demand), we would have expected a bullish -0.31 MMbbl/day or -2.2 MMbbl/day weekly drawdown. This is a huge +0.84 MMbbl/day correction factor--and a 1.7 MMbbl/day spike from the previous week--suggesting that either imports are underestimated or exports are overestimated. With imports at 5-month highs, it seems unlikely these are still underestimated. Regardless, I would not be surprised if the calculated storage draw (-2.2 MMbbls) and the reported build (+5.4 MMbbls) begin to converge in the coming weeks, resulting in larger-than-expected storage withdrawals.

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

Investors apparently agreed. After falling to near $61/barrel in early-AM electronic trading before reversing sharply higher following the EIA report with WTI settling up 24 cents or 0.4% at $62.02/barrel. Brent rose $71.77/barrel. The commodity likely also benefited from favorable geopolitical headlines with non-essential US personnel ordered out of Iraq due concern over increasingly aggressive behavior from Iran. Sanctions on that country and Venezuela continue to drive optimism capping global supplies. However, it is these geopolitical headlines that concern me as they seem to be acting as a crutch supporting oil despite 2-year high domestic inventories which would ordinarily argue for lower prices. Should the geopolitical concerns subside, robust domestic inventories could once again draw investors' attentions and result in a sell-off. According to my Fair Price model, based on current inventories alone, WTI is currently very appropriately valued, trading at a premium of less than 0.5% over its Fair Price of $61.78/barrel, as shown in the Figure to the right. However, given a loose supply/demand imbalance, this Fair Price falls under $60/barrel in the next month and under $55/barrel by the Autumn. At this time, I do remain cautiously long WTI via short DWT, but I will have a low threshold to flip to net short should WTI prices top $63/barrel near-term.

Meanwhile, the recent rally in natural gas came to a screeching halt on Wednesday as the June 2019 front-month contract tumbled 6 cents or 2.2% to $2.60/MMBTU. While the near-term temperature outlook continues to look favorable with some significant heat likely to impact the Southeast over Memorial Day Weekend that will drive strong early-season cooling demand, the reliable ECMWF ENS model continues to forecast below-average temperatures for at the first week of June. At this time, I remain cautiously short the sector via short UGAZ with a downside price target of $2.55/MMBTU. With domestic production flattening and LNG feedgas demand rising, I will consider flipping to long under this threshold.

My Oil & Natural Gas Portfolio rose to a new 2019 year-to-date high on Wednesday, rising +0.3% to push 2019 year-to-date gains to +14.0% through the first 94 trading days of the year, or +37.5% annualized. I made no trades on Wednesday and am comfortable with my current holdings. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for May 4-10 this morning at 10:30 AM EDT. I am projecting a +103 BCF storage injection. Such a build would be a modest 14 BCF bearish versus the 5-year average and nearly flat versus last year's injection. As the Figure to the right shows, though bearish, it would be the third smallest injection in the last 5 years, but would trail 2017 (+61 BCF) and 2016 (+66 BCF) by considerable margins. The bearishness of the build was driven by seasonally cool temperatures countered somewhat by an early-week drop in domestic production. Additionally, LNG feedgas demand held near all-time highs throughout the week in the 5.3-5.5 BCF/day range for a weekly total of 37.9 BCF, a new all-time high. These elements resulted in my projection pealing back from as high as +113 BCF earlier in the week down to its current level. Should a +103 BCF injection verify, natural gas inventories would rise to 1650 BCF while the storage deficit versus the 5-year average would contract to -289 BCF. The year-over-year surplus would hold flat at +128 BCF. Click HERE for more on this week's projected injection.

With natural gas bulls and bears seemingly battling over the $2.60/MMBTU with offsetting near-term bullish and bearish influences, today's reported injection could tip the scales towards one camp or the other. I feel that a reported injection over +105 BCF will be viewed as unequivocally bearish versus expectations and consistent with a looser-than-anticipated balance, pushing prices under $2.60/MMTBU and back towards the recent lows. On the other hand, a reported injection under +100 BCF, while still bearish versus the 5-year average, would suggest a tighter-than-expected supply/demand balance and could fuel a push back towards $2.65/MMBTU near-term. A reported injection between +100 BCF and +105 BCF would be neutral versus expectations with prices equally likely to rally or pull back.

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 fall to a weekly low today as seasonally mild temperatures dominate the major demand centers of the Northeast, suppressing both late-season heating demand and early-season cooling demand. Highs will reach the mid-to-upper 70s in Washington, DC, Philadelphia, and New York City while Boston climbs into the mid-60s, all within 5F or normal. The largest above-average anomalies will be found across the central Plains with Omaha, NE potentially topping 90F, Des Moines the upper 80s, and even Minneapolis the lower 80s, all 15F warmer-than-normal, though relatively low population densities in this part of the nation will limit the heat's impact on total demand. Overall, the forecast mean population-weighted nationwide temperature today will warm 3.2F from Wednesday to 67.9F, a new 2019 high and 2.1F warmer-than-normal. Total Degree Days will fall to 6.0 TDDs, 0.9 TDDs fewer than normal and the single fewest for May 16 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-cyle pipeline data, I am projecting a +18 BCF/day daily natural gas storage injection, 2 BCF larger than Wednesday's injection and nearly 6 BCF bearish versus the 5-year average +13 BCF/day. By tonight, projected Realtime natural gas inventories will reach 1736 BCF while the storage deficit versus the 5-year average contracts to 275 BCF. Click HERE for more on today's projected storage injection and Realtime natural gas inventories.