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June 20, 2019

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Oil Unable To Hold Onto Gains Despite All-Around Bullish EIA-Reported Storage Withdrawal While Natural Gas Slumps To New 3-Year Low On July Temperature Concerns; EIA Forecast To Announce 14th Straight Bearish Natural Gas Storage Injection Today


6:00 AM EDT, Thursday, June 20, 2019
In its weekly Petroleum Status Report covering June 8-14, the EIA announced a rare crude oil inventory withdrawal, but ultimately investors seemed to be looking for more. The agency reported that domestic storage fell by -3.1 MMbbls last week, only the second withdrawal in the last six weeks. The draw was considerably larger than Tuesday's American Petroleum Institute (API) forecast of a -0.8 MMbbl draw and was even bullish versus the 5-year average -2.5 MMbbl draw. It was the second largest withdrawal in the last nine weeks dating all the way back to mid-March. As a result, crude oil inventories dropped to 482.4 MMbbls while the storage surplus versus the 5-year average inched lower to +37.0 MMbbls. However, thanks to a year-ago -5.9 MMbbl draw, the surplus versus 2018 continued to grow and now stands at a robust +55.9 MMbbls. Click HERE for the latest EIA-reported crude oil inventories.


The drivers behind the bullish draw were multifactorial and seen across the board. Refinery inputs continued to steadily rise, gaining 0.2 MMbbls/day from the previous week to 17.3 MMbbls/day. However, as shown in the Figure to the right, refinery demand still trails 2018 by a steep 0.4 MMbbls/day. Also on the demand side, exports jumped by 0.3 MMbbls/day to 3.4 MMbbls/day, up a solid 1.1 MMbbls/day year-over-year. Turning to supply, imports dipped by 0.1 MMbbls/day to 7.5 MMbbls/day. While imports are down a solid 0.8 MMbbls/day year-over-year, they are up more than 1.5 MMbbls/day from the recent lows of under 6 MMbbls/day. Finally, domestic production slid for a second straight week, dropping another 0.1 MMbbls/day to 12.2 MMbbls/day, but is still up a robust 1.3 MMbbls/day from a year ago. It is worth remembering that this is a calculated rather than a measured value and is subject to revision. Adding up all of these supply/demand elements would have predicted a -1.02 MMbbl/day or a massive -7.1 MMbl/week inventory drawdown, which would have been the second largest draw on record for the week. This means another large "Adjustment Factor" of 0.58 MMbbls/day, which is the EIA's way of syncing the reported draw (-3.1 MMbbls) and the calculated draw (-7.1 MMbbls). This adjustment factor is essentially unchanged from the previous week. It is worth noting that, were this adjustment factor to collapse and were refinery demand merely to catch up to year-ago levels, the weekly draw would have topped -10 MMbbls. And if imports were to fall towards their April lows, well, welcome short squeeze... Point being, there is potential for much larger withdrawals in the weeks to come.


Despite what I considered to be an all around bullish report--especially given recent standards--oil investors were not impressed. WTI jumped 1% to $54.50/barrel immediately after the report, but could not hold onto these gains. Ultimately, WTI closed down 14 cents or 0.3% to $53.76/barrel while Brent dipped a steeper 32 cents to $61.82/barrel. Given that the European price point fell steeper than the American, this suggests that investors did in fact regard the EIA inventory data with at least some bullishness, but continued fears over a global demand slowdown and, perhaps, fading geopolitical concerns in the Middle East dominated Wednesday trading. Nonetheless, I feel that yesterday's storage data was a considerable step in the right direction for the commodity and maintain that oil is oversold at current prices. This is further supported by my Fair Price Model which, as the Figure to the right, calculates a Fair Price of $59.20/barrel, an undervaluation of 8.5%. However, as the Figure also shows, this Fair Price rapidly declines to under $55/barrel by the end of the summer based on the current underlying supply/demand imbalance which, even after yesterday's bullish data, are still averaging 3.7 MMbbls/week loose versus the 5-year average. However, should yesterday's draw be the beginning of a trend and a tightening of the imbalance, the Fair Price will remain elevated. For this reason, I feel that yesterday's losses were unwarranted and maintain a bullish sentiment with a price target of $60/barrel for WTI. Should the market tighten faster than anticipated, this could even wind up being conservative. I remain aggressively long WTI via short DWT at this time.


On the other hand, natural gas continues to trip over its own feet. On fears of an early-July cooldown hinted at in some of the models, the July 2019 front month contract fell to a fresh 3-year low, sliding 5 cents or 2.2% to $2.28/MMBTU. The GFS ENS, in particular, has been insistent for the past 48 hours or so that, after cooling degree days jump to above-average by early next week that a trough will replace a weak ridge across the Heartland by June 30 or so leading to another stretch of below-average temperatures and above-average natural gas storage injections. Even though I calculate Powerburn topped 36 BCF/day--3 BCF/day higher than a year ago--on Thursday and has been consistently above year-ago levels throughout the summer, investors fret--within reason--that such a cooldown would only pump inventories higher. While true, I continue to feel that bearish sentiment is overwhelming reason right now and that prices have fallen too far, too fast given the fact that inventories remain below the 5-year average and have virtually no threat of reaching all-time highs this autumn, much less challenging storage capacity. Prices are down a steep 23% year-over-year despite inventories being only 200 BCF higher and, according to my Fair Price model, as shown in the Figure to the right, are trading at a steep 18% undervaluation versus a Fair Price of $2.77/MMBTU. It is for these reasons that, despite exceptionally strong bearish sentiment, I am maintaining my long position with an upside price target of $2.60/MMBTU. This is not to say that I expect prices to immediately bounce. With sellers in control it is certainly possible further downside could remain, rational or not.


Of more immediate concern for natural gas investors, however, is today's EIA Storage Report. The EIA will release its weekly storage numbers for June 8-14 this morning at 10:30 AM EDT. I am projecting a +102 BCF injection, 20 BCF larger than the 5-year average and 8 BCF bearish versus last year'sbuild. As shown in the Figure to the right, it would be the second largest injection in the last 5 years for the week, 8 BCF smaller than the +112 BCF build in 2014. It will be the 14th straight bearish injection and the sixth straight triple digit injection, the longest streak since 2014. Should a +104 BCF injection verify, natural gas inventories would rise to 2192 BCF while the storage deficit versus the 5-year average would contract to -210 BCF. Storage would finish the week +197 BCF than this time last year. Click HERE for more on this week's projected storage injection.


With investors singularly focused on the temperature outlook and almost unanimously bearish, it seems unlikely that today's report will trigger a sustainable reversal unless it is exceptionally bullish versus expectations. I expect we would need to see a -95 BCF or smaller withdrawal to be considered unequivocally bullish versus expectations, driving prices back above $2.35/MMBTU near-term. On the other hand, a reported build of +108 BCF or larger would be unequivocally bearish and suggestive of a looser-than-expected market and could drive prices under $2.20/MMBTU. An injection between +95 BCF and +108 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.