March 28, 2019

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Crude Oil Pulls Back After The EIA Announces Larger-Than-Expected--But Still Bullish--Inventory Build; EIA Projected To Announce Bearish +34 BCF Natural Gas Storage Withdrawal In Today's Report, The Last Of The Season; Largest Daily Storage Injection Of 2019 Expected Today As Mild Temperatures Overspread Central & Eastern US

6:00 AM EDT, Thursday, March 28, 2019
In its weekly Petroleum Status Report for March 16-22, the EIA announced Wednesday morning that crude oil inventories rose by +2.8 MMbbls. On the one hand, investors for whatever reason were expecting an inventory withdrawal, despite the fact that we are in the heart of the weak refinery maintenance season and there have only been 5 draws for the week in the last 35 years. The American Petroleum Institute (API), on the other hand, was forecasting a +1.9 MMbbl build. Given that, it would seem today's build was a disappointment. However, it was still quite bullish versus the 5-year average +5.3 MMbbl build, sending the storage deficit versus the 5-year average to a new 2019 high of -7.6 MMbbls. Since mid-January, this deficit has contracted by 45 MMbbls from a peak surplus of +37 MMbbls. The bullishness of the build was driven by crude oil imports which fell another 0.4 MMbbls/day week-over-week to average 6.54 MMbbls/day, the fifth time in the last seven weeks that imports have been under 7 MMbbls/day, as shown in the Figure to the right. Imports are down a robust 1.6 MMbbls/day or 19.7% year-over-year. Countering this drop in imports, exports also fell by 0.51 MMbbls/day from the previous week to 2.89 MMbbls/day, perhaps in response to a recent narrowing of the Brent-WTI spread, but are still nearly double year-ago levels. Also on the demand side, refinery inputs averaged just 15.83 MMbbls/day, down 0.37 MMbbls/day from the previous week and down a significant 0.97 MMbbls/day from the previous year. On the one hand, it is obviously disappointing that refinery demand is so weak. Even a flat year-over-year level would have flipped that +2.8 MMbbl build to a -3.5 MMbbl draw, the second largest on record for the week. However, when the summer driving season starts to kick in over the next 6-8 weeks, I expect to see a rapid rise in demand, especially since WTI prices are running roughly 10% lower year-over-year, which should result in a rapid tightening and a series of large storage withdrawals, which may catch some investors off-guard and could result in a price spike.

Click HERE for more on the latest EIA-reported crude oil inventories and supply/demand data.

Despite the above data which continues to support a bullish outlook, crude oil investors weren't convinced and WTI oil prices quickly sold off following the report, dropping more than 2% to near $58.80/barrel by noon Thursday. However, the dip buyers stepped in and the commodity finished the session with a more sedate 53 cent or 0.9% loss to $59.41/barrel. Brent fell just 14 cents to $67.83/barrel. I still feel that the commodity is undervalued at current levels. According to my Fair Price Model which compares current and forecast inventories to historical storage/price data points, WTI is undervalued by a steep 7.5% versus its Fair Price of $64.66/barrel. Anticipating possible further tightening in supply/demand, this Fair Price rises above $70/barrel by late May and even $80/barrel by next Fall, as shown in the Figure to the right. However, above $70/barrel, I expect demand will begin to be curtailed and the market will again loosen. Regardless, I remain quite bullish on the sector and am maintaining a $65/barrel 2019 price target on WTI, which may prove conservative. Click HERE for more on my crude oil Fair Price Model.

Meanwhile, in its last day as the Front Month Contract, the April 2019 natural gas contract continued its slow march lower, falling 1% to $2.71/MMBTU. It will be replaced today by the May 2019 contract which settled at $2.71/MMBTU, an insignificant 1 cent contango. The commodity continues to fade under the threat of a mild April temperature outlook which could cut demand and unmask the impact of production that is up nearly 10 BCF/day year-over-year. Over the next 6 weeks alone, I am projecting that the storage deficit versus the 5-year average will contract by nearly 200 BCF to around -360 BCF, the lowest in over a year. Or, if the most bearish of the different models that make up my Hybrid Model verify, a 300 BCF contraction is not impossible. This could certainly fuel lower prices in the near-term. However, should prices dip under $2.65/MMBTU, the commodity becomes increasingly undervalued and I expect supply/demand balance will tighten further with price-dependent fuel-switching and rising LNG exports leading the way. However, the issue with getting long natural gas on a break under $2.65/MMBTU and just forgetting about it until next winter is that the futures market has shifted towards an increasing Contango. As shown in the Figure to the right, prices rise from the current $2.72/MMBTU to $3.04/MMBTU by December, a more than 10% increase. And should the commodity fall further near-term, this Contango will likely only widen further. This is bad news for holders of ETFs such as UNG, BOIL, or UGAZ as these funds must rotate their funds to the next futures contract each month. In a state of Contango, this effectively amounts to selling low and buying high, resulting in a long-term price-independent underpeformance. At this time, I am maintaining a $2.65/MMBTU downside price target, at which point I will likely still plan to flip to long, keeping a close eye on the Futures strip.

The EIA will release its weekly Natural Gas Storage Report for March 16-22 this morning at 10:30 AM EDT. I am projecting a second straight bearish storage withdrawal, potentially the last of the season, at -34 BCF storage withdrawal, a slight 7 BCF smaller than the 5-year average -41 BCF but a more substantial 32 BCF bearish versus last year's -66 BCF withdrawal. The bearishness of the projection was driven by a late-week collapse in demand as unseasonably mild temperatures overspread much of the eastern third of the nation. As the Figure to the right shows, this would be the 3rd weakest draw in the last 5 years, behind only a +3 BCF injection in 2015 and a -8 BCF draw the following year. Should such a draw verify, natural gas inventories would fall to 1109 BCF while the storage deficit versus the 5-year average would contract to -549 BCF. And should this end up being the final draw of the season, the 1109 BCF level would end up being the second smallest nadir in the last 5 years behind only 2014's 824 BCF and the 7th lowest all-time. Click HERE for more on this week's projected withdrawal.

While this week's draw will still be driven primarily by heating demand, it will still provide important insights towards the supply/demand balance we can expect during the upcoming Shoulder Season. I feel that today's report will carry more downside risk in the event of an disappointing withdrawal than upside potential in the event of a bullish surprise as investors seem to be looking for excuses to sell, not buy, right now. I expect that a reported withdrawal of under -30 BCF will be viewed as a disappointment and concerning for a looser-than-anticipated supply/demand imbalance, sending prices falling under $2.70/MMBTU. On the other hand, a reported withdrawal of larger than -40 BCF could be large enough to pressure prices back over $2.75/MMBTU. A reported draw between -30 BCF and -40 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.

Natural gas demand will fall for a second straight day today as much warmer temperatures overspread the densely-populated East Coast. After several days of below-average readings, highs from Baltimore, MD to Pittsburgh, PA to Columbus, OH will all warm into the low 60s today, 5F-10F warmer-than-normal. Similar warmth will dominate the Midwest and Great Plains with Chicago nearing 60F, St Louis, MO 70F, and Oklahoma City 80F, all around 10F warmer-than-normal. Below-average temperatures will be restricted to Florida where such readings will only restrict cooling demand, the far northern Plains where there is little population to take advantage of the chill, and the West Coast. Overall, thanks to the warming trend across the eastern two-thirds of the nation, today's forecast mean population-weighted nationwide temperature will warm 3.0F from Wednesday to 54.6F, 2.3F warmer-than-normal. Total Degree Days (TDDs) will fall to 11.1 TDDs, 2.5 TDDs fewer than normal and the 12th fewest out of the last 38 years. Click HERE for more on today's temperature and degree day outlook.

Based on this forecast and early-cycle pipeline demand, I am projecting a bearish +5 BCF/day daily natural gas storage injection, 5 BCF larger than Wednesday and an ugly 8 BCF bearish versus the 5-year average -3 BCF/day withdrawal. It will be the largest injection so far in the fledgling injection season. Meanwhile, LNG feedgas demand will fall for a second straight day today as flows to Sabine Pass finally appear to be picking back up. Total demand will rise 0.1 BCF/day from Wednesday to 3.99 BCF/day, still more than 1.5 BCF/day below last week's all-time highs. By tonight, projected Realtime natural gas inventories will be near 1112 BCF while the storage deficit versus the 5-year average will fall to -526 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.