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April 19, 2018

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EIA Projected To Announce Bullish -21 BCF Natural Gas Storage Withdrawal In Today's Report; Record Withdrawal Now Likely For April 14-20, Driving Storage Deficit Above -500 BCF And Topping January's Peak; Oil Eclipses $48/barrel For The First Time Since 2014 On Bullish Crude Inventory Drawdown


6:00 AM EDT, Thursday, April 19, 2018
In its weekly Petroleum Status Report, the EIA announced Wednesday morning that crude oil inventories declined by -1.0 MMbbls during the week of April 7-13. This was on target with Tuesday's API forecast, a modest 3.6 MMbbls bullish versus the 5-year average +2.6 MMbbl build, and a welcome return to bullish withdrawals following the previous week's surprise +3.3 MMbbl build speedbump. The drawdown was driven by a 720,000 barrel/day week-over-week decline in crude oil imports to 7.93 MMbbls/day and a 540,000 barrel/day rebound in exports to 1.75 MMbbl/day, reversing the previous week's mismatch. With the draw, crude oil inventories fell to 427.6 MMbbls. The year-over-year deficit held steady at 104.7 MMbbls while the deficit versus the 5-year average grew to -15.5 MMbbls. This is the lowest 5-year storage deficit since August 8, 2008, when WTI was trading at just over $115/barrel. Of course, this is a somewhat misleading statistic as 5-year averages were much lower that year and current inventories would actually be at a +130 MMbbl surplus if we were using 2008 5-year averages in this year's calculation. Additionally, the EIA also announced that gasoline inventories declined by -2.9 MMbbls (5-year average: -0.3 MMbbls) while distillate stocks fell by -3.1 MMbbls (5-year average: -0.5 MMbbls), both modestly bullish versus their respective 5-year averages. It should go without saying that domestic production set another record high last week, climbing 15,000 barrels/day to 10.54 MMbbls/day, up 1.288 MMbbls/day year-over-year.


While the overall report was quite bullish, I was somewhat concerned about the lackluster rise in refinery demand, the primary source of crude oil demand in the US. Inputs actually fell by 7,000 barrels/day last week to 16.95/MMBTU and are only up 5,000 barrel/day year-over-year, the smallest year-over-year gain since October 2017. As the Figure to the right shows, demand has been consistently higher year-over-year over the past 6 months, but over the past month as demand normally begins to ramp up ahead of the summer driving season, refinery inputs have only sluggishly increased, rapidly narrowing gains versus 2017. This leaves export demand and highly volatile imports as the primary buffers blunting the impact of record US production and maintaining inventories at a storage deficit. It is unclear why demand has not picked up recently, but it is possible that more expensive crude oil is curbing demand, which could ultimately cap prices. However, the EIA did announce that demand for refined gasoline itself topped 9.857 MMbbls/day, which is the strongest level ever seen in April--and higher than is often seen in the peak months of June-August--although this number has previously been inflated. Regardless, it does suggest that refinery inputs will probably need to pick up during the remainder of April to accommodate demand as we enter the driving season. While fundamentals are still in place to take WTI oil to my near-term price target of $70/barrel, should demand remain sluggish, the price may struggle to move much higher than that unless demand picks up or imports drop.


Following the EIA data, crude oil prices jumped, topping $68/barrel for the first time since November 26, 2014, rallying $1.95 or 2.9% to settle at $68.47/barrel. Brent oil climbed $1.90 to close at $73.48/barrel, also a new 4-year high. Prices were also bolstered by unconfirmed reports that Saudi Arabia was looking for prices in the $80-$100/barrel range ahead of this summer's Saudi Aramco IPO. Natural gas, meanwhile, was unable to hold onto early-session gains, finishing up less than a penny at $2.74/MMBTU ahead of today's EIA Storage Report. The commodity remains stuck in the mud, unable to take advantage of a highly favorable temperature pattern throughout April thanks to the (perceived) drag of record domestic production. My Oil & Natural Gas Portfolio climbed +1.7% on Wednesday to push gains since the portfolio's inception on May 1, 2017 to +49.1%, a new all-time high. The portfolio is now on pace to top +50% before its 1-year anniversary. Year-to-date gains through the first 74 trading days of 2018 are at +13.9%, or +47.4% annualized. I made two trades on Thursday with a focus on risk management and freeing up cash to push into another trade later this week or early next week. 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 for April 7-13 this morning at 10:30 AM EDT. In what is typically the second week of the storage injection season, I am projecting a -23 BCF inventory drawdown, a massive 61 BCF bullish versus the 5-year average +38 BCF injection. The draw was driven by record-setting cold across the Midwest and Ohio Valley during the first three days of the storage week with daily draws exceeding -12 BCF/day on Saturday and Sunday, April 7 and 8. Late in the week, record warmth built northward across the southern Plains and East leading to the first sizable daily injections of the year, but it was too little, too late. A -23 BCF storage withdrawal would be the only draw in the past 5 years, as shown in the Figure to the right, and only one of seven in the full 24 year period of record. It would be 27 BCF bullish versus the smallest injection since 2013, a +4 BCF build in 2016, and 97 BCF bullish versus the largest injection, an ugly +74 BCF build in 2015. Should a -23 BCF withdrawal verify, natural gas inventories would drop to 1312 BCF, although I estimate that storage levels bottomed out around 1294 BCF intra-week before storage injections on Thursday and Friday. The storage deficit versus the 5-year average would climb to -436 BCF or -25% while the year-over-year deficit would roar higher to -795 BCF or -38%. Click HERE for more on this week's projected withdrawal.


While the exceptionally bullish projection is likely already priced in to what traders feel is a fair price, what investors will be eyeing today is the departure from the analyst consensus which, similar to my projection, is generally in the -20 BCF to -30 BCF range. A smaller-than-expected draw would confirm the loosening trend seen in 4 out of the last 5 weeks, raising fears that record production will cast a significantly bearish influence this summer even with the enormous storage deficit, while a larger-than-expected draw would at least temporarily assuage these concerns. I project that it will take a reported draw of over -30 BCF to be considered unequivocally bullish with prices likely to perhaps finally break out of their 10-week trading range and top $2.80/MMBTU. On the other hand, a reported withdrawal of under -20 BCF would be considered a bearish disappointment with prices likely to break back down under $2.70/MMBTU. A reported draw between -20 BCF and -30 BCF would be neutral with prices equally likely to rally or pullback. But unless the report is exceptionally bullish or bearish, I feel it is unlikely that this week's report will break natural gas out of its increasingly narrow trading range. Overall, I feel that upside potential outweighs downside risk heading into this report.


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. Keep an eye on production numbers as an decline or signs of stabilization could be viewed as a bullish catalyst and trigger a rally.


Natural gas inventories will hold nearly flat today with yet another small storage withdrawal expected. Temperatures will remain unseasonably chilly across the upper Midwest, Ohio Valley, and into the Northeast today with readings more consistent with late March than late April. In the wake of a storm that dumped a half foot of snow in nearby Madison, WI, Chicago will struggle to reach 45F today, around 15F colder than normal. Further east, Pittsburgh will only reach the lower 40s while Buffalo, NY may not clear the upper 30s, each around 20F colder-than-normal. The Megalopolis will be around 10F below-average today, with Philadelphia rising into the upper 50, New York City the mid-50s, and Boston the upper 40s. If you are looking for above-average temperatures, you will be restricted to Florida where Jacksonville could reach the mid-80s (+6F warmer than normal) or the Pacific Northwest where Seattle and Portland will both reach the low 60s, each around 5F above-average. Overall, the forecast mean population-weighted temperature will cool by 0.6F day-over-day to 54.1F today, 4.4F colder-than-normal. Forecast Total Degree Days will rise to 12.4 TDDs, 3.1 TDDs greater than normal and the 5th most for April 19 in the last 37 years since 1981. Click HERE for more on today's temperature and degree day data. Based on this forecast and early-cycle pipeline data, I am projecting a -1 BCF/day natural gas storage withdrawal today versus yesterday's flat +0 BCF, 10 BCF bullish versus the 5-year average +9 BCF/day build. By the end of the day today, natural gas inventories will be near 1310 BCF while the storage deficit versus the 5-year average will have climbed to -485 BCF and will likely top the -486 BCF peak from early January overnight tonight. Click HERE for more on today's projected daily storage draw and Realtime inventories.


Expect yet another daily storage withdrawal on Friday as temperatures cool further across the East, probably on the order of -3 BCF/day. This, however, will likely (finally) be the last daily storage withdrawal of the season. However, it will push my projected weekly storage withdrawal for April 14-20 to an incredible -6 BCF. Such a withdrawal would be a massive 66 BCF bullish versus the 5-year average +62 BCF build and 76 BCF bullish year-over-year. Most importantly, it would be the largest--and only--storage withdrawal for the April 14-20 period in the full 24-year period for which EIA storage data is available, dating back to 1994, as shown in the Figure to the right. The closest thing to a withdrawal we've seen in the past 5 years was a +31 BCF build in 2013. Should such a withdrawal verify, natural gas inventories would fall to 1306 BCF while the storage deficit versus the 5-year average would rise to a new 4-year high of -502 BCF. Truly, it is incredible that natural gas prices have not seen a sustainable rally in the face of such bullish demand over the past few weeks. As a wrong-footed near-term bear, I am not complaining per se, but I certainly am surprised, especially since the large deficit should dramatically reduce supply concerns heading into next Fall, even with record production, and likely bought inventories the cushion they needed to hold over until LNG export projects start coming online late this year and into 2019. During December and early January, such a such a storage deficit bought prices that peaked at over $3.50/MMBTU while this Spring, prices were unable to top $2.80/MMBTU. With milder temperatures likely for the final few days of April and into early May, it would seem that the bulls' chances of a sustained rally may have come and gone. This projection remains preliminary and will be revised further over the next 4-5 days as finalized temperature and pipeline data is integrated into my model. Click HERE for more on this week's projected draw.