February 16, 2017

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EIA Projected To Announce Bearish -122 BCF Natural Gas Withdrawal In Today's Storage Report; Crude Oil Inventories Rise To New Record After EIA reports +9.5 MMbbl Weekly Inventory Build; Natural Gas Demand Poised To Rise For Third Straight Day Today With Still-Bearish -19 BCF Draw Expected

6:00 AM EDT, Thursday, February 16, 2017
Natural gas snapped a 3-day losing streak on Wednesday, but didn't earn any style points in the process, rising just 2 cents or 0.7% to close at $2.93/MMBTU. The commodity had traded as much as 2% higher early in the day's session. The commodity continues to be plagued by temperature forecasts that point to exceptional and record-setting warmth through the final week of February that will likely lead to three consecutive 5-year minimum storage withdrawals, a streak that should begin today.

The EIA will release its weekly Natural Gas Storage Report for the week of February 4-10 this morning at 10:30 AM EDT. I am projecting a -122 BCF weekly storage withdrawal, which would be a bearish 35 BCF smaller than the 5-year average and 15 BCF smaller than last year's -137 BCF draw. As the Figure to the right shows it would also be the smallest weekly withdrawal in the past 5 years, 5 BCF smaller than 2012's -127 BCF draw. In contrast, 2014 saw the largest withdrawal at -239 BCF. The weak draw was drive by much above-average temperatures nationwide with a mean population-weighted weekly temperature of 46.0F, up 4F from the previous week and 5F warmer than average. Daily withdrawals were as strong as -31 BCF on Saturday, February 4, versus the 5-year average daily draw of -22 BCF/day as a modified arctic airmass temporarily boosted demand. Demand rapidly weakened, however, with withdrawals dropping to just -4 BCF on Tuesday, February 7 as nationwide temperatures rose more than 10F above average. Despite withdrawals rebounding to nearly -30 BCF by Thursday, February 9 as a blizzard pounded the Northeast, it was by no means sufficient to prevent the bearish weekly withdrawal.

Should the -122 BCF storage withdrawal verify, natural gas inventories would fall to 2437 BCF while the storage surplus versus the 5-year average would grow to +79 BCF. This would be the highest surplus since December 9. On the other hand, at 2437 BCF, natural gas inventories would drop below last year's season minimum of 2468 BCF reached on March 25, 2016. With more than 8 weeks remaining in this year's withdrawal season, the year-over-year deficit is likely to exceed -500 BCF. See more on this week's projected withdrawal HERE.

Even if today's official EIA withdrawal comes in larger than projected, it is unlikely to have a lasting impact on natural gas as investors remain fixated on the temperature outlook and the even more bearish weekly draws to come. Likewise, with natural gas down 23% from its December highs, it is unlikely that a miss today would be sufficient on its own to bring natural gas too much lower. For this reason, I feel that it would take a withdrawal smaller than -115 BCF to be considered unequivocally bearish to push prices to new 2017 lows and a withdrawal larger than -130 to be considered unequivocally bullish to prompt a sustained rebound. A withdrawal between -115 BCF and -130 BCF would be neutral with prices equally likely to rally or pullback as traders turn their eyes to the rest of February.

Check back at 10:30 AM EDT on my Current Inventories Page for the official EIA report and updated projections.

Natural gas demand will rise for a third straight day today as temperatures across the densely-populated East cool, even as readings rebound across the Plains. In the wake of yet another Nor'Easter that brought a foot of snow to Main and a slushy 1-2 inches to Boston, temperatures will fall 5F-10F day-over-day in the northwesterly flow behind this system. Highs in Boston and New York will only reach the mid-30s today while inland areas will be stuck in the 20s, around 5F colder than average. Temperatures will be near average in the 40s and 50s all the way south to Georgia. Across the central Plains, however, temperatures will stage a warm-up with highs rebounding into the 60s from Colorado to Kansas and Nebraska, 15F-20F warmer than average. Areas across western Texas 2 days removed from 2-4 inches of snow--and 5 days removed from the low-90s--will see temperatures rise back to near average in the low-to-mid 60s. California will see the first in another series of Pacific storms impact the area bringing a minimum of 1-2 inches of rainfall to much of the state, just a teaser of what is to come over the next week. Overall, thanks to cooling across the most densely populated portion of the country, the forecast mean population-weighted nationwide temperature will fall 2 degrees day-over-day today to 44.6F, which is still more than 2 degrees warmer than average. Based on this outlook and early-cycle pipeline data, I am projecting an -18 BCF daily natural gas storage withdrawal, unchanged day-over-day and 5 BCF smaller than the 5-year average. See more on today's intraday storage withdrawal HERE.

Despite milder-than-average temperatures across much of the nation this week, one element of natural gas demand that has rebounded has been powerburn, or gas burned to generate electricity. Powerburn has lagged by 1-3 BCF/day year-over-year due largely to a declining share of natural gas due to fuel switching to coal associated with higher early-winter gas prices as well as increases in installed wind capacity. Throughout January and early February, I calculate that the natural gas share of US utility electricity generation has generally been in the 20%-23% range, even briefly dropping below 20%. This compares to 2016 when the natural gas power share was around 30%. This week, however, the natural gas power share has steadily climbed from 20% over the weekend to an average of 26% yesterday, peaking as high as 28% intraday. As a result, I calculate that powerburn climbed to 1-week highs yesterday north of 24 BCF/day. While this could be a short-term aberration due to increased nuclear outages and weak wind generation, it could also be reflective of sharply lower natural gas prices making the commodity more competitive with coal. While powerburn is a less significant component of demand during the winter when consumption is largely driven by heating demand, if the natural gas power share can remain elevated heading into the springtime and important summer cooling season, this could bode well for the long term health of the commodity. Of course, no level of natural gas power share can compensate for the bludgeoning of record warmth that the nation will experience over the next 10 days. Current generation mix for utility electricity generation is shown in the Figure to the right. See more on natural gas electricity generation and powerburn HERE.

In yesterday's Petroleum Report, the EIA announced that crude oil inventories rose by +9.5 MMbbls to 518.1 MMbbls for the week of February 4-10. This was bearish versus both the 5-year average +2.3 MMbbls and last year's +1.3 MMbbls. In fact, it was the single most bearish inventory build for the February 4-10 timeframe in the last 33 years. The build was in-line with Tuesday's API forecast +9.9 MMbbls. At 518.1 MMbbls, crude oil inventories rose to a new record high, topping the 512.1 MMbbls from April 29, 2016. The storage surplus versus the 5-year average also climbed to a new record at +148.2 MMbbls. With yesterday's build, supply/demand balance has averaged more than 4 MMbbl/week loose versus the 5-year average over the past month. At this rate and with the winter inventory injection season only a third of the way over, crude oil inventories could reach 600 MMbbl as soon as April 28, barring a sudden tightening of the market. As mentioned yesterday, the estimated crude oil working capacity is 620 MMbbls. Adding to the bearishness, the EIA also reported that gasoline inventories rose by +2.9 MMbbls while distillates fell by 0.9 MMbbls, both of which were bearish compared to their respective 5-year averages and analyst projections. See more on crude oil inventories and storage projections HERE.

Despite yesterday's report being for all intents and purposes unequivocally bearish, oil was essentially flat on the day, falling a mere 9 cents or 0.2% (and just 2 cents after the supply data was released) to close at $53.11/barrel. Following the report, I took the somewhat unusual step to close out my small crude oil long position for breakeven and, in the same session, initiate a similarly small short position via a short position in the 3x leveraged ETF UWT. This position is worth just 10% of my target position size, although I will accumulate should prices rally from here. My near term price target for the commodity--barring a sudden tightening of the market--is $50/barrel.