May 23, 2019

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Crude Oil Finally Collapses After The EIA Announces Another Exceptionally Bearish Storage Build, But Further Downside Should Be Limited As WTI Reaches Its Fair Price; Natural Gas Approaches Its Downside Price Target Ahead Of Today's Projected Bearish +103 BCF Storage Injection; Gas Demand Begins To Rise As South Heats Up

6:00 AM EDT, Thursday, May 23, 2019
In its weekly Petroleum Status Report for May 11-17, the EIA announced Wednesday morning that crude oil inventories rose by +4.8 MMbbls. This was greater than the API's +2.4 MMbbls forecast and was an ugly 6.2 MMbbls bearish versus the 5-year average -1.4 MMbbl drawdown. With the build, crude oil inventories rose to a nearly 2-year high of 476.8 MMbbls while the storage surplus versus the 5-year average climbed to +22.2 MMbbls. The year-over-year surplus actually shrank slightly thanks to last year's even uglier +5.7 MMbbl build, but remains at a robust +38.7 MMbbls. The bearish build was driven by a combination of falling exports and soft refinery demand, even as imports took a steep drop. Exports fell by 0.43 MMbbls/day from the previous week to 2.92 MMbbls/day, up a modest 1.17 MMbbls/day from 2018, but, as I will explain momentarily, may have actually fallen further than reported. Imports dropped 0.7 MMbbls/day from the previous week to 6.94 MMbbls/day, down a massive 1.2 MMbbls/day from 2018, although last year's 8.16 MMbbl/day level was an anomaly and this week's inventory level is closer to a 0.5-0.7 MMbbl/day year-over-year decline compared to last year's running 6-week average. Refinery demand still has yet to see the long-awaited seasonal uptick ahead of the coming driving season, averaging just 16.58 MMbbls/day, down 0.1 MMbbls/day week-over-week and essentially flat versus 2018. This is not good enough as domestic production inched higher to 12.2 MMbbls/day, up a massive 1.48 MMbbls/day year-over-year. It is worth noting that for a second straight week, the supply/demand imbalance saw an unusually large correction factor, used by the EIA to sync their reported storage builds/draws and those predicted by summing supply and demand. Adding production (12.2 MMbbls/day), imports (6.9 MMbbls/day), exports (-2.9 MMbbls/day), and refinery demand (-16,578 MMbbls/day) would yield a daily draw of -0.36 MMbbls/day, or -2.5 MMbbls/day, bullish versus the 5-year average and a far cry from the EIA's reported +4.8 MMbbl build. This resulted in a huge 0.872 MMbbl/day correction factor, up 0.05 MMbbls/day from the previous week. This suggests that either imports are being underestimated or exports are being overestimated. Something funny is going on for such a large discrepancy for a second straight week.

Regardless, after investors had shrugged off a string of bearish builds for the past several weeks, turning to tense geopolitics or strong OPEC production cut compliance to justify their bullish stance, they finally took notice on Wednesday. WTI stumbled $1.71 or 2.7% to settle at $61.42/barrel, its largest drop since May 2. Brent, with less exposure to US markets, fell a softer $1.19 to $70.99/barrel. According to my Fair Price Model, this decline was almost exactly in line with what my Fair Price model--which compares current storage to past inventory/price points--projected. As shown in the Figure to the right, based on current inventories alone, WTI, at $61.42/barrel, is trading within 1% of its calculated Fair Price of $61.02/barrel. It is for this reason that I am willing to stay in the long trade despite the big inventory builds. Admittedly, this model projects that the Fair Price will fall under $60/barrel by early June as the market is oversupplied by a massive 4.8 MMbbls/day over the past month. However, I still do anticipate that this supply/demand imbalance will rapidly tighten heading into the summer. For better or for worse, I am maintaining my $65/barrel upside price target and will look to add to my long position on a move under $60/barrel.

Meanwhile, natural gas continued its slump, falling by over 2% for a second straight day, retreating 7 cents to $2.54/MMBTU. Investors this week have been punishing the commodity on fears over a colder-than-normal June temperature outlook which, coupled with a loose underlying supply/demand imbalance, could result in the steady contraction of the storage deficit versus the 5-year average accelerating. The commodity is nearing my downside price target of $2.50/MMBTU, below which I feel that fuel-switching will begin to materially tighten the market. I will look to cover my short position under $2.50/MMBTU and will even consider flipping to net long the sector.

My Oil & Natural Gas Portfolio was essentially flat on Wednesday, falling -0.1% as large gains in my short natural gas position were offset by large losses in oil and associated equities. I made no trades on the session. Through the first 99 trading days of 2019, the Portfolio is up +14.1% year-to-date, or +35.8% annualized. In addition to the above-mentioned trading ideas in oil and natural gas, I am also looking to boost my Chesapeake Energy (CHK) long position on a move under $2.00/share. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for May 11-17 this morning at 10:30 AM EDT. At this time, I am projecting a +103 BCF storage injection. Such a build would be a modest 15 BCF bearish versus the 5-year average--the 10th straight bearish build--and 10 BCF larger than last year's +93 BCF build. As the Figure to the right shows, it would be the second largest injection for the May 11-17 period in the last 5 years, just 4 BCF better than 2014's +108 BCF injection. It would also be the third largest all-time since 1994, behind 2014 and 2001's +109 BCF build. The bearishness of the build was driven by generally seasonal temperatures throughout the week that averaged +65.2F on the week, around 0.4F cooler than normal, and boosted by the underlying loose market. An all-time high build for the week was likely prevented by strong LNG feedgas which topped out at a new high of 39.3 BCF for the week. Should a +107 BCF injection verify, natural gas inventories would rise to 1756 BCF while the storage surplus versus the 5-year average would dip to -271 BCF. Since peaking at an interim high of -565 on March 8 the storage deficit has no been cut in half in an efficient 2 months. The year-over-year deficit, meanwhile, will rise to +140 BCF. Click HERE for more on this week's projected storage injection.

Given the sudden bearish change in sentiment in the natural gas sector, I feel that downside risk outweighs upside potential following today's Report. Even if the reported build is slightly smaller than expected, I still feel that the bearish early June outlook will prevent a significant rally based on the storage report alone. I expect that it will take a reported injection of smaller than +96 BCF to be viewed as unequivocally bullish, resulting in a bounce back towards $2.60/MMBTU. On the other hand, I feel that a reported injection of +106 BCF or larger would be viewed as a disappointment versus expectations and consistent with a looser-than-anticipated supply/demand imbalance and could drive a break under $2.50/MMBTU near-term. An injection between +96 BCF and +106 BCF would be neutral versus expectations with prices equally likely to rally or pull back.

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 rise slightly today as heat begins to build across the Southeast and Mid-Atlantic. Richmond, VA, Raleigh, NC, Columbia, SC, and Atlanta, GA could all reach 90F today, 5F-10F warmer-than-normal. Such readings will spur some early-season powerburn heating demand. On the other hand, temperatures will remain unseasonably chilly across the Northern Plains into the Desert Southwest, countering the gains in cooling demand across the South. Minneapolis, MN will only see the mid-60s, Omaha, NE the low 70s, and Kansas City, MO the mid-70s, each around 5F cooler-than-normal. The anomalies will be far more impressive further west with Phoenix, AZ again not reaching 80F, Las Vegas, NV only seeing the mid-60s, and Salt Lake City, UT and Denver, CO not reaching 60F, all 20F-25F below-average, shutting down any cooling demand region-wide. Overall, thanks to the warming trend across the Southeast, today's forecast mean population-weighted nationwide temperature will warm 2.7F from Wednesday to 69.8F, 2.3F warmer-than-normal. Total Degree Days (TDDs) will rise to 8.5 TDDs, 1.3 TDDs greater than normal and the 9th most for May 23 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 +15 BCF/day daily natural gas storage injection today, down less than 1 BCF/day from Wednesday and 2 BCF bearish versus both the 5-year average and last year's build. By tonight, projected Realtime natural gas inventories will be near 1843 BCF while the storage deficit versus the 5-year average inches down to -267 BCF and the year-over-year surplus rises to +146 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. Look for gas demand to hold steady on Friday with another +15 BCF/day daily build expected, pushing the injection for the full week of May 18-24 up to +102 BCF, a slight 5 BCF bearish versus the 5-year average.