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May 30, 2019

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EIA Double-Header Today: Another Triple-Digit Natural Gas Storage Injection Expected While Investors Cheer Bullish -5.3 MMbbl Forecast Crude Oil Drawdown; Gas Demand To Dip Today As Heat Finally Relents Across The South


6:00 AM EDT, Thursday, May 30, 2019
Natural gas continues to pivot around the $2.60/MMBTU level. The commodity rebounded on Wednesday, rising 5 cents or 2% to settle at $2.63/MMBTU following losses in each of the previous 2 sessions. The front-month June 2019 contract expired at the close of trading and will be replaced by the July 2019 contract, which settled at $2.62/MMBTU, a negligible 1 cent backwardation. It is not clear what drove Wednesday's rally, besides an ever-increasing tightly rangebound trading pattern with $2.60/MMBTU acting as a focal point. Near-term computer models continue to point to a seasonally cool start to June with both the ECMWF and GFS ENS models trending cooler beyond June 5, as shown in the Figure to the right. At the risk of sounding repetitive, little has changed regarding my near-term natural gas outlook. I continue to see a prolonged period of rangebound trading and maintain a slight bearish bias with a downside price target of $2.50/MMBTU.


Meanwhile, crude oil fell sharply out of the gates on Wednesday before staging a fierce rally just prior to the close. WTI dipped more than 3% to under $57/barrel early but settled down just 33 cents or 0.6% to $58.81/barrel, perhaps due to anticipation of a EIA-reported inventory withdrawal in today's Petroleum Status Report. Brent fell 66 cents to $69.45/barrel. I remain cautiously bullish on the oil sector and Wednesday's late rally--and the subsequent API storage data, discussed below--reaffirmed this sentiment. I had previously discussed adding to my long oil position via short DWT on a break under $57.50/barrel. Unfortunately, I decided that I did not want to gamble the day before the EIA's official storage numbers in light of the recent string of bearish builds, especially given last week's vigorous downside response to a larger-than-expected rise in inventory levels. In other words, I chickened out. Regardless, I continue to hold a moderate-sized DWT short position providing long exposure, as well as long positions in CHK and SWN. I am maintaining my $65/barrel upside target in the sector.


Speaking of my holdings, like oil, my Portfolio staged a fierce late day rally on the back of that commodity, rallying from an early session -1% loss to finish the day up +0.4%. The gains pushed year-to-date gains back up to +12.8% or +31.5% annualized. I made no trades on day. Click HERE for more on my current oil and natural gas holdings.


It will be a busy day for the EIA today, as the agency will release its regularly-scheduled Natural Gas Storage Report at 10:30 AM followed at 11:00 AM by its Petroleum Status Report, delayed one day due to the Memorial Day Holiday.


Starting with natural gas, I am projecting a +101 BCF storage injection, a third straight triple digit build and a slight 4 BCF bearish versus the 5-year average. As the Figure to the right shows, such a build would be the third largest in the last 5 years, behind 2015's +118 BCF and 2014's +114 BCF. A pattern consisting of hotter-than-normal readings across the Deep South and colder-than-normal readings across the northern third of the nation allowed gas demand to squeeze the maximum number of late-season heading degree days and early-season cooling degree days out of the pattern. A smaller, bullish build was only prevented by prolonged, unseasonable cold across the Desert Southwest, suppressing a major source of early-season cooling demand. Should a +101 BCF injection verify, natural gas inventories would rise to 1854 BCF while the storage deficit versus the 5-year average would inch lower to -270 BCF. Storage levels will finish the week +143 BCF higher than this time last year. Click HERE for more on last week's projected injection.


I expect that today's actual EIA-reported build would need to diverge significantly from expectations in order to shake natural gas out of its current rangebound funk. I feel that the EIA would need to report a storage injection in excess of +105 BCF to be considered unequivocally bearish versus expectations so as to drive a near-term breakdown to $2.50/MMBTU. On the other hand, I feel that a reported build of +96 BCF or smaller would be considered a bullish surprise and could drive a near-term move above $2.65/MMBTU. A reported injection between +96 BCF and +105 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.


Moving on to oil, the EIA will release its Petroleum Status Report this morning, also covering the May 18-24 period. After the close of trading on Wednesday, the American Petroleum Institute (API) announced that it was forecasting a -5.3 MMbbl inventory withdrawal. This would be the first draw in the last three weeks and only the second in the last six. It would be a modest 2.2 MMbbls bullish versus the -3.1 MMbbl 5-year average draw and 1.7 MMbbls larger than last year's -3.6 MMbbl draw. It would be the largest draw fort he week in the last 5 years and the second largest all-time since 1983, behind only 2008's big -8.9 MMbbl draw. It comes as a welcome relief to beleaguered oil bulls have been pummeled by a series of huge storage builds in recent weeks. However, the bullishness of the oil draw is countered by the API's more muted refined product numbers. While the Institute is forecasting a bullish -2.1 MMbbl distillate draw (5-year average: +0.1 MMbbls), it is calling for a very bearish +2.7 MMbbl gasoline build (5-year average -1.8 MMbbl). As a result, Total Petroleum Inventories (crude oil + gasoline + distillates) are forecast to fall by -4.7 MMbbl, which is exactly neutral versus the 5-year average, as shown in the Figure to the right. Fortunately for oil bulls, investors typically pay more attention to the crude oil numbers, rather than refined products. Additionally, the sector is deeply oversold and, in my opinion, is looking for an excuse to rally. Immediately following the API's announcement, WTI prices gained nearly 1% to $59.20/barrel, where they held overnight, as investors responded positively to the potential draw. Check back after 11:00 AM EDT on my Crude Oil Inventories Page HERE for more on the EIA's official storage numbers.


Natural gas demand will fall today as temperatures moderate across the Southeast and Mid-Atlantic, cutting cooling demand. After reading the mid-to-upper 90s yesterday, highs in Washington, DC and Baltimore will only reach the mid-to-upper 80s today. Meanwhile, it will still be very toasty across the Southeast with Raleigh, Charlotte, and Columbia all reaching the upper 90s, 5F-10F hotter than normal. On the other hands, it will be a seasonably cool day across Teas, the nations largest natural gas consuming state. Highs will be in the 80s statewide, generally around 5F cooler-than-normal with larger anomalies across the western part of the state. Temperatures will continue to rebound across the Desert Southwest with Phoenix, AZ approaching seasonal norms in the mid-90s after over a week of unseasonably chilly temperatures. Overall, thanks to the cooldown across the Southeast and Texas, but a warm-up across the Southwest, today's forecast mean population nationwide temperature will hold essentially flat, rising less than 0.1F to 72.3F, 2.9F warmer-than-normal. However, Total Degree Days (TDDs) will drop to 8.6 TDDs, but will still be 0.7 TDDs greater than normal and the 18th most for May 30 in the last 38 years since 1981. Click HERE for more on today's temperature and degree day outlook.


Based on today's temperature and degree day outlook, I am projecting a +17 BCF/day daily natural gas storage injection today, 2 BCF larger than both yesterday's build and the 5-year average. By tonight, projected Realtime natural gas inventories will reach 1944 BCF while the storage deficit slides to -268 BCF and the year-over-year surplus rises by 3 BCF to +152 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. Look for gas demand to rebound on Friday as temperatures continue to rebound across the West with a +15 BCF/day daily injection expected. Nonetheless, I am still calling for another triple digit bearish storage injection this week at +105 BCF for May 25-31. I will have much more on this projection in Friday's commentary.