April 19, 2017

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EIA Forecast To Announce Fourth Consecutive Bullish Crude Oil Inventory Drawdown In Today's Petroleum Report; Natural Gas Settles At 2-Week Low As Persistently Mild Temperatures Prompt Bearish Storage Injections; Nuclear Reactor Outages Rise To 2017-High Stimulating Substitution Demand

6:00 AM EDT, Wednesday, April 19, 2017
Natural gas extended its early-week losses yesterday, sliding 2 cents or 0.6% to $3.15/MMBTU. The commodity is now down 2.5% over the past two trading days and is at its lowest price since April 3. The recent natural gas pullback has been driven by expectations for bearish storage injections for the next two EIA Inventory Reports as well as a continued overvaluation versus its Fair Price, based both on current and projected inventory levels out to 8 months.

Crude oil also dipped on Tuesday, falling 24 cents or 0.5% to settle at $52.41/barrel ahead of today's EIA Petroleum Report. It was the lowest close since April 7 as investors continue to fret over rising domestic production and uncertainty that OPEC will extend its own production cuts in next month's meeting.

The EIA will release its weekly Petroleum Report this morning at 10:30 AM EDT for the week of April 8-14, 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 -0.840 MMbbl storage drawdown for the week. Such a decline in inventories would be quite bullish versus the 5-year average +3.4 MMbbl build as well as last year's +2.7 MMbbl build. A -0.84 MMbbl draw would be the largest weekly draw in the last 5-years for the April 8-14 period, ahead of 2013's -0.61 MMbbl draw, which was the only other draw during this period, as shown in the Figure to the right. In contrast, 2014saw the most bearish build at a massive +7.2 MMbbls. Should the API's forecast verify, crude oil inventories would dip to 532.6 MMbbls while the storage surplus versus the 5-year average would slide to +127.0 MMbbls. It would be the 4th consecutive weekly decline in the surplus and would be the lowest since the week of December 9, 2016, an indication that the market seems to be tightening.

The API's refined product forecast for today's report is split with gasoline inventories expected to climb a bearish +1.4 MMbbls versus the 5-year average -1.6 MMbbl drawdown while distillates look to drop by a bullish -1.8 MMbbls versus the 5-year average -0.7 MMbbl draw. Overall, Total Petroleum Inventories (crude oil + gasoline + distillates) are forecast to decline by -1.2 MMbbls to 918.5 MMbbls versus the 5-year average build of +1.0 MMbbls. As a result, the Total Petroleum Inventory surplus versus the 5-year average would fall to +161.7 MMbbls, which would be the lowest since December 30, 2017.

Should the API's forecast verify, crude oil supply/demand balance will be averaging a strong 3.8 MMbbls/week tight versus the 5-year average. At this rate, crude oil inventories could enter a year-over-year deficit as soon as the third week of June with the surplus versus the 5-year average falling below +100 MMbbls around the same time. Crude oil is trading at a very steep 26% overvaluation versus its Fair Price based on current inventories alone but, thanks to this newly tight market and expected contraction of the surplus, the overvaluation quickly decays. Should market conditions persist or only slowly loosen back up (assuming a continued rise in domestic production), the overvaluation could flip to an undervaluation by late June or early July. And by early December--8 months from now--this undervaluation could reach as high as 24%. This is shown by the Figure to the right where red bars represent an overvaluation for a storage projection for a given point in time and green bars an undervaluation. Averaging the entire 8-week period, I am projecting that crude oil is trading at an overall 7.8% undervaluation versus its long-term Fair Price. See more on my Crude Oil Fair Price Model HERE. For this reason, I continue to hold a small long position in crude oil via a short stake in the 3x leveraged inverse ETF DWT. However, I, too, share investor concerns about rising domestic production which last week topped 9.23 MMbbls/day to extend year-over-year gains to over 0.250 MMbbls/day. For this reason, I will have a very low threshold to take what looks to be around a 15% profit even though, at present, market fundamentals seem to be modestly favoring the bulls.

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

Turning now to natural gas, demand will hold steady near average levels today as cooling across the northern Plains and Northeast is offset by warmth across the southern Plains and Southeast. High temperatures from Virginia to central New York will drop around 10F day-over-day from the mid-60s to the mid-50s today while readings from the Dakotas to Minnesota and Wisconsin will fall around 5F, also into the 50s. Such highs are around 5F colder than average across both regions. Further south, however, high temperatures today will reach into the low 80s after lows only fell to around 60F this morning as far north as northern Missouri and southern Nebraska, 10F-15F warmer than average. Overall, the forecast mean population-weighted nationwide temperature today is 62.9F, nearly unchanged from yesterday and 4.5F warmer than average. Forecast Total Degree Days (TDDs) today are 8.0, 1.3 TDDs less than normal and the 13th fewest for the date in the last 37 years. See more on today's Temperature and degree day outlook HERE. Based on this forecast and early-cycle pipeline data, I am projecting a +9 BCF daily storage injection, unchanged from yesterday and 1 BCF larger than the 5-year average. See more on today's storage projection and intraday natural gas inventory levels HERE. With 3 days remaining in the storage week, I continue to project a modestly bearish +69 BCF storage injection, 12 BCF larger than the 5-year average.

In other news, nuclear outages jumped over the weekend before pulling back slightly yesterday, contributing to an increase in natural gas substitution demand. As of Tuesday, outages stand at 560 GWh, or 23.5% of US capacity. Outages continue to trail the 5-year average by 51 GWh or 8%, but are up a massive 207 GWh or 59% year-over-year, helping to tighten the market versus last year. This is shown in the Figure to the right. 19 nuclear reactors are shut down completely while a further 11 are only operating at partial capacity ranging from 14% to 95% while the remaining 69 are at 100% capacity. With 560 GWh of nuclear offline, natural gas substitution demand stands at 4.7 BCF/day, 1.73 BCF/day higher than 2016 but still 0.4 BCF/day less than the 5-year average. Through the first four days of the April 15-21 natural gas storage week, weekly substitution demand is up 6.8 BCF over 2016 but 2.6 BCF less than the 5-year average. Despite the gains in nuclear-associated natural gas substitution demand, it is not sufficient to outweigh the combination of year-over-year gains in wind output and persistently milder-than-average temperatures, both of which continue to suppress demand leading to expected modestly bearish storage injections for the next two weeks.