6:00 AM EDT, Thursday, October 31, 2019
In its weekly Petroleum Status Report for October 19-25, the EIA announced Wednesday morning that crude oil inventories rose by +5.7 MMbbls. This was much larger than Tuesday's American Petroleum Institute (API) expectation of a -1.7 MMbbl draw and was 4.6 MMbbls bearish versus the 5-year average +1.1 MMbbl build. As a result, crude oil inventories rose to 438.9 MMbbls--the highest since August 9--while the storage surplus versus the 5-year average rose to +12.9 MMbbls. Year-over-year, oil inventories are +9.8 MMbbls higher.
The bearish build--compared to the previous week's bullish -1.7 MMbbl draw--appears to have been largely driven by a sharp rise in imports. Imports jumped by 0.8 MMbbls/day or +14% from the previous week's 23-year low to 6.7 MMbbls/day, still a respectable 0.7 MMbbls/day lower than last year, as shown in the Figure to the right. With Saudi Arabia, in particular, aggressively curtailing supply to the US to counter gains in domestic production, I expect imports to hold well below 7 MMbbls/day for at least the next several months. Officially, production held at 12.6 MMbbls/day last week, up 1.4 MMbbls/day or 13% year-over-year, though my own calculations suggest that output is comfortably over 13 MMbbls/day. As a result, total supply rose by 0.8 MMbbls/day to 19.3 MMbbls/day, up 0.8 MMbbls/day or 4% from 2018. On the demand side, refinery demand rose for a second straight week, gaining +0.1 MMbbls/day to 16.0 MMbbls/day, though still down 0.4 MMbbls/day or 4% from last year. Refinery demand has now trailed 2018 levels for the past 12 straight weeks. This rise in refinery inputs was more than countered by a 0.4 MMbbls/day drop in exports from last week's multi-month high to a still-solid 3.3 MMbbls/day, up a massive 0.8 MMbbls/day or 34% from 2018. Thus, total demand fell by 0.2 MMbbls/day from the previous week to 19.3 MMbbls/day, up 0.4 MMbbls/day or 2.2% from the previous year. With total supply up 0.8 MMbbls/day from 2018 and demand up 0.4 MMbbls/day, supply/demand balance last week was 0.4 MMbbls/day loose year-over-year, somewhat disappointing given the aggressive moves to curtail imports and boost exports. It is worth nothing that refined products both saw inventory drawdowns, though they were split versus the 5-year average. Gasoline stocks saw a slightly bullish -3.0 MMbbl draw (5-year average: -2.4 MMbbls) while distillates only fell by a bearish -1.0 MMbbls (5-year avearge: -2.9 MMbbls). Nonetheless, distillate stocks remain at a robust storage deficit versus the 5-year average (14 MMbbls or 10%) while gasoline storage is at a tiny surplus (+3 MMbbls or +1.5%).
Click HEREfor more on the latest EIA-reported crude oil inventories and supply/demand data.
Unsurprising, oil prices dropped Wednesday after the bearish storage build, though the decline was actually relatively restrained. WTI fell 48 cents or 0.9% to $55.06/barrel while Brent fell a sharper 98 cents or 1.6% to $60.61/barrel. It was the lowest settlement for both price points since October 22. Even with the rise in storage, WTI remains steeply undervalued according to my Fair Price Model. Based on current inventories, the commodity is undervalued by 11% versus a Fair Price of $62.53/barrel. Based on storage projections for the next 8 months, WTI is averaging a 9.2% undervaluation (Fair Price $60.18/barrel versus average Futures Price $54.66/barrel). I was very tempted to buy--or, more accurately, short DWT--on the intraday dip under $55/barrel. However, I held up because I already have a large (11% of my holdings) position and, honestly, this was a disappointing build and could drive near-term sentiment lower, even if long term the commodity is still undervalued. Nonetheless, I am maintaining an aggressive $65/barrel upside price target as I still expect inventories to fall sharply as refinery output rebounds and imports remain suppressed.
Meanwhile, the short squeeze continued in the natural gas sector for a third straight day with the new December 2019 front-month contract rising 2% to $2.69/MMBTU. The rally is purely temperature-driven as short-term models continue to forecast a sustained period of much below-average temperatures for the next 14 days and both the GFS and ECMWF trended even colder yesterday, as shown in the Figure to the right. However, as long-time natural gas traders will know, such wintertime rallies are very dependent on the computer models remaining very cold. Once the fuel for the rally dries up, the commodity tends to sell-off sharply. With inventories still likely to hold 500 BCF or more above year-ago levels, I expect this will hold true for this rally as well. It is why, perhaps somewhat prematurely, I quickly shifted from net long to net short natural gas on Tuesday. It is certainly possible that the front-month contract tops $2.75/MMBTU in the next few days if the temperature outlook trends colder and the EIA reports a smaller-than-expected build, but I expect significant upside to be limited and feel that $3.00/MMBTU is (or should be) out of reach here. On the other hand, I would not be surprised to see prices fall back as low as $2.25/MMBTU by the end of November if warmer-than-average temperatures verify, suggested by the ECMWF-EPS long-term model, given what would be some ugly year-over-year comparisons. This is supported by my Fair Price model which is now overvalued across all time frames, including by over 15% on the January 2020 and February 2020 contracts.
The EIA will release its weekly Natural Gas Storage Report for October 19-25 this morning at 10:30 AM EDT. For the week, I am projecting a +90 BCF injection, an ugly 25 BCF bearish versus the 5-year average and a massive 41 BCF larger than last year's +49 BCF injection. As the Figure to the right shows, it would be the single largest injection for the week all-time since 1994, topping 2014's +88 BCF build. Historically, injections for the week have been as low as a -1 BCF withdrawal back in 2006. Should a +90 BCF build verify, inventories would rise to 3696 BCF while the storage surplus versus the 5-year average would rise to +53 BCF. The year-over-year surplus, meanwhile, would reach an enormous +560 BCF or +18%. Click HERE for more on last week's projected injection.
I expect investors will largely neglect today's Report unless the injection comes in far above or far below expectations, instead focusing on the near-term temperature outlook. Any bullish or bearish bias will largely be due to trends in the temperature outlook, though I feel, given the current sentiment, a smaller-than-expected injection would be more likely to result in a further rally than a larger-than-expected build would be to result in a pullback. I expect that a reported injection of +86 BCF or smaller would be sufficiently bullish versus expectations on its own to drive prices up to $2.75/MMBTU near-term. On the other hand, I feel that it would take an injection of +98 BCF or larger to be considered unequivocally bearish and to reverse the current downtrend and take prices back under $2.60/MMBTU. A reported injection between +86 BCF and +98 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 rise for a fourth straight day today as unseasonably cold temperatures shift eastward. Chicago, IL could receive a coating of snow this afternoon--and western suburbs could top a half foot--with highs only reaching the mid-to-upper 30s, 20F colder-than-normal. The chill will extend all the way south to the Gulf of Mexico with New Orleans only reaching the low 50s, nearly 25F colder-than-normal and sufficient to drive some extremely early-season heating demand. Look at all of that purple! On the other hand, in the strong southerly flow ahead of the arctic cold front knifing eastward, the Eastern Seaboard will remain unseasonably mild today. Washington, DC and Philadelphia will top 70F today and New York City and Boston may top 70F today, all 10F-15F warmer-than-normal. These anomalies will extend all the way south into Florida where Jacksonville could reach the low 90s, also 10F above-average. Overall, temperatures will actually inch higher by 0.2F to 55.2F today thanks to the building warmth across the densely-populated East, but will remain 0.6F colder-than-normal. Because the warm will be getting warmer and the cold getting colder, Total Degree Days (TDDs) will rise to 13.1 TDDs today, 1.6 TDDs greater than normal and the 8th most for October 31 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 +2 BCF/day daily natural gas storage injection down nearly 2 BCF from Wednesday and a robust 6 BCF bullish versus the 5-year average. Realtime natural gas inventories will inch higher to 3746 BCF while the storage surplus versus the 5-year average falls to +55 BCF. The year-over-year surplus will slump 7 BCF to 567 BCF. Click HERE for more on today's projected daily injection and Realtime natural gas inventories.
October 31, 2019
Home --> Daily Commentary & Archive --> October 31, 2019 Daily Commentary
Subscribe to:
Posts (Atom)