EIA Forecast To Announce Modestly Bearish +48 BCF Weekly Storage Injection In Today's Inventory Report; Gas Demand To Fall Today As Northeast Temperatures Rise; Oil Plunges Nearly 4% To 3-Week Low Despite Bullish Storage Draw After Surprise Gasoline Inventory Build & Continued Domestic Production Gains
6:00 AM EDT, Thursday, April 20, 2017
Natural gas rebounded from early-week losses on Wednesday, climbing 4 cents or 1.3% to settle at $3.19/MMBTU ahead of today's EIA Storage Report. Thanks to some post-2:30 PM selling, the popular natural gas ETF, UNG, underperformed on the day, rising just 0.9%. The commodity has been under some pressure recently as forecasts for near-to-above average temperatures and an ongoing overvaluation versus its Fair Price had worked to suppress investor appetite.
Crude oil, meanwhile, suffered its worst daily loss in 6 weeks, plunging $1.97 or 3.8% to $50.44/barrel to a nearly 3-week low following the EIA's Petroleum Report. In the report, the EIA announced that crude oil inventories fell by -1.1 MMbbls, larger than the API's -0.8 MMbbl forecast and quite bullish versus the 5-year average +3.4 MMbbl build for the week. However, the EIA also announced a surprise +1.5 MMbbl gasoline storage build, unusual for this time of year when driving demand is beginning to increase. This, coupled with yet another rise in domestic production (by 17,000 barrels/day to 9.25 MMbbls/day, now up 300,000 barrels/day year-over-year), cancelled out the crude oil inventory draw down and triggered some selling. However, I believe that the strongly bearish response to the report was exaggerated and was likely influenced by overall poor market sentiment with the Dow falling 119 points and near-expiration volatility with the May 2017 contract expiring at the close of trading today. Indeed, over the past month, crude oil builds or drawdowns have averaged a bullish 3.9 MMbbls/week tight versus the 5-year average, helping to drive the storage surplus versus the 5-year average down to +126.8 MMbbls, the lowest since December 9, 2017. As a result, the crude oil overvaluation versus current inventories alone according to my Fair Price Model has been cut by a third to just 17% with the commodity projected to settle into an undervalued state by late May should current market conditions persist. Over the full 8-month period for which storage projections are available, the commodity is trading at an average 14% undervaluation. I continue to hold a small crude oil long but, after yesterday's performance, I'm not thrilled with it, although the position is holding onto a small 5% gain, and may consider closing in the near term.
See more on crude oil inventories and more data on my Crude Oil Inventories Page HERE.
The EIA will release its weekly Natural Gas Storage Report for the week of April 8-14 this morning at 10:30 AM EDT. I am projecting a +48 BCF storage injection for the week, which would be 13 BCF larger than the 5-year average and a bearish 42 BCF larger than last year's bullish +6 BCF storage injection, which was the smallest in the last 5-years. A +48 BCF injection would be the second largest in the last 5 years behind only 2015's disastrous +78 BCF build, as shown in the Figure in the right. The above-average storage injection was driven by a mean nationwide average weekly temperature of 60.5F, the warmest week since October 29-November 4 and 3F warmer than average. LNG feedgas demand to Sabine Pass did not significantly influence the week's demand as the 15.64 BCF in weekly feedgas was essentially unchanged from the previous week.
Should a +48 BCF storage injection verify, natural gas inventories would rise to 2109 BCF while the storage surplus would climb slightly to +276 BCF or +15%. The year-over-year storage deficit would fall sharply to -374 BCF, the smallest since March 10. See more on this week's projected injection my Weekly Natural Gas Page HERE.
Natural gas continues chop around with largely horizontal trading over the past week and I don't expect the results of today's Report to change this trend. I expect that a storage injection larger than +55 BCF will be viewed as unequivocally bearish with prices likely to pullback towards the $3.10/MMBTU levels while a build of less than +40 BCF will be viewed as unequivocally bullish with prices pushing towards new highs north of $3.30/MMBTU in the near-term. A weekly injection between +40 BCF and +55 BCF would be neutral with prices equally likely to rise or pullback. With the commodity still upwards of 7% overvalued versus its 8-month Fair Price, I expect it will be difficult for natural gas to maintain substantial gains at this time barring a change in fundamentals. For this reason, I continue to hold a short position via short UGAZ which I plan to continue to hold.
Check back at 10:30 AM EDT for the EIA's official storage injection on my Current Natural Gas Inventories Page HERE.
Natural gas demand will fall today as temperatures once again warm across the densely-populated Northeast. Highs today will rise into the 80s in Richmond, VA, the mid-70s from Washington, DC to Baltimore, and the mid-60s from Philadelphia to Boston, all 10F-15F warmer day-over-day and 5F-10F warmer than normal. Highs from the Southeast to Ohio Valley will be similarly milder than average. This warming trend will be partially countered by a 5F-10F cooldown across the northern Midwest with Minneapolis lucky to see 50F today--10F colder than normal. Across the western half of the nation, temperatures today will generally be within 5F of average. Overall, the forecast mean population-weighted nationwide temperature today will rise more than 2F day-over-day to 65.1F, nearly 6F warmer than average. Total Degree Days (TDDs) will fall 0.5 day-over-day to just 7.5 TDDs today, 1.4 below average and the 12th fewest for the date in the last 37 years, indicating a weak temperature-driven component to natural gas demand. See more on today's temperature and degree day forecast HERE. Based on this outlook and early cycle pipeline data, I am projecting a modestly bearish +9 BCF daily storage injection, just under 1 BCF larger than yesterday and 1 BCF larger than the 5-year average +8 BCF/day.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.