March 21, 2019

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Oil Tops $60/Barrel After Exceptional -9.6 MMbbl EIA-Reported Inventory Drawdown While Natural Gas Retreats On Warming Late-March Outlook; EIA Forecast To Announce Slightly Bearish Gas Withdrawal In Today's Storage Report In Early Glimpse At Shoulder Season Fundamentals; Oil & Natural Gas Portfolio Hits New 2019 High

6:00 AM EDT, Thursday, March 21, 2019
Amidst already high expectations, the EIA surprised all on Wednesday morning in an exceptionally bullish Petroleum Status Report. The agency announced that crude oil inventories plunged by -9.6 MMbbls during the week of March 9-15, 7 MMbbls larger than the -2.6 MMbbl API-forecast draw and an overwhelming 13.4 MMbbls bullish versus the 5-year average +3.8 MMbbl build. As the It was the largest draw for the March 9-15 period on record, tripling the previous record holder, a -3.2 MMbbl draw from 2003 and, as the Figure to the right shows, it was the third largest draw for any week during the month of March in 35 years of data. Withdrawals of any kind during the month of March are unusual as demand typically falls to a seasonal minimum as refineries shut down for maintenance ahead of the summer driving season. With the drawdown, crude oil inventories fell to 439.5 MMbbls--the lowest since November 1--while a long-standing storage surplus versus the 5-year average flipped to a -5.1 MMbbl deficit. Inventories are still up +11.2 MMbbls year-over-year, but that spread, too, is contracting and seems poised to flip to a deficit in the coming weeks.

The exceptionally bullish draw was driven largely by exports which rose by 33% week-over-week to 3.4 MMbbls/day, up 1.8 MMbbls/day year-over-year, as shown in the Figure to the right. Exports are being boosted by a consistently wide WTI-Brent pricing spread which held between $8 and $10 per barrel last week. Imports rose by +0.2 MMbbls/day week-over-week but remained soft at 6.9 MMbbls/day, down 0.15 MMbbls/day year-over-year and under 7.0 MMbbls/day for the fifth week out of the last six as OPEC looks to restrict supply to the US. Additionally, it is particularly impressive that inventories fell so steeply despite refinery demand coming in at an anemic 16.2 MMbbls/day, down a relatively steep 0.58 MMbbls/day from 2018. Domestic production again inched back up to a record high, rising 0.1 MMbbls/day from the previous week to 12.1 MMbbls/day, up 1.7 MMbbls/day year-over-year. It is worth noting that there is a larger-than-normal discrepancy between the EIA-reported storage withdrawal and the supply/demand numbers. If you add up total supply (+19.0 MMbbls/day) and demand (-19.6 MMbbls/day), you would arrive at a daily draw of just under -0.6 MMbbls or -3.9 MMbbls/week, still extremely bullish but 5.7 MMbbls or 0.8 MMbbls/day off from EIA's reported -9.6 MMbbl draw. It is likely that either exports are being over-reported and/or imports are being under-reported and I would not be surprised to see this correct itself over the next week, resulting in a larger build in next Wednesday's Status report.

Click HERE for more on the latest EIA-reported crude oil inventories.

It is perhaps for this reason that the investor response was somewhat muted given what was an overwhelmingly bullish storage report. Nonetheless, the May 2019 new front-month WTI contract still rose 94 cents or 1.6% to settle at $60.23, settling above $60/barrel for the first time since November 9. The commodity is now up a massive +42% in just 3 months since falling to $42.53/barrel in late December. Nonetheless, the commodity is still significantly undervalued according to my Fair Price model, trading at a 7% discount versus a Fair Price of $64.35/barrel based on current inventories alone. And because the domestic crude oil supply/demand imbalance is averaging a remarkable 8.2 MMbbls/week tight versus the 5-year average over the past month, my projected Fair Price climbs above $80/barrel by the Fall, even accounting for some loosening in the market. Ultimately, this may be too aggressive as demand destruction could accelerate loosening long before such prices are reached. Nonetheless, I remain very bullish on the sector and am maintaining a $65/barrel price target on WTI, which may ultimately be conservative.

Meanwhile, natural gas prices gave up much of the early week's gains yesterday, falling 1.9% to settle at $2.82/MMBTU ahead of today's weekly Storage Report. The driver behind Wednesday's pullback was, once again, the near-term temperature outlook. After the March 25-April 1 period trended sharply colder on Tuesday as near-term models began showing the potential for a trough across the Northeast allowing colder air to settle southward, the same models backed off of this scenario yesterday. As the Figure to the right shows, after 14-day total ECWMF ENS and GFS ENS forecast gas-weighted degree days (GWDDs) trended sharply higher on Tuesday, the models retreated from this very bullish outlook on Wednesday, even though forecast 14-day GWDDs remain above-average. But with the month of April still looking very mild across most of the major demand centers of the northern tier, many weak-handed bulls likely threw the towel in. At this time, I remain near-term bearish on the commodity and would like to see prices drop under $2.75/MMBTU, which I feel will be a good long-term entrypoint on the long side.

My Oil & Natural Gas Portfolio broke out to new highs on Wednesday, rising +0.6% to push 2019 year-to-date gains to +10.4% or +48.6% annualized. I made no trades on the day. Gains were led by my long oil holding via short DWT which rallied +5.1% to push gains in the position to +25.2%. As discussed above, my price target for WTI is $65/barrel and I have no plans to begin taking profits in this position before that level. My newly-minted short natural gas position, which stands at a net 5.3% of my holdings with a 13.3% UGAZ short partially offset by an 8.1% DGAZ short, was also solidly in the black. At this time, I am targeting the $2.75/MMBTU level at which point I will take profits on the UGAZ position and return to a net long position, which I expect I will hold throughout the summer. My LNG long holding, the largest net position in my portfolio, continues to struggle breaking through the $70/share level, falling -0.6% on Wednesday. My cash position stands at a comfortable 54% of my holdings, though ideally I would like to reduce this to around 40%. Options include adding to my UGAZ and DGAZ positions to increase total 3X ETF exposure (without increasing net exposure) which will benefit long-term from leverage-induced decay, adding to risky, but undervalued oil & gas producers like my current SWN long or others such as CHK or CRC, or to add to my oil long via short DWT on a pullback under $58/barrel. Stay tuned. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for March 9-15 this morning at 10:30 AM EDT. I am projecting a -47 BCF storage withdrawal, 9 BCF bearish versus the 5-year average and the third weakest draw in the last 5 years, as shown in the Figure to the right. It would be an impressive 157 BCF smaller than the previous week's record-setting -204 BCF draw. Natural gas demand got off to a relatively strong start to the week as arctic air remained entrenched across the Central US with bullish draws for the first four days of the week. However, things fell apart as an exceptionally strong storm system brought blizzard conditions to the Western Plains, but sent warm air surging northward in the southerly flow ahead of the storm, resulting in the season's first daily storage injection on Thursday. Should a -47 BCF draw verify, natural gas inventories would fall to 1339 BCF while the storage deficit versus the 5-year average would contract to -560 BCF. Click HERE for more on last week's projected withdrawal.

Between a potential late March cooldown followed by the threat of a very mild April and start to the injection season, natural gas investors have a lot on their mind and may be poised to overlook today's generally neutral report. In my opinion, this would be a mistake. Today's expected sub-50 BCF withdrawal will be the first quasi-Shoulder Season report and will give important insight in supply/demand fundamentals in the setting of rapidly diminishing heating demand. I feel that a reported withdrawal of under -45 BCF will be viewed as a disappointment and suggestive of a looser-than-expected market and should lead to prices retreating under $2.80/MMBTU. On the other hand, a reported draw of over -50 BCF would be suggestive of a tighter-than-anticipated market, a positive sign for the upcoming Shoulder Season, and should result in prices again challenging the $2.85/MMBTU or even $2.90/MMBTU near-term, although that threat of a warm April should ultimately keep any rally in check. A reported draw of between -45 BCF and -50 BCF would be neutral versus expectations with prices equally likely to rise or fall.

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.

Natural gas demand will fall below the 5-year average to a weekly low today as widespread warmer-than-normal temperatures overspread the northern half of the nation. The largest anomalies will probably be across the Pacific Northwest where Seattle, WA could approach 65F, 10F warmer-than-normal. Further east, Billings, MT and Des Moines, IA could reach 60F while Minneapolis tops 50F, all 5F-10F warmer-than-normal. Across the densely-populate I-95 corridor, highs today will be seasonally mild with Washington, DC and Philadelphia reaching the low 50s while New York City and Boston make it to the upper 40s, 0F-5F above-average. Colder-than-normal readings will be restricted to the Desert Southwest where Las Vegas will struggle into the lower 60s--10F colder-than-normal--and the Ohio Valley with Indianapolis stuck in the mid 40s, nearly 10F below-average. Overall, today's forecast mean population-weighted nationwide temperature will warm 1.1F from Wednesday to 51.5F, 0.9F warmer-than-normal. Total Degree Days (TDDs) will fall to 13.3 TDDs, 1.9 TDDs fewer than normal and the 10th fewest for March 21 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.

Based on this forecast and early-cycle pipeline data, I am projecting a -2 BCF/day daily natural gas storage withdrawal, 2 BCF larger than yesterday and 3 BCF bearish versus the 5-year average -5 BCF/day daily draw. It will likely best the smallest withdrawal this week. By tonight, projected Realtime natural gas inventories will inch lower to 1095 BCF while the storage deficit versus the 5-year average contracts slightly to -570 BCF. Click HERE for more on today's projected daily withdrawal and Realtime natural gas inventories. Gas demand will recover slightly on Friday with a near-average -5 BCF/day daily withdrawal expected. For the full week of March 16-22, I am projecting a -49 BCF withdrawal, a slight 8 BCF bullish versus the 5-year average but 17 BCF smaller than last year's draw. I will have much more on this week's projection in Friday's Commentary, but in the meantime, click HERE for more.