May 22, 2019

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Natural Gas Falls As June Outlook Trends Cooler While Oil Rally Fizzles As Geopolitics Can Only Offer So Much Support; EIA Forecast To Announce Another Bearish Crude Oil Storage Build In Today's Petroleum Status Report; Gas Demand To Drop With Bearish +16 BCF Daily Storage Injection Expected As Unseasonable West Chill Counters Southeast Heat

6:00 AM EDT, Wednesday, May 22, 2019
Natural gas gave up most of Monday's gains yesterday, sliding 6 cents or 2.2% to settle at $2.61/MMBTU, as a pattern of choppy, up-and-down trading continues. The pullback was driven by a near-term temperature outlook that trended somewhat cooler after investors had seemingly overreacted to the upside a day earlier on speculation that an upcoming heatwave across the Southeast could spread up the Eastern Seaboard and persist into early June--something that now appears less likely. Additionally, Monday evening's run of the gold-standard long-term 46-day ECMWF-EPS model trended colder as well. As the Figure to the right shows, expect above-average total gas-weighted degree days (GWDDs) through early June as blistering heat across the South and lingering chill across the northern tier boost demand. Thereafter, however, the long-term models continue to espouse below-average GWDDs throughout the month of June. While the ECMWF-EPS is cooler than its CFSv2 stablemate, both support a prolonged period of below-normal temperatures across the Central US--including the largest natural gas-consuming state of Texas--as a persistent trough is repeatedly reinforced across the region. By the end of June, this could drive natural gas inventories above 2300 BCF, just 225 BCF less than the 5-year average and nearly 200 BCF higher than a year ago. This outlook further reinforces my near-term bearish sentiment and I continue to target a downside price target of $2.50/MMBTU. Click HERE for more on the near- and long-term temperature outlook on my Advanced Modeling Page.

Meanwhile, crude oil saw yet another early-session rally fizzle out as conflicting catalysts continue to abound in the sector. After topping $63.50/barrel early, WTI settled down 11 cents or 0.2% at $62.99/barrel while Brent held onto a small 21 cent gain to end at $72.18/barrel. The usual arguments dictated trade. On the bearish side, ongoing uncertainty on the global demand outlook due to the US-China trade war and US inventories at nearly 2-year highs weighed. On the bullish side, over-compliance by OPEC members on production curbs and continued tensions in the Middle East have supported the sector. At this time, I am maintaining a cautious $65/barrel upside price target, though if US inventories continue to rise, I expect that geopolitical speculation will only be able to prop up oil for so long. On the other hand, should storage start to tumble as the summer driving season kicks into gear, the bulls may find themselves with another upside catalyst that could tilt the current impasse in their favor.

My Oil & Natural Gas Portfolio took advantage of the drop in natural gas to rally to a new year-to-date high on Tuesday. The Portfolio rose +1.0% to push 2019 gains to +14.2%, or +36.6% annualized. I made no trades yesterday, but did add to my natural gas net short position on Monday's overreaching rally, pushing net exposure to a modest 7.4% of my holdings with a 13.6% short UGAZ position partially offset by a 6.2% DGAZ short position. My downside price target remains $2.50/MMBTU. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Petroleum Status Report for May 11-17 this morning at 10:30 AM EDT detailing oil and refined product inventories and supply/demand data. After Tuesday's close, the American Petroleum Institute announced that it was forecasting a +2.4 MMbbl crude oil inventory build. This would be 3.8 MMbbls bearish versus the 5-year average -1.4 MMbbl draw and would be the 8th largest build on record in the last 35 years--and the second highest since 2002. Should such a build verify, crude oil inventories would rise to 474. MMbbls, the highest since August 4, 2017, while the storage surplus versus the 5-year average would climb to a robust +19.8 MMbbls. The year-over-year surplus would see a rare contraction, falling 3.3 MMbbls to +36.3 MMbbls after last year's +5.7 MMbbl build. Total Petroleum Inventories won't get any help from refined products with the API calling for a neutral +0.4 MMbbl gasoline build (5-year average: +0.3 MMbbls) and an only marginally bullish -0.2 MMbbl distillate draw (5-year average: +0.0 MMbbls). Total Petroleum Inventories (crude oil + gasoline + distillates) would therefore rise by +2.5 MMbbls, 3.7 MMbbls bearish versus the 5-year average -1.2 MMbbl draw. Overall, this looks to be yet another modestly bearish storage report. Bullish investors may try to blame the build on storminess in and around the major export and refinery hub of Houston, but the fact remains that inventories are rising when they should be falling. At some point, the geopolitical situation overseas is going to calm down and, if inventories are still rising at that time, I wouldn't want to be stuck long oil. At this time, I am cautiously maintaining my $65/barrel price target though with every passing week and inventory build, this sentiment becomes weaker.

Check back on my Crude Oil Inventories Page HERE after 10:30 AM EDT for the official EIA storage numbers.

Meanwhile, natural gas demand will fall sharply today as temperatures moderate some across the Midwest and cool slightly across the Northeast. Highs rebound into the mid 60s in Minneapolis, just 6F cooler than normal and into the upper 70s in Chicago, nearly 10F warmer than normal, as the second powerful storm system in under a week moves away. Across the Northeast, highs will generally be within 5F of normal with Washington, DC and Philadelphia only reaching the upper 70s after topping 90F earlier in the week and New York City and Boston only the lower 70s. It will stay hot across the Southeast with Atlanta, Birmingham, Little Rock, and Nashville all topping 90F, 5F-10F hotter than normal and plenty sufficient to drive strong powerburn cooling demand. Temperatures will continue to heat up into the end of the week and weekend with parts of Georgia and Alabama likely seeing triple digit heat. However, today's strong cooling demand across the Southeast will be partially offset by exceptionally chilly readings across the Southwest with Las Vegas only reaching the mid-60s and Phoenix the mid-70s, both 20F-25F cooler than normal. Overall, thanks to the moderating trend across the Heartland, today's forecast mean population-weighted nationwide temperature will rise 1.4F from Tuesday to 67.1F, still 0.2F cooler-than-normal. However, Total Degree Days (TDDs) will fall to 7.3 TDDs, just 0.2 TDDs greater than normal and the 19th most for May 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 +16 BCF/day daily natural gas storage injection, 4 BCF larger than Tuesday's injection and 2 BCF bearish versus the 5-year average +14 BCF/day. By tonight, projected Realtime natural gas inventories will reach 1828 BCF while the storage deficit versus the 5-year average falls to -269 BCF. The year-over-year surplus will inch higher to +143 BCF. Click HERE for more on today's projected injection and Realtime natural gas inventories. Even as the Southeastern heat builds to finish the week, I expect projected daily storage injections to remain at or above the 5-year average near +15 BCF/day thanks to continued chilly conditions across the West and a loose underlying supply/demand imbalance. For the week of May 18-24, I am still projecting a slightly bearish +101 BCF storage injection, 4 BCF larger than the 5-year average.