April 25, 2019

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Crude Oil Dips After Bearish Inventory Build As Imports Rebound While Natural Gas Holds Onto Small Gains As Near-Term Temperature Outlook Cools; EIA Projected To Announce Bearish +90 BCF Natural Gas Storage Injection In Today's Report

6:00 AM EDT, Thursday, April 25, 2019
In its weekly Petroleum Status Report for the week of April 13-19, the EIA announced Wednesday morning that inventories rose by +5.4 MMbbls. While this was shy of the American Petroleum Institute's (API's) forecast of a +6.8 MMbbl build, it was still quite bearish versus the 5-year average +1.9 MMbbls. With the build, storage levels rose to 460.6 MMbbls, the highest since October 6, 2017. Inventories continue toe the line between surplus and deficit versus the 5-year average and last week's deficit flipped back to a +3.0 MMbbl surplus. Levels are at a more sizable +30.9 MMbbl surplus compared to the same week last year.

The primary driver of this week's bearish build versus last week's surprise drawdown was a sharp rise in imports. Imports rose by nearly 1.2 MMbbls week-over-week to 7.15 MMbbls/day, the highest since February but, as the Figure to the right shows, a steep 1.3 MMbbls/day lower compared to 2018. Nonetheless, this amounts to an 8.4 MMbbl weekly increase in supply which accounts for the entirety of the difference between last week's -1.4 MMbbl draw and this week's +5.4 MMbbl build. Otherwise, production bounced back to its record level of 12.2 MMbbls/day, up 0.1 MMbbls/day from last week and up +1.6 MMbbls/day from 2018, pushing total supply year-over-year gains to +0.3 MMbbls/day. On the demand side, refiner demand may be finally picking up after an extended maintenance season. Demand rose by 0.5 MMbbls/day from the previous week and, thanks to a dive this time last year, was only off by 40,000 barrels/day year-over-year. Additionally, crude oil exports rose 0.3 MMbbls/day from the previous week to 2.68 MMbbls/day, in the middle of the recent range, but only up 0.35 MMbls/day year-over-year. This leaves a calculated supply/demand balance that is nearly perfectly balanced year-over-year.

Click HERE for the latest EIA crude oil inventory and supply/demand data.

Following the report, WTI fell, dipping 41 cents or 0.6% to $65.89/barrel, its first loss in five sessions. Overall, I view the report as a bit of a disappointment and feel the move lower was justified. The fact that we are seeing bearish inventory builds with imports at a mere 7.2 MMbbls/day could lead to a loosening of the supply/demand imbalance--which is merely flat year-over-year--should OPEC+ relax production quotas in June or US production respond to the rise in the rig count. According to my Fair Price model which evaluates supply/demand balance, current inventories, and previous storage/price points, the commodity is overvalued by 3.8% from a Fair Price of $63.36/barrel based on current inventories. Supply/demand balance has averaged 2.7 MMbbls/week loose versus the 5-year average over the past month. Based on this trajectory, the Fair Price falls to $56/barrel by the Fall, a 15% overvaluation, as shown in the Figure to the right. Obviously, investors are expecting the market to tighten up with the onset of the summer driving season. And it very well may. However, if things disappoint, I see near-term downside outweighing upside. It was for this reason that I took partial profits on my long oil position via short DWT on Tuesday, reducing exposure. I will have a low threshold to cover the remainder of my 3% stake and would not be surprised to see a near-term move under $64/barrel, especially on any weakness in US equities markets.

Meanwhile, natural gas inched higher as the near-term temperature outlook continued to trend colder for the final days of April and first few of May. The front-month May 2019 contract rose 1 cent or 0.3% to $2.46/MMBTU in a low-volatility session. As the Figure to the right shows, forecast total 14-day Gas-Weighted Degree Days (GWDDs) have trended consistently higher over the past 48 hours as forecast by both the GFS ENS and ECMWF ENS and are now well-above normal for the period. However, thanks to a loose market and the fact we are in the shoulder season when fluctuations in degree days mean less than during the heart of the summer and winter, I am still projecting bearish inventory builds for each of the next four weeks. Nonetheless, the cooling trend has shaved roughly 20 BCF off my projection for April 27-May 3 and it is now "only" around 18 BCF bearish versus the 5-year average. Given this news, I would not be surprised to see natural gas make a move above $2.50/MMBTU or even a bit higher--especially if today's EIA Storage Report comes in better than expected--but with a loose supply/demand imbalance and May still looking seasonal temperature-wise, any rally will be a selling opportunity rather than the beginning of a sustainable rally, at least for the next several weeks. Click HERE for more on the latest computer model data on my Advanced Modeling Page.

The EIA will release its weekly Natural Gas Storage Report for April 13-19 this morning at 10:30 AM EDT. I am projecting a +90 BCF storage injection, 43 BCF larger than the 5-year average and a massive 111 BCF bearish versus last year's -21 BCF draw. As the Figure to the right shows, it would be the largest withdrawal in the last 5 years--for the third week in a row-- for the week of April 13-19 just topping 2015's +87 BCF build. It would also be the largest injection all-time for the week. The exceptionally bearish build was driven, unsurprisingly, by seasonally mild temperatures nearly nationwide. Mean population-weighted temperatures averaged 60.6F for the week, 2.7F warmer-than-normal. However, it is worth noting that the projected build did trend lower from a mid-90s build earlier last week. However, thanks to rising LNG feedgas demand, this projection has retreated slightly. Nonetheless, should a +90 BCF injection verify, natural gas inventories would rise to 1337 BCF while the storage deficit versus the 5-year average would contract to -371 BCF or -22%. The newly-minted year-over-year surplus would rise to +54 BCF or +4%. Click HERE for more on last week's projected storage injection.

Thanks to the colder near-term forecast and natural gas prices just shy of 3-year lows, I feel that there is upside potential if today's reported injection comes in below expectations. I expect that a reported injection of smaller than +90 BCF will be viewed as a bullish surprise with prices trading north of $2.50/MMBTU near-term. On the other hand, I feel that it would take an injection of +96 BCF or larger to be considered unequivocally bearish with prices falling under $2.45/MMBTU. A reported injection between +90 BCF and +96 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.