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September 19, 2019

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Oil Pulls Back Again After The EIA Announces First Inventory Build In A Month & Saudi Output Rebounds; EIA Projected To Announce Neutral Natural Gas Inventory Build In Today's Report; Oil Worth A Nibble As Undervaluation Rises While Natural Gas Remains Long-Term Overvalued After Short Squeeze


6:00 AM EDT, Thursday, September 19, 2019
In its weekly Petroleum Status Report for September 7-13, the EIA announced Wednesday morning that crude oil inventories rose by +1.0 MMbbls. This was close to the EIA's expectation for a +0.6 MMbbl build, but was the first weekly injection in a month and was 3.4 MMbbls bearish versus the 5-year average -2.4 MMbbl draw. With the build, crude oil inventories rose to 417.1 MMbbls, while the fresh storage deficit versus the 5-year average was cut in half to just -3.3 MMbbls. The year-over-year surplus, meanwhile, rose by around 3 MMbbls to +23.0 MMbbls. The bearishness of the build was driven largely by a sharp drop in refinery demand. Inputs tumbled by 0.8 MMbbls or 4.5% from the previous week to just 16.7 MMbbls/day, the lowest since May 24 and down 0.7 MMbbls/day from 2018, as shown in the Figure to the right. Also on the demand side, exports were near steady week-over-week at 3.2 MMbbls/day, down 0.1 MMbbls/day, but are still up a robust 0.8 MMbbls/day from 2018. On the supply side, crude oil imports slumped 0.33 MMbbls/day from a week earlier, yet are down a steep 1.0 MMbbls/day or 12.1% lower compared to 2018, as they have been throughout the summer. Finally, calculated crude oil production held flat at 12.4 MMbbls/day, up 1.4 MMbbls/day or +12.7%.


Click HERE for more on this week's EIA storage data.


The combination of a lackluster Petroleum Status Report--especially compared to some of the big EIA-reported storage draws in recent weeks--coupled with Saudi Reports that 50% of the oil production disrupted by Saturday's missile attack had been restored, led to another disappointing day in the oil sector. Following Tuesday's sharp 5.7% pullback in the wake of Monday's record-setting nearly 15% gain, WTI fell $1.23 or 2.1% to settle at $58.11/barrel. Brent shed another 95 cents to $63.60/barrel. I feel that such a pullback following the huge spike was both inevitable and necessary--and it was for this reason that I took profits on half of my DWT short position before beginning to leg back into the trade on Tuesday. With Saudi Arabia exporting just 0.45 MMbbls/day to the US last week, and less than 0.3 MMbbls/day the week before, the impact of the attacks will not be directly felt much in the United Stats. What is more important, in my opinion, is the ongoing supply/demand tightness which, even after this week's bearish build, is averaging 1.8 MMbbls/week tight versus the 5-year average. According to my Fair Price Model, WTI is at a steep 9% discount versus its Fair Price of $64.14/barrel based on current inventories alone. This comes after that undervaluation had dropped under 3% during Monday's spike. Moreover, this Fair Price rises to $65/barrel by early October and $68/barrel by early 2018 as I expect the storage deficit versus the 5-year average to grow heading into the end of the year. Additionally, despite rebounding Saudi production, the entire region is a powder keg of instability and I feel that a risk premium will be attached to the commodity going forwards. For this reason, I am maintaining my $70/barrel WTI price target and will look to add to my short DWT position (providing long exposure) on any dips.


Meanwhile, the natural gas rally showed more signs of running out of steam on Wednesday, but managed to avoid selling off. The October 2019 front month contract settled down 1 cent to close at $2.64/MMBTU after challenging $2.70/MMMBTU early in the session. While temperatures will remain hot for the remainder of September--particularly across the South--October is looking to start above-average as well according to my Hybrid Model which, by that time, is bearish for natural gas demand as it will quash early-season heating demand. According to my Fair Price Model, natural gas is essentially right at its Fair Price of $2.64/MMBTU based on current inventories alone, but this Fair Price balloons to over 15% by the middle of the heating season as I expect the storage deficit to continue to contract and likely flip to a surplus. For this reason, I remain relatively aggressively short the commodity via short UGAZ and am targeting a $2.50/MMBTU downside price target.


The EIA will release its weekly Natural Gas Storage Report for September 7-13 this morning at 10:30 AM EDT. For the period, I am projecting a +82 BCF storage injection. Such a build would be right at the 5-year average and 1 BCF smaller than last year's mark. As the Figure to the right shows, it would be the second smallest injection in the last 5 years, but a steep 26 BCF behind the 5-year low +56 BCF from 2016. The neutral injection comes despite natural gas powerburn averaging 37.1 BCF/day, a huge 5.9 BCF/day higher than 2018, thanks to near-record domestic production, rising Canadian imports, and slumping LNG feedgas demand. Should such an injection verify, natural gas inventories would rise to 3101 BCF while the storage deficit versus the 5-year average would hold nearly steady at -77 BCF. Click HERE for more on this week's projected injection.


On the one hand, natural gas has shown impressive resilience this week despite a medium-to-long term temperature outlook that does not look favorable, as well as a year-over-year storage surplus that has topped +400 BCF. This suggests that investors would be willing to overlook a bad miss in today's report. On the other hand, at some point the commodity will likely crack and a larger-than-expected injection could be the catalyst. At this time, I feel that a +85 BCF or larger storage injection would be viewed as bearish versus expectations and could lead to a quick break under $2.60/MMBTU. I feel that a +75 BCF or smaller injection would be considered unequivocally bullish versus expectations and could result in the commodity pushing towards Summer 2019 highs near-term. A reported injection between +75 BCF and +85 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.