July 20, 2017

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Crude Oil Rises To 6-Week High After EIA Reports That Inventories Fell To A New 6-Month Low; EIA Projected To Announce Bullish +31 BCF Natural Gas Storage Injection In Today's Storage Report As Prices Hover Near 6-Week Highs; Gas Demand Rises As Nation Set To Record Warmest Day Of 2017 Today

6:00 AM EDT, Thursday, July 20, 2017
Crude oil rose for a second straight day after the EIA reported a much larger crude oil inventory drawdown than expected, rising 72 cents or 1.6% to settle at a new 6-week high of $47.12/barrel. Since falling as low as $42.54/barrel on June 21, oil has staged a nearly 11% rally over the past 3 weeks as positive rumors from OPEC and a continued decline in US inventories have emboldened the bulls.

In its weekly petroleum report on Wednesday morning covering the week of July 8-14, the EIA announced that crude oil inventories fell by -4.7 MMbbls, much larger than Tuesday's API forecast of a +1.6 MMbbl build and comfortably bullish versus the 5-year average -2.9 MMbbl drawdown. With the draw, crude oil storage levels slid to 490.6 MMbbls, the lowest since January 20. Since inventories peaked at 535.5 MMbbls on March 31, crude oil inventories have fallen by 45 MMbbls and have dropped in 13 out of the last 15 weeks. The storage surplus versus the 5-year average dropped to +100.4 MMbbls, the lowest that it has been in nearly a year while the year-over-year deficit is now nearly flat at a mere 1.8 MMbbls. Over the past month, crude oil inventories have averaged a strong 1.4 MMbbls/week tight versus the 5-year average. At this rate, inventories will flip to a year-over-year deficit by next week which could grow as high as 16 MMbbls by the end of 2017 while the surplus versus the 5-year average could drop under 75 MMbbls by the beginning of 2018. Observed & projected oil inventories are shown in the Figure to the right.

See more on the latest crude oil inventories HERE.

Adding to the bullishness of the report, the EIA announced that gasoline inventories slid by a strong -4.5 MMbbls (5-year average +0.52 MMbbls) and distillates fell by -2.2 MMbbls (5-year average +1.7 MMbbls). Both gasoline and distillates are now at a year-over-year deficit, although each remains above its 5-year average by 5% and 13%, respectively. Gasoline inventories, in particular, are on a roll with stocks falling over 10 MMbbls in the past 5 weeks alone. Overall, total petroleum inventories--which includes crude oil, gasoline, and distillates--tumbled by 11.5 MMbbls, leaving the 5-year average of -0.7 MMbbls in the dust. It was the second time in the past 3 weeks that total petroleum inventories have fallen by more than 10 MMbbls week-over-week, during which time the surplus versus the 5-year average has fallen from +151 MMbbls to +128 MMbbls as of this week.

See more on gasoline and distillate inventories HERE.

The only significant blemish in the EIA's report was news that estimated crude oil domestic production continues to rise, climbing another 32,000 barrels/day last week to 9.43 MMbbls. Production is now up 935,000 barrels/day or 11% year-over-year and is within 170,000 barrels/day of a new all-time high, with the Baker Hughes rig count at just a fraction of its 2014 peak.

See more on domestic crude oil production HERE.

Overall, this week's storage report was undeniably bullish, and really just another in a series of bullish storage reports dating back to April. Inventories as well as the storage surplus versus the 5-year average have steadily declined, even in the face of rising domestic production. Further, over the past month, refined product storage levels, particularly gasoline, have begun to fall as well, during a time of year when stores typically rise. Even with the recent rally in crude oil, the declining storage surplus and tight market leave crude oil steeply undervalued according to my Fair Price model. This undervaluation stands at 12.5% based on current inventories alone and 16.5% averaged over the next 8 months based on long term storage projections. For this reason, I continue to hold a long position in crude oil. However, I remain deeply concerned about the relentless rise in domestic production (even though it is an estimate and could ultimately be revised lower), especially as the rig count has continued to rise. Additional rallies will likely only increase the threat of further rises in production as drilling economics become more favorable. For this reason, my oil long stake is among my smallest positions. My near term price target for the commodity is $50/barrel, at which time I may consider taking profits.

Natural gas, meanwhile, finished the day down 2 cents or 0.7%, ahead of today's EIA Storage Report, a healthy breather after the commodity had risen to a 7-week high the day before. The EIA will release its weekly Natural Gas Storage Report for July 8-14 this morning at 10:30 AM EDT. I am projecting a +31 BCF, an exceptionally bullish 28 BCF bullish versus the 5-year average +59 BCF and 7 BCF bullish versus last year's build. As the Figure to the right shows, it would be the second-smallest injection in the last 5 years, just behind 2012's +28 BCF build. By contrast, the injection would be nearly 70 BCF smaller than 2014's +99 BCF build. The bullish injection was driven by above-average temperatures across much of the eastern half of the nation last week, particularly across the Plains, Mid-Atlantic, and Southeast. The mean nationwide population-weighted temperature last week averaged 79.0F, a 2017 high and nearly 2F warmer than average. As a result of the heat, Natural Gas Powerburn averaged 33.2 BCF/day last week, also a new 2017 high. The projection also got a bullish boost from natural gas production which, based on a preliminary analysis dropped by around 0.5 BCF/day on the week. Should a +31 BCF injection verify, natural gas inventories would rise to 2976 BCF while the storage surplus versus the 5-year average would drop sharply to +146 BCF, the lowest since February 10 when it was +87 BCF. See more on this projection on my Weekly Inventories Page HERE.

Following natural gas' rally over the past two weeks, the commodity is now approaching its Fair Price, undervalued by a small 2% based on both observed and 8-month projected inventories. Nonetheless, the temperature forecast remains favorable in the near-to-medium term with blazing heat expected across the Heartland for the remainder of this. For this reason, it is somewhat unclear whether natural gas is heading into today's report from a position of strength or weakness. Overall, I do feel that the commodity is somewhat susceptible to a pullback should today's number miss while it will take a truly spectacular build to drive prices much higher near-term. I expect that an injection over +33 BCF will be viewed as bearish with prices likely to at least a temporarily pullback, although I expect any such correction to be relatively small and probably short-lived. I expect that an injection of +25 BCF or smaller will be viewed as unequivocally bullish with prices likely to push towards $3.15/MMBTU. A reported injection between +25 BCF and +33 BCF will be neutral with prices equally likely to rise or pullback.

Check back at 10:30 AM EDT for the official EIA storage injection 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 likely rise to a weekly--and summer 2017--high today as brutal heat stretches from the central Plains to the I-95 corridor. As the figure to the right shows, Excessive Heat Warnings stretch from central Kansas to Illinois and then to Philadelphia while heat advisories cover parts of 14 states from the Louisiana Gulf Coast to northern Iowa and east to New York City. High temperatures will be at or above average across essentially all areas east of the Rockies today with the largest anomalies across New England with Boston expected to reach the low-90s today, 14F warmer than normal. New York City will feel the heat as well with a forecast high today of 96F, 12F hotter than normal. Philadelphia and its Excessive Heat Warning is expected to reach 98F with heat indices over 100F-105F. Further west, triple digit heat is likely to reach as far north as South Dakota, 10F-15F warmer than average, with major demand centers Chicago, St Louis, and Kansas City all climbing into the 90s. Parts of South Dakota, Nebraska, and Iowa will likely see warmer highs today than typical hot spot Phoenix, Az, which is "only" forecast to reach 102F.

Overall, the forecast mean population-weighted nationwide temperature will rise to 81.7F today, 1.3F warmer than yesterday and a whopping 4.0F warmer than average, a new 2017 high. Total Degree Days will rise as well to 17.1 TDDs, 2.7 TDDs larger than normal and the second most for July 20 behind only the ongoing heatwave of 2011. See more on today's temperature and degree day outlook HERE. Based on this forecast and early cycle pipeline data, I am projecting an exceptionally bullish +2 BCF/day daily natural gas storage injection, nearly 2 BCF smaller than yesterday and 5 BCF bullish versus the 5-year average +7 BCF/day. I expect that natural gas powerburn will once again exceed 40 BCF/day today. See more on today's daily storage projection as well as intraday inventory levels HERE.