July 18, 2019

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Oil Declines Despite Larger-Than-Expected Crude Draw After The EIA Reports Big Refined Product Builds; EIA Projected To Announce Neutral +63 BCF Natural Gas Storage Injection In Today's Report; Gas Demand To Hold Steady As Heartland Heat Builds, But East Coast Cools;It's Hard Not To Be Near-Term Bearish On Natural Gas But Steep Long-Term Discount Favors The Bulls

6:00 AM EDT, Thursday, July 18, 2019
In its weekly Petroleum Status report for July 5-12, the EIA announced Wednesday morning that crude oil inventories fell by -3.1 MMbbls. This was larger than Tuesday's American Petroleum Institute expectation of a -1.4 MMbbl draw and was slightly bullish versus the 5-year average -2.7 MMbbl draw. However, the decline in storage was less than a third the previous week's -9.5 MMbbl draw. The impact of individual components of supply and demand were likely muddled by the late-week influence from Tropical Storm Barry with drops in imports, exports, refinery demand and production offsetting eachother. A -0.3 MMbbl/day week-over-week decline in production to 12.0 MMbbls/day was partially offset by a -0.2 MMbbl/day decline in refinery demand. Imports slumped -0.5 MMbbls/day to 6.8 MMbbls/day--down a massive 2.2 MMbbls/day year-over-year--while exports dropped by an identical -0.5 MMbbls/day to 2.5 MMbbls/day as Barry interrupted shipping traffic into and out of Gulf ports. In fact, all of these components nearly perfectly offset each other from the previous week. What then explains the significant drop in the reported inventory drawdown? Answer: the EIA adjustment factor. This is the metric that the EIA uses to square the difference between the reported draw and the draw predicted by summing the individual components of supply and demand. Last week, this adjustment factor flipped negative to -0.47 MMbbls/day, meaning that the draw predicted by supply/demand elements was smaller than that reported by the EIA, suggesting that demand was overestimated or supply was underestimated. This week, that adjustment factor flipped back positive to +0.52 MMbbls/day, suggesting the opposite, that imports or production were overestimated or exports or refinery demand was underestimated. Summing individual supply/demand elements would predict a -0.97 MMbbl/day daily draw or -6.8 MMbbl/week, double that reported by the EIA and only a small drop from the previous week. Thus, I would not be surprised to see the adjustment factor flip back negative in the weeks to come, resulting in a big draw. With the -3.1 MMbbl decline, crude oil inventories fell to 455.9 MMbbls--the lowest since April 12--while the storage surplus versus the 5-year average dipped to +22.8 MMbbls. With another bullish draw, the crude oil supply/demand balance remains rather tight. As a result, I project that large draws are likely to continue for the rest of the summer with inventories falling to near 400 MMbbls by October, as shown in the Figure to the right. This would result in the storage surplus versus the 5-year average flipping to a deficit by September and the year-over-year surplus flipping to a deficit by October.

While the EIA's crude oil inventory numbers could be considered slightly bullish, its refined product numbers could not, and that is what doomed the report. The agency reported a massive +5.7 MMbbl distillate build, 5.0 MMbbls bearish versus the 5-year average, but in-line with API expectations. However, gasoline stocks rose by +3.6 MMbbls, much higher than both the API's -0.5 MMbbl draw and the 5-year average -1.3 MMbbl draw. With the builds, distillates rose to 136.2 MMbbls--up more than 10 MMbbls in the last 3 weeks alone--while gasoline storage rose to 232.8 MMbbls, shrinking a long-standing year-over-year deficit to a mere -3.0 MMbbls.

Click HERE for more on this week's oil and refined product inventories as well as supply/demand data.

While the EIA's refined product inventories were admittedly quite disappointing, the otherwise solid -3.1 MMbbl crude oil inventory draw in other weeks would have perhaps allowed investor response to the Report to coast along. However, with Secretary of State Mike Pompeo diffusing some of the tension with Iran the day before, investors were just looking for an excuse to sell. And sell they did. The front-month WTI contract slid 84 cents or 1.5% to settle at $56.78/barrel, following the previous session's 3.3% sell-off. Brent slipped 69 cents to $63.66/barrel. Personally, I feel that the sell-off was exaggerated. According to my Fair Price model, WTI is now undervalued by a steep 7.1% versus a Fair Price of $60.94/barrel. And with the market still tight versus the 5-year average over the past 4 weeks, this Fair Price rises to $65/barrel by September and $70/barrel by early 2020. I feel that a sustained rally was never going to be driven by geopolitical tensions but rather by tightening supply/demand. For this reason, I am maintaining my $65/barrel 2019 WTI price target. I was sorely tempted to add to my DWT short position after the EIA report to boost long exposure, but felt that it was better to let the selling run its course. Should WTI drop to $56/barrel, I will likely add 2%-3% short DWT positions at $1-$2/barrel intervals on the way down until I reach a maximum position rise of 12% versus my current 4%.

Meanwhile, ahead of its own EIA Storage Report today, natural gas had a rather tranquil day after Tuesday's 4% selloff. August 2019 gas fell less than a penny to settle at $2.30/MMBTU, down around 7% from the recent intraday high of $2.48/MMBTU from last week. The pullback remains driven by a near-term temperature outlook for the last week of July that has trended markedly cooler with a broad area of unseasonably chilly temperatures expected across the eastern 2/3rds of the nation. As shown in the Figure to the right, the GFS ENS has trended below-average for its 14-day accumulated Gas-Weighted Degree Days while the ECMWF ENS has likewise trended considerably cooler. Therefore, I continue to feel that the sell-off is appropriate, even if the price point is too low. For this reason, while it is hard not to be near-term bearish looking at this forecast, I am prepared to hold onto my long position, allow above-average volatility and associated leverage-induced decay to work its magic on my short 3X natural gas positions, and wait this selling out. My upside price target remains $2.60/MMBTU, though this will likely rely heavily on the August temperature outlook coming in warmer than normal.

My Oil and Natural Gas Portfolio paid the price for the pullback in oil, dropping -0.9% on Wednesday. One week removed form a new 2019 high of more than +15%, year-to-date gains have dropped to +11.8%, or +21.8% annualized. I made no trades on Wednesday. As discussed above, my next trade will likely be to add to my DWT short on a move in WTI under $56/barrel. With oil and natural gas both weak right now, I have zero interest in adding to equity positions, no matter how cheap they may look. Likewise, with my natural gas net long stake now at a robust 11.1% after Tuesday's accumulation, I will likely refrain near-term from adding to this. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for July 5-12 this morning at 10:30 AM EDT. I am projecting a neutral +63 BCF storage injection, right at the 5-year average. This would technically snap an 18 week run of bearish storage reports. It would be the third largest injection for July 5-12 in the last 5 years as shown in the Figure to the right, but thanks to some tiny injections in 2016-2018, this is skewed to the low side and a +63 BCF injection would actually be the 6th smallest injection for the week in the last 25 years. Should a +63 BCF injection verify, natural gas inventories would rise to 2534 BCF while the storage deficit versus the 5-year average would hold flat at -142 BCF. The year-over-year surplus, on the other hand, would rise by +17 BCF to +292 BCF. Click HERE for more on last week's projected injection.

Investors seem to be looking for an excuse to sell and, with this projection straddling neutrality, I feel that risk is biased towards the bears on a miss. I expect that a reported injection of +66 BCF or larger will be viewed as a disappointment versus expectations and would result in natural gas prices dropping to $2.25/MMBTU near-term. On the other hand, I feel that it would take a reported injection of +56 BCF or lower to be viewed as unequivocally bullish versus expectations with prices moving at least temporarily back towards $2.35/MMBTU. A reported build between +56 BCF and +66 BCF would be neutral versus expectations with prices equally likely to rally or pullback.

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 hold steady today as intense heat remains entrenched across the eastern half of the nation. Excessive Heat Warnings and Heat Advisories are up for an impressive 21 states, as shown in the Figure to the right, with several more under Excessive Heat Watches. Highs will reach the mid-to-upper 90s across much of the Central Plains including Des Moines, St Louis, and Oklahoma City, 5F-10F hotter than normal. Further north, Chicago, Milwaukee, and Minneapolis will all reach the lower 90s, around 10F hotter than normal. Across the East, temperatures will fall slightly with New York City only seeing the low 80s (near-normal) and Boston well below-average in the upper 60s with persistent showers. Likewise, Philadelphia and Washington, DC will cool 5F-10F day-over-day, only reaching the upper 80s, near-average for this time of year. As a result of this cooling across the East, today's forecast mean population-weighted nationwide temperature will inch lower by -0.1F to 80.1F, still 2.3F hotter than normal thanks to the intense heat across the Central US. Total Degree Days (TDDs) will hold nearly steady at 15.3 TDDs, 0.9 TDDs greater than normal and the 14th most for July 18 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 +5 BCF/day daily natural gas storage injection, less than 0.5 BCF larger than Wednesday and 1 BCF bullish versus the 5-year average +6 BCF/day build. Powerburn cooling demand tied for 2019 high yesterday at 43 BCF and I expect today's number to be comparable, up 3-4 BCF/day over 2018. LNG feedgas demand looks to fall 0.1 BCF today to 5.2 BCF/day with a recovery in Cove Point flows countered by a drop in Sabine Pass to 2.7 BCF/day, perhaps as part of post-Barry maintenance. Feedgas demand will still be up 2.4 BCF/day versus 2018. By tonight, projected Realtime natural gas inventories will reach 2571 BCF while the storage deficit versus the 5-year average inches higher to -145 BCF. The year-over-year surplus will gain another 2 BCF to +306 BCF. Click HERE for more on today's projected daily injection and Realtime natural gas inventories. Gas demand looks to peak for the foreseeable future on Friday and Saturday at around +4 BCF/day before steady climbing to reach double digit daily builds by around July 27 thanks to the unseasonably chilly airmass previously discussed.