May 17, 2018

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WTI & Brent Oil Rise To New 3-Year Highs After EIA Reports Larger-Than-Expected Inventory Drawdowns As Exports Rise To Record Highs; EIA Projected To Announce First Triple-Digit Build Of 2018 In Today's Storage Report; Gas Demand To Slide Today Thanks To Rain-Cooled East As Realtime Inventories Top 1600 BCF, But Bullish Weekly Build Still Expected

6:00 AM EDT, Thursday, May 17, 2018
In its weekly Petroleum Status Report for May 5-11, the EIA announced on Wednesday morning that crude oil inventories fell by -1.4 MMbbls. This was much smaller than Tuesday's API forecast of a +4.9 MMbbl build and very close to the 5-year average -1.3 MMbbl draw. As a result, crude oil inventories fell to 432.4 MMbbls while the storage deficit versus the 5-year average held steady -10.0 MMbbls while the year-over-year deficit continued a steady contraction, falling to a still-impressive -88.4 MMbbls.

The larger-than-expected inventory drawdown was driven largely by crude oil exports which rose to a new record 2.57 MMbbls/day last week, up 0.69 MMbbls/day from the previous week and a massive 1.48 MMbbls/day or +136% year-over-year, as shown in the Figure to the right. The large gains in exports have been driven by an exceptionally favorable Brent-WTI price spread which averaged comfortably over $6/barrel last week and closed Wednesday at a new multi-year high of $7.79/barrel. It is encouraging to see exports break through the 2.5 MMbbl/day threshold as US export capacity is somewhat unclear even as it will be up to this relatively new source of demand to keep up with the steady growth in domestic production, which tacked on another 22,000 barrels/day last week to average 10.72 MMbbls/day last week, up 1.418 MMbbls/day or 15% year-over-year and a new all-time high. If oil supply/demand balance is going to remain tight, exports will likely play a crucial role. However, it is worth noting that some analysts had exports considerably lower last week, below 2.0 MMbbls/day, based on tanker tracking, which could also explain the significant discrepancy between the API's forecast and the observed EIA numbers.

Nonetheless, the storage drawdown was overall bullish, especially after accounting for refined product draws with gasoline stocks falling an impressive -3.8 MMbbls. With the summer driving season kicking into gear over the next few weeks, I expect to see rising inventory withdrawals, provided that refinery input finally begins its seasonal increase, exports remain strong and imports remain weak. For this reason, I expect WTI to remain above $70/barrel and would not be surprised to see it challenge $75/barrel, especially if there is new geopolitical turmoil and inventories get a strong early-season draw. The one thing that I feel is not sustainable, however, is the Brent-WTI spread which is approaching $8/barrel, nearly triple its four-year average. I expect either WTI to spring higher and start catching up with Brent which will struggle to top $80/barrel without another catalyst (most likely), or Brent to pull back should geopolitical turmoil settle down and begin closing the gap as WTI holds firm above $70/barrel.

Click HERE for more on crude oil and refined product inventories, supply, and demand data.

Following the EIA's report, WTI oil recovered most of its early-session losses but still spent much of the day in the red before a last-minute rally sprung the commodity higher by 18 cents or 0.3% on the day to settle at $71.49/barrel, a new 3.5 year high. Brent oil, on the other hand, had no such trouble and finished the session up a comfortable 85 cents or 1.1% at $79.28/barrel, also a 3.5 year high, driving the spread to $7.79/barrel as discussed above. Natural gas, meanwhile, pulled back after breaking out of its trading range earlier in the week. Ahead of today's EIA Storage Report, natural gas fell 2 cents or 0.7% to settle at $2.82/MMBTU. The commodity reached a new 1-month high on Tuesday of $2.84/MMBTU, the highest since April 18, as strong powerburn amidst an early-season heatwave bolstered demand. My Oil & Natural Gas Portfolio rose +0.2% on the day, also thanks to a late-session rally, to push 2018 year-to-date gains back to +13.5%, or +36.3% through the first 94 trading days of 2018. These gains were driven largely by my equities positions, previously a liability and now an asset. This pushed gains back to within 1% of all-time highs. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

The EIA will release its weekly Natural Gas Storage Report this morning at 10:30 AM EDT. I am projecting a +104 BCF storage injection, which would be 17 BCF bearish versus the 5-year average and 40 BCF larger than last year's injection. It would be the first triple digit build since July 2017 and only the second since the summer of 2015 as there were no >+100 BCF weekly injections in 2016. Such an injection would be the second largest for the May 5-11 period in the last 5 years, behind only 2014's +106 BCF injection. The bearish build was driven by the combination of near-record domestic production and generally seasonal temperatures without anomalously cool air to drive late-season heating demand or early-season heat to drive powerburn demand. Overall, mean nationwide population-weighed nationwide temperatures averaged 68.2F last week, a modest 4.4F warmer-than-normal, but still not warm enough. Despite the triple digit build and the fact that it is above the 5-year average, the 17 BCF differential just isn't enough. Should inventories average 17 BCF/week bearish versus the 5-year average each week of the injection season, the 5-year average would only contract by 408 BCF leaving storage levels 100 BCF below the 5-year average heading into the withdrawal season. Regardless, should a +104 BCF verify, natural gas inventories would rise to 1536 BCF while the storage deficit versus the 5-year average would contract to -503 BCF. Click HERE for more on last week's projected storage injection.

While the temperature outlook has trended increasingly bullish over the past few days, natural gas is trading near multi-month highs, which will put some pressure on today's report to deliver the goods. If we have learned anything over the past few months it is that natural gas is only looking for an excuse to pull back once it reaches the top of its trading range. I expect a reported withdrawal over +108 BCF to be viewed as a bearish disappointment, suggestive of a loosening market, and could drive the commodity back down to $2.75/MMBTU. However, any single-digit injection under +100 BCF would likely be viewed as a bullish surprise, even it is still bearish versus the 5-year average, and could put upward pressure on the commodity to reach my near-term price target of $3.00/MMBTU. A reported withdrawal between +100 BCF and +108 BCF would be neutral with prices equally likely to rally or pull back. In addition to the magnitude of the injection, I also expect investors will be very closely monitoring this afternoon's EIA Weekly Update in which production data is released. Over the past 5 weeks, US production has been stubbornly flat near 80 BCF/day, which has been somewhat surprising as most analysts had expected it to continue rising steadily. Should production remain flat, this would be yet another bullish driver and could compensate for a disappointing injection, and vice-versa.

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 slightly today as temperatures continue to cool along the Eastern Seaboard. Major demand centers from Washington, DC to New York City will be seasonally cool today in the upper 60s to lower 70s--0F-5F below-average--as a stalled frontal boundary brings waves of showers and thunderstorms to the area. This airmass will be countered somewhat by building warmth across the Plains and Midwest. Most of Texas will reach the lower 90s while areas as far north as the Dakotas will reach the mid-80s, generally 5F-10F warmer than normal. This includes Dallas with a forecast high of 90F (normal: 83F), Little Rock 87F (normal: 81F), and Minneapolis 80F (normal: 70F). Overall the forecast mean population-weighed nationwide temperature will be nearly steady day-over-day at 70.3F, still 4.2F warmer-than-normal. Total Degree Days will fall to 7.0 TDDs, 0.1 TDDs above-average but still the 13th fewest for May 17 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 +14 BCF/day daily natural gas storage injection, less than 1 BCF larger than yesterday, a 1-week low, and less than 2 BCF bearish versus the 5-year average +13 BCF/day. By this afternoon, I project that Realtime natural gas inventories will top 1600 BCF while the storage deficit versus the 5-year average holds stubbornly near -507 BCF. Click HERE for more on today's daily storage projection and Realtime natural gas inventories.

Natural gas demand will likely rebound on Friday to wrap up the week as heat builds across the Deep South with a +11 BCF/day daily build expected. It will be a strong end to a week in which I am projecting a return to a bullish weekly build thanks to consistently warmer-than-average temperatures especially across the East that drove very strong early-week powerburn demand. For the week of May 12-18, I am projecting a preliminary +83 BCF storage injection, 6 BCF smaller than the 5-year average +89 BCF build. As the Figure to the right shows, such a build would be the third smallest in the last 5 years, behind only +72 BCF and +74 BCF injections from 2016 and 2017, respectively. And neither of those two years, of course, was starting from a -500 BCF deficit. As I've said before, any below-average storage injection this summer is a huge victory for the bulls. Should a +83 BCF build verify, natural gas inventories would rise to 1619 BCF while the storage deficit versus the 5-year average would edge higher to -509 BCF or -24%. The year-over-year deficit, meanwhile, would contract only slightly to -814 BCF or -33%. This remains a preliminary projection and will be revised over the next 5 days as finalized temperature and pipeline data is integrated into my model. Click HERE for more on this week's projected build. The EIA will release its official storage injection numbers for the week next Thursday, May 24 at 10:30 AM EDT.