July 24, 2019

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Cooling Trend In The Near-Term Computer Models Snuffs Out Natural Gas Rally; Oil Rises Ahead Of Mammoth -11 MMbbl Forecast Crude Drawdown For Today's EIA Petroleum Status Report, But Expected Bearish Refined Product Builds Check Gains; Gas Demand To Hold Near Weekly Lows Today As Powerburn & LNG Feedgas Demand Both Fall

6:00 AM EDT, Wednesday, July 24, 2019
Natural gas continued to tread water in its $2.25/MMBT-$2.35/MMBTU trading range, dropping 1 cent or 0.5% on Wednesday to settle at $2.30/MMBTU. The commodity has been stuck in this range since July 16 as investors adopt a watch-and-wait attitude. On the one hand, the abrupt cooldown this week--and hints of another during the second and third weeks of August--have kept natural gas from rising back to its July peak of $2.50/MMBTU 10 days ago, while the combination of a tightening supply/demand imbalance and expected warm-up next week have kept the price floor near $2.25/MMBTU and above the 3-year lows of $2.15/MMBTU set back in mid-June. Overall, over the last 24 hours, the near-term computer model outlook has been mixed, with the GFS ENS trending slightly warmer and the typically superior ECMWF shifting cooler, as shown in the Figure to the right. Both, however, have introduced the threat of a cooldown beginning around August 6. Given how laser-focused investors have been on the temperature outlook this summer, I would not be surprised if this keeps prices in check near-term with a pullback towards $2.25/MMBTU certainly possible. However, longer term, I remain cautiously bullish on the commodity and am maintaining a $2.60/MMBTU price target on the sector, though this will require that the month of August on the whole feature hotter-than-normal temperatures. Click HERE for more on the near-term temperature outlook on my Advanced Modeling Page.

Meanwhile, crude oil erased early-session losses with a robust afternoon rally. WTI rose 55 cents or 1% to settle at $56.77/barrel while Brent again outperformed, rallying 57 cents to $63.83/barrel. There remain multiple bullish catalysts supporting oil prices right now. First, geopolitical tension remains elevated across the Middle East with Iran threatening tanker traffic and stating (without evidence) that it had arrested American CIA operatives. A potential future source of tension is new British PM Boris Johnson and his uncertain attitude towards the region, given the recent Iranian seizure of a British vessel. Additionally, news broke yesterday that US negotiators will head to China next week to work towards a possible trade deal, which could support future demand growth. And finally, investors are anticipating another bullish crude oil inventory drawdown on the order of -4 MMbbls in today's Petroleum Status Report which looks like it could actually end up being conservative. More on that below. At this time, I feel that upside potential continues to considerably outweigh downside risk and I am maintaining my $65/barrel upside price target, which is in line with my Fair Price Model.

My Oil & Natural Gas Portfolio succumbed to the pullback in natural gas as well as a fall in volatility--my largest position--and pulled back slightly on Tuesday. The Portfolio fell -0.3% to reduce 2019 year-to-date gains to +11.2%, or +20.2% annualized. I did not make a trade on Tuesday--and have not done so since July 23. While the watch-and-wait strategy might not get the adrenaline flowing, I like my holdings right now and do not wish to reduce my cash position (39%) such that I overplay my hand and am forced to close positions in the future. I remain comfortably long natural gas (net 11.5%) via short DGAZ and UGAZ and long WTI oil (5.8%) via short DWT with upside price targets of $2.60/MMBTU and $65/barrel, respectively. Despite discounts in both sectors, I do not wish to get greedy here. Patience is key. The only trade I will consider would be to add to my WTI position under $55/barrel. Should these price targets be reached, year-to-date gains would likely top +20%. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Petroleum Status Report today for July 13-19, detailing the latest oil and refined product inventories as well as supply/demand data. After the close of trading on Tuesday, the American Petroleum Institute (API) announced that it was forecasting a mammoth -11.0 MMbbl crude oil inventory draw. Such a draw would be a robust 7.5 MMbbls bullish versus the 5-year average -3.4 MMbbl decline. It would be the largest drawdown all-time for the July 13-19 period dating back to 1983, nearly double the previous record-holder, last year's -6.2 MMbbl. Should it verify, crude oil inventories would tumble to 444.9 MMbbls, down more than 40 MMbbls since peaking at 485.5 MMbbls on June 7 and the lowest level since March 22, a time when prices were trading at $59.04/barrel. The storage surplus versus the 5-year average would continue its rapid retreat, sliding to +15.3 MMbbls while the year-over-year surplus would dip more modestly to +40.0 MMbbls. While such numbers would be exceptionally bullish, they are blunted somewhat by API expectations of another set of bearish refined product builds. Gasoline inventories are expected to rise +4.0 MMbbls (5-year average: -0.2 MMbbls) while distillates will jump +1.4 MMbbls (5-year average: -0.2 MMbbls). Most analysts are expecting impacts from Tropical Storm Barry this week and while a 1.1 MMbbl/day decline in production is consistent with the larges storage draw, the rise in refined products is not since one would expect a shut-in of coastal refineries to hurt crude oil demand and exaggerate draws in gasoline and distillates due to reduced refining capacity. Regardless, Total Petroleum Inventories--crude oil + gasoline + distillates--will fall -5.1 MMbbls, still a slightly bullish 1.2 MMbbls bullish versus the 5-year average. Given the likelihood that short-term impacts from Barry will cloud today's report, I'm not sure how much I will read into today's numbers unless they are considerably more bullish or less bullish than expected. Should oil dip, I will strongly consider adding to my rather modest position. 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 remain well below-average near weekly lows today as unseasonably cool temperatures dominate the eastern half of the nation once again. Highs 5F-15F cooler-than-normal will be widespread with the Megalopolis generally seeing readings in the upper 70s to lower 80s. Across the major cities of the Great Lakes, Chicago and Detroit will both reach 80F while Pittsburgh and Buffalo only top out in the upper 70s, each 5F-10F cooler-than-normal. Highs will be in the upper 80s to lower 90s across most of Texas--the nation's largest natural gas-consuming state--still around 5F cooler-than-normal. After nearing 100F each of the last two days, both Salt Lake City and Boise will cool around 10F day-over-day back to near average at 90F. Above-average temperatures will be restricted to the immediate West Coast with the southern part of California's Central Valley--including Fresno--reaching triple digits. Nonetheless, thanks to the cooldown in the Rockies and continued chill across the East, today's forecast mean population-weighted nationwide temperature will fall another -0.3F from Tuesday to 74.1F, 3.7F cooler-than-normal. Total Degree Days (TDDs) will hold steady near 9.4 TDDs, 5.0 TDDs fewer than normal and the third fewest for July 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 very bearish +11 BCF/day daily natural gas storage injection. Such a build is nearly identical to Tuesday and an ugly nearly 6 BCF larger than the 5-year average. Natural gas powerburn will probably slip a bit below Tuesday's surprisingly strong 37.8 BCF/day, more than 1 BCF/day higher than 2018 despite the unseasonably cool temperatures. LNG feedgas demand will fall -0.2 BCF from Tuesday, even as flows to Corpus Christi hit a new all-time high over 1.4 BCF/day, thanks to a drop in flows to Cameron to 0.0 BCF based on early-cycle pipeline numbers. Nonetheless, thanks to a sharp drop-off this week last year, LNG feedgas demand will be up 2.9 BCF/day from 2018. By tonight, look for Realtime natural gas inventories to top 2600 BCF, nearly 6 weeks ahead of last year's pace when that threshold wasn't reached until September 4th. The storage deficit versus the 5-year average will slide under -150 BCF while the year-over-year surplus reaches +310 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. Look for natural gas demand to rise slightly to wrap up the week but with highs still below-average across a large area, expect bearish builds to continue at +10 BCF and +8 BCF on Thursday and Friday, respectively.