May 17, 2017

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Oil Slumps Afterhours Following API Forecast Of Bearish +0.88 MMbbl Crude Oil Storage Build; Heatwave Across the Northeast Today As Natural Gas Remains Above-Average With +9 BCF Storage Injection Expected

6:00 AM EDT, Wednesday, May 17, 2017
On a day when the NASDAQ closed at an all-time record high, natural gas prices saw their largest daily drop since February 17 as the commodity tumbled 11 cents or 3.6% to settle at $3.23/MMBTU, a 1-week low. The daily loss came despite a reasonably favorable temperature forecast as investors seem to be finally acknowledging the building overvaluation of natural gas, which I estimated as high as 8% versus its 8-Month Average Fair Price before Tuesday's pullback. With the overvaluation still holding near 3.5%, I remain short natural gas, but will have a low threshold to take profits on any further weakness that brings the commodity close to its long-term Fair Value.

Crude oil, on the other hand, snapped a 4-day winning streak as WTI dipped 19 cents or 0.4% to close at $48.66/MMBTU ahead of today's EIA Weekly Petroleum Report. Including yesterday's API inventory forecast--more on this below--oil is now overvalued by a scant 1% based on current inventories which then transitions to a 16% 8-month average undervaluation. I remain long a small position.

The EIA will release its weekly Petroleum Report this morning at 10:30 AM EDT for the week of May 6-12, detailing crude oil, gasoline, and distillate inventories as well as demand, imports, and domestic production. On Tuesday afternoon, the American Petroleum Institute (API) announced that it was forecasting a +0.88 MMbbl storage build. Such an injection would be bearish versus the 5-year average -0.6 MMbbl drawdown and it would be the most bearish build in 9 weeks. As the Figure to the right shows, it would be the second most bearish storage injection in the past 5 years, behind only 2012's +2.1 MMbbl build with each of the other years seeing storage draws. Should the API forecast verify, crude oil inventories would rise to 523.4 MMbbls while the storage surplus versus the 5-year average would increase +113.9 MMbbls, breaking a streak that saw the surplus from +146 MMbbls on March 3 tumble all the way to +112 MMbbls. Despite the modestly bearish weekly forecast build, crude oil supply/demand balance remains a bullish 3.22 MMbbl/week tight versus the 5-year average. The API also announced that refined product inventories would largely offset with gasoline inventories reportedly falling a bullish -1.8 MMbbls (5-year average: -0.9 MMbbls) while distillates rose a bearish +1.8 MMbbls (5-year average: -0.4 MMbbls).

While the crude oil market would remain tight versus the 5-year average over the past month, the API's forecast of a storage build does raise red flags of a loosening market. For months, rising domestic production and lackluster demand have been offset and then some by strong oil exports that have averaged around 0.5 MMbbls/day. Should those begin to weaken, that could lead to a rapidly loosening market. Following the release of the API's numbers, crude oil unsurprisingly fell in excess of 1% to around $48.10/MMBTU. While I remain long crude oil with a short DWT position, I have low confidence in this trade that remains near break-even for me and will have a low threshold to take profits.

Check back at 10:30 AM EDT on my Crude Oil Inventories Page HERE for official EIA storage numbers and updated projections.

Natural gas demand will hold steady today even as temperatures surge across the Northeast. An early season heatwave will be in the works with Washington, DC and Philadelphia all climbing into the low 90s with New York City and Boston rising into the mid-80s, 10F-20F warmer than average regionwide. This will boost cooling demand across a densely-populated region. Elsewhere, temperatures will cool dramatically across the northern Plains and Intermountain West with highs only reaching the upper 50s from Nebraska to the Dakotas into the low elevations of Colorado, Montana, and Idaho. Further west, Salt Lake City will only reach the mid-40s today, 25F colder than average with some AM snow showers possible. However, thanks to the warming trend across the far more populous Northeast, the forecast mean nationwide temperature today will surge by nearly 3F to 72.0F, 6.0F warmer than average. Total Degree Days (TDDs) will be 9.9 TDDs today, a strong 3.0 TDDs greater than average and the single most 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 +9 BCF daily storage injection, 4 BCF bullish versus the 5-year average +13 BCF/day. Should this forecast verify, natural gas inventories will reach 2,400 BCF today, even as the storage surplus falls to +228 MMbbls or +10%, the smallest since February 17. See more on today's daily projection and intraday storage levels.

Over the weekend, natural gas demand held well above average as a Mother's Day storm brought cloudy, rainy weather to the Northeast keeping highs from New York City to Boston in the low 50s. Additionally, highs 10F-20F colder-than-average across much of the Intermountain West bolstered late-season heating demand while a surge of warmth brought temperatures into the low 90s as far north as Minnesota, prompting some early-season cooling demand. Projected daily storage injections ranged from +8 BCF on Saturday to +9 BCF on Sunday, well-below the 5-year average +13 BCF/day. Natural gas demand will dip slightly to open the week as temperatures remain below average across New England and above-average across the Plains but cool across the Desert Southwest suppressing cooling demand. Highs will moderate some across the Northeast with Boston and New York City both rising into the mid-60s, still around 5F cooler than average. Highs today will be 5F-10F warmer than average across most of the Southeast and Great Plains with highs in the 90s across the Deep South from central Texas to Jackson, Ms and Birmingham, Al while much of the Plains will see mid-80s from St Louis to Des Moines to Omaha. Across the Desert Southeast, Phoenix, Az will only reach the mid-80s, 10F colder than average while the major cities of California will only be in the mid-60s to lower 70s from Los Angeles to Fresno. Overall, the forecast mean population-weighted temperature today will rise 1.3F day-over-day to 66.4F, 0.8F warmer than-average. Total Degree Days (TDDs) will reach 7.6 TDDs today, 0.7 TDDs larger than normal. See more on today's temperature outlook HERE. Based on this forecast and early-cycle temperature data, I am projecting a +9 BCF daily storage injection today, up less than 1 BCF day-over-day and 4 BCF smaller than the 5-year average +13 BCF/day. See more on today's projected injection and intraday storage levels HERE.