August 28, 2019

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Natural Gas Dips After Sharp Rally While Oil Rises On OPEC Over-Compliance & Global Supply Concerns; EIA Expected To Announce Massive Crude Oil Inventory Drawdown In Today's Petroleum Status Report; Gas Demand To Hold Steady As Fall-Like Temperatures Persist Across the Heartland

6:00 AM EDT, Wednesday, August 28, 2019
One day after natural gas spiked by nearly 4%, investors took some money off the table on Tuesday as the commodity fell 3 cents or 1.3% to settle at $2.20/MMBTU. The near-term temperature outlook did trend slightly cooler, but it was subtle. In truth, Monday's rally was likely exaggerated thanks to the overwhelming size of the short position that set the stage for a squeeze. The forecast is by no means favorable and with record domestic production, I am still projecting bearish natural gas storage injections for each of the next four weeks which will drive the year-over-year surplus north of +400 BCF by mid-September. Smart bearish traders who had taken profits heading into last weekend likely saw yesterday's mini-short squeeze as an opportunity to jump back into the trade. As I've stated before, I feel that any cooling for the first half of September--effectively the backend of the cooling season--could result in a prompt sell-off to $2.00/MMBTU. Long-term, I continue to feel that natural gas is fundamentally undervalued as LNG exports climbs to record highs and exploration and drilling activity is cut due to discounted pricing. Nonetheless, any rally this Fall will be driven by the weather. No matter how much the market tries to tighten--or loosen--price fluctuations in the near-term will be driven by Mother Nature. I am maintaining my $2.40/MMBTU upside price target, but acknowledge that it will be a rocky, uneven road to get to this level.Meanwhile, oil traded sharply higher as OPEC July compliance with production cuts reached a new 2019 high of 159%, the prospects of a deal with Iran that would see that country's oil back on the market faded, and investors anticipated a large domestic inventory draw in today's EIA Petroleum Status Report. WTI rose $1.29 or 2.4% to settle $54.93/barrel while Brent added a lesser 81 cents to each $59.51/barrel.

Likely to drive prices today, the EIA will release its weekly Petroleum Status Report for August 17-23 this morning at 10:30 AM EDT. After Tuesday's close, the American Petroleum Institute (API) announced that it was expecting a massive -11.1 MMbbl inventory drawdown, 8.5 MMbbls bullish versus the 5-year average -2.6 MMbbl. Not only would it be the largest draw on record for the August 17-23 period by a factor of 2 (previous record: -5.9 MMbbl in 1998), it would be the 7th largest draw all-time for any week since 2000.Should such a withdrawal verify, crude oil inventories would fall to 426.7 MMbbls, a new 2019 low and the smallest since October 26, 2018. The storage surplus versus the 5-year average would drop to a mere +5.8 MMbbls while the year-over-year surplus would drop to just +20.9 MMbbls, the lowest since March 22. For much of the summer, whenever we saw a large draw, it has usually been countered by large builds in refined products. However, this week, the API is expecting draws in both gasoline (-0.3 MMbbls) and distillates (-2.5 MMbbls), neutral and 3.3 MMbbls bullish versus their respective 5-year averages. As a result, I am expected Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to fall by -13.9 MMbbls, a huge 11.9 MMbbls bullish versus the 5-year average -2.1 MMbbls. Should these numbers verify, it would be difficult not to be bullish on the oil sector right now. The commodity has been held in check all summer by persistent trade war fears while the supply/demand imbalance has tightened up. As a result, my Fair Price based on current inventories alone is $61.98/barrel and, should we see as big a draw as expected today, this Fair Price will jump to nearly $63/barrel, a 12% undervaluation. For this reason, I remain very bullish on the sector and am maintaining a $65/barrel upside price target. Check back after 10:30 AM EDT on my Crude Oil Inventories Page HERE for the latest EIA data.

Natural gas demand will hold steady today as unseasonably cool temperatures dominate the Central US and milder readings bookend the coasts. I am projecting a +12 BCF/day daily storage injection, flat from yesterday and more than 2 BCF/day bearish versus the 5-year average. By tonight, I expect Realtime natural gas inventories to be nearing 2920 BCF while the storage deficit versus the 5-year average dips to -85 BCF and the year-over-year surplus climbs to +378 BCF. Click HERE for more on today's projected daily injection and Realtime natural gas inventories.

For the remainder of the week, look for unseasonably chilly conditions to persist across the Central US, but moderating temperatures across the Eastern Seaboard will lead to a small bump in demand. Nonetheless, I expect daily injections to be bearish versus the 5-year average throughout the week. As the Figure to the right shows, after peaking near +14 BCF/day on Sunday, daily natural gas storage injections could fall to +11 BCF/day by Thursday, still above the 5-year average +9 BCF/day. For the full week of August 24-30, I am projecting a +86 BCF storage injection, a huge 20 BCF bearish versus the 5-year average and 22 BCF higher than a year ago. This would take the storage deficit versus the 5-year average down to -81 BCF and the year-over-year surplus up to +384 BCF. It would be the second largest injection for the week in the last 5 years, behind only 2015's +89 BCF injection. Click HERE for more on this week's projected injection. Based on longer-term projections, I expect natural gas inventories to top 3000 BCF sometime by the middle of next week, either Wednesday September 4 or Thursday September 6. This would be more than a month ahead of last year's pace when that level wasn't reached until October 10.