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August 22, 2019

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Crude Oil Dips Following Neutral EIA Petroleum Status Report While Natural Gas Slides As Near-Term Temperature Outlook Trends Steadily Cooler; EIA Projected To Announce Modestly Bearish +64 BCF Storage Injection In Today's Report; LNG Feedgas Demand Soars To New Record High As Facility Maintenance Concludes


6:00 AM EDT, Thursday, August 22, 2019
In its weekly Petroleum Status Report, the EIA announced Wednesday morning that crude oil inventories fell by -2.7 MMbbls during the week of August 10-16. On the one hand, this snapped a two-week streak in which storage levels had risen, but at the same time, the decline was smaller than Tuesday's American Petroleum Institute (API) expectation of a -3.5 MMbbl draw and was an uninspiring neutral versus the 5-year average, also -2.7 MMbbl. The draw also compared unfavorably versus last year's bullish -5.8 MMbbl decline. Imports dipped by -0.5 MMbbls/day from the previous week to 7.2 MMbbls and are 0.3 MMbbl/day lower than 2018, but imports have been consistently under 7.0 MMbbl/day throughout the summer and with Saudi Arabia making a push to tighten flows to the US, this number has to be at least a little disappointing. On the other hand, exports rose by another 0.1 MMbbls/day week-over-week to 2.8 MMbbls/day, more than double last year when exports were a mere 1.2 MMbbls/day, impressive considering that the Brent-WTI spread fell under $5/barrel last week, which would typically be less favorable for exports. Refinery inputs jumped 0.4 MMbbls/day to 17.7 MMbbls, down a mere -0.2 MMbbls/day from a year ago and continuing the steady rise in demand since April. Finally, domestic production held steady at 12.3 MMbbls/day, but is still up a robust 1.3 MMbbls/day. The adjustment factor--the EIA's way of correcting between the reported inventory decline and the calculated supply/demand balance--rose 0.2 MMbbls to a large 0.6 MMbbls/day. This means that supply/demand numbers would point to a large -6.9 MMbbl draw rather than the reported -2.7 MMbbl draw and suggests that reported demand is either overestimated or supply is underestimated. The correction factor is also more than 0.9 MMbbls/day higher than a year ago when it was -0.3 MMbbl/day, suggesting instead an underestimation of demand or an overestimation of supply.


With the draw, crude oil inventories fell to 437.8 MMbbls while the storage surplus versus the 5-year average held steady at +14.3 MMbbls. Inventories are up +29.4 MMbbls year-over-year. Despite the neutral draw and builds the previous two weeks, the supply/demand imbalance versus the 5-year average has still averaged 0.3 MMbbls/week tight versus the 5-year average over the past month. Should this trend persist, inventories would bottom out near 435 MMbbls by early October. However, I would not be surprised to see refinery demand pick up some more and for imports to dip back under 7 MMbbls in the weeks to come as Saudi Arabia continues to cut imports, resulting in further tightening of the supply/demand imbalance. For this reason, I expect inventories to bottom out closer to 400 MMbbls.


Overall, this was a neutral report, and didn't provide either the bulls or the bears much in the way of trading ammunition. After trading slightly higher ahead of the report, crude oil slowly slid into the red by the end of the session as investors looked to other catalysts, primarily ongoing concerns about a slowdown in global demand. WTI finished Wednesday down 45 cents or 0.8% to $55.68/barrel. The report did little to sway my current bullish sentiment towards the sector. According to my Fair Price model, the commodity is undervalued by nearly 10% versus a Fair Price of $60.98/MMBTU. And with inventories expected to fall further, pushing this Fair Price closer to $62/barrel, and Futures prices in backwardation as shown in the Figure to the right, this undervaluation approaches 15% by the end of 2019. For this reason, I remain bullish on the sector. Out of an abundance of caution due to the potential for a global economic slowdown, I wouldn't chase WTI above $55/barrel, but feel that under this mark, starting a long position or adding to one is reasonable. My 2019 price target remains at $65/barrel.


Meanwhile, natural gas quickly gave up early-session gains to finish the day down 5 cents or 2.2% to $2.17/MMBTU, the lowest close since August 14. While there is a certain sense of optimism that the EIA will report another smaller-than-expected storage injection in today's report, as it has the past two weeks, Mother Nature is looking very uncooperative for the next several weeks. In an unusual degree of agreement, both the ECMWF ENS and GFS ENS models have trended steadily cooler over the past week and 14-day accumulated gas-weighted degree days (GWDDs) for both are below average, as shown in the Figure to the right. As I've discussed previously, it will be very difficult for natural gas to rally in the face of such unfavorable conditions, no matter how much better-than-expected EIA numbers are. While I am still maintaining a $2.40/MMBTU upside price target, I would not be surprised for natural gas to trade lower near-term before bottoming, potentially even breaking the $2.00/MMBTU level. Were I not alreayd long the sector, I would not chase the commodity at current levels, but should it fall under $2.00/MMBTU, would look to accumulate rather aggressively on the long side. As it stands, I am short the 3X ETF DGAZ in my Oil & Natural Gas Portfolio, a trade which will benefit long-term from leverage-induced decay, which is why I have not abandoned my position yet.


The EIA will release its weekly Natural Gas Storage Report for August 10-16 this morning at 10:30 AM EDT. For the week, I am projecting a +64 BCF natural gas storage injection, 13 BCF bearish versus the 5-year average and 17 BCF larger than last year's build. Gas-weighted degree days were 3.1% lower than 2018 for the week which, together with the more than 7 BCF/day year-over-year gain in production, drove the bearish build. As the figure to the right shows, it would be the 2nd largest injection for the week in the last 5 years, behind only 2014's +86 BCF injection. Should a +64 BCF injection verify, natural gas inventories would rise to 2802 BCF while the storage deficit versus the 5-year average would fall to -98 BCF. The year-over-year surplus would climb another 17 BCF to +374 BCF. Click HERE for more on the latest projection for the current storage week.


I feel that downside risk outweighs upside potential for this report. As discussed above, even a smaller-than-expected build probably won't be enough to overcome a bearish near-term temperature outlook beyond a day or two bump. On the other hand, a larger-than-expected injection would further reinforce the bearishness of the weather forecast. I feel that an injection of +66 BCF or larger would be viewed as bearish versus expectations and would likely drive prices under $2.10/MMBTU over the next several days. On the other hand, I feel that it would take an in injection of +58 BCF or smaller to be viewed as unequivocally bullish and enough to drive prices back above $2.20/MMBTU. A reported injection between +58 BCF and +66 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.


Natural gas demand will fall today even as unseasonably warm temperatures dominate the immediate Eastern Seaboard as September-like readings expand across the Heartland. Washington, DC, Philadelphia, New York City, and Boston could all hit 90F today, perhaps for the final time this year as a group, each around 10F hotter-than-normal. On the other hand, highs across the Great Lakes, Midwest, and Northern Plains will be unseasonably chilly with highs more than 10F cooler-than-normal in many areas. These include Kansas City and Omaha, which will only reach the mid-70s, as well as Minneapolis and Detroit, which will be stuck in the lower 70s. And after a blistering week, highs across Texas will finally cool back to near-average, with Dallas, Houston, and San Antonio "only" reaching the mid-to-upper 90s. Overall, thanks to the expanding Canadian airmass across the Central US, today's forecast mean population-weighted mean nationwide temperature will cool -1.1F from Wednesday to 77.6F, still 1.4F warmer-than-normal thanks to the East Coast heat. Total Degree Days (TDDs) will drop to 12.7 TDDs, the 9th most for August 22 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 +9 BCF/day daily natural gas storage injection, 2 BCF larger than Wednesday's build and 1 BCF bearish versus the 5-year average. Natural gas powerburn will likely fall to near 43-44 BCF/day, still up a robust 9 BCF/day year-over-year. Meanwhile, based on early-cycle data, LNG feedgas demand will soar to a new all-time high as facility maintenance has rapidly concluded. Flows to Sabine Pass will top 3.7 BCF/day while Corpus Christi holds at all-time highs near 1.5 BCF/day. Total feedgas will reach 6.4 BCF/day, up 0.6 BCF/day from Wednesday and 3.5 BCF/day from the same week last year. This represents over 93% total capacity. By tonight, look for total flows to top 2847 BCF while the storage deficit versus the 5-year average contracts down to -102 BCF. Click HERE for more on today's projected storage injection and Realtime natural gas inventories.