April 4, 2019

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Oil Falls, But Cuts Losses After Bearish & Larger Than Expected +7.2 MMbbl Inventory Build; Natural Gas Continues Tepid Trading As Investors Weigh Record Production & Seasonality Against Colder Outlook, But Upside Potential Outweighs Downside Risk; EIA Projected To Announce Bearish +17 BCF Natural Gas Storage Injection In Today's Report

6:00 AM EDT, Thursday, April 4, 2019
In its weekly Petroleum Status Report for March 23-29, the EIA reported Wednesday morning that crude oil inventories rose by +7.2 MMbbls in a week that was likely impacted by the closure of Houston's Ship Channel. After a string of bullish reports, this one was a bit of a dud. The reported build was significantly bearish versus the 5-year average +0.2 MMbbl build and was more than twice Tuesday's API forecast +3.0 MMbbl build. It was the second largest build for the March 23-29 period behind only +8.5 MMbbl and +7.3 MMbbl builds in 2012 and 2008, respectively. With the build, crude oil inventories rose to 449.5 MMbbls while the storage deficit versus the 5-year average was essentially erased, falling to a negligible 0.7 MMbbls. Inventories are up +24.2 MMbbls year-over-year. Of note, the storage region PADD 3--which includes the Gulf Coast and Houston--saw a build of more than +8.7 MMbbls while the other regions saw small builds or draws all less than +/-1.5 MMbbls, as shown in the Figure to the right. PADD 3 was likely impacted by the chemical fire and associated shipping channel closure the previous week, cutting export capacity and inflating the storage build. If true, it could mean that this week's larger-than-expected build was a one-off deal and bullish draws will return in short order.

Regardless, the bearish build was driven by modest increases and decreases in imports and exports, respectively, as well as a new record high in domestic oil production. Imports rose by 0.22 MMbbls/day to 6.76 MMbbls/day, although this was the fourth straight week in which imports held under 7.0 MMbbls/day and imports are still down an impressive 1.14 Mbbls/day compared to last year. Meanwhile, exports fell by 0.16 MMbbl/day from the previous week to 2.72 MMbbls/day, driving the year-over-year gain down to 0.55 MMbbls, driven by a combination of the aforementioned shipping closure and perhaps as exporters are beginning to pull back as the WTI-Brent spread has contracted from $10/barrel to under $7/barrel. Additionally, domestic oil production continued its slow march higher rising 0.1 MMbbls/day week-over-week to a new all-time high of 12.2 MMbbls/day, up a 1.74 MMbbls/day from 2018. As the Figure to the right shows, production growth over the past 6 weeks has largely kept pace with last year's growth. With these week-over-week changes--and refinery demand largely unchanged--total supply/demand balance loosened by 0.48 MMbbls, or nearly 3.5 MMbbls, from the previous week. Of note, adding total supply (18.963 MMbbls/day) and demand (-18.572 Mbbls/day), one would arrive at a +0.4 MMbbl/day or +2.7 MMbbl/week build, well under the observed +7.2 MMbbl build. This means that supply is being underestimated or demand is being overestimated by 0.643 MMbbls/day aka the "adjustment factor," up from 0.477 MMbbls/day last week. The significance of these unusually large adjustment factors is not yet clear, but I would not be surprised to see a series of larger-than-expected withdrawals in the coming weeks as the adjustment factor flips back to negative, as it is often want to do.

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

Unsurprisingly, following the larger-than-expected build, WTI oil promptly fell over 1% to just over $62.00/MMBTU immediately post-report. However, the commodity rallied the rest of the session, briefly flipped into the black, and finished the session down a mere 34 cents or 0.5% at $62.24/barrel. Brent closed down 21 cents or 0.3% at $69.16/barrel. Even though the commodity finished with a small loss, the fact that oil was able to rally despite an all-around disappointing report is a very bullish indicator. The next several weeks will be particularly important as we transition from the refinery maintenance season towards the summer driving season and its traditionally large storage withdrawals. At this time, my Fair Price model is calculating a tiny undervaluation of 2.1% versus a Fair Price of $63.82/MMBTU based on current inventories alone. In order to sustain a rally higher, the market must show that yesterday's anomaly was a fluke and supply/demand balance remains tight. Averaged over the past month, supply/demand balance is still a bullish 4.2 MMbbls/week tight versus the 5-year average. As the Figure to the rigt shows, such an imbalance--even accounting for some loosening--drives the Fair Price above $70/barrel by July. For this reason, I expect further upside and am maintaining a 2019 WTI price target $65/barrel. I feel that dips under $60/barrel--which would be a reasonable pullback given the magnitude of the recent move--should be bought.

Meanwhile, natural gas continued to tread water on Wednesday, closing down 0.8% at $2.66/MMBTU. Investors continue to weigh the impact of record production and the traditionally bearish shoulder season against a mid-April forecast that has steadily trended colder over the past 3 days. I continue to feel that near-term upside outweighs downside risk. However, I foresee rangebound trading due to these opposing elements and my upside price target is only $2.75/MMBTU. Thanks to small losses in both oil and natural gas, my Energy Portfolio pulled back from Tuesday's 2019 high, shedding -0.4%. The Portfolio remains up +10.7% year-to-date or +42.0% annualized. I continue to monitor my positions closely but have yet to make a trade this week. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for March 23-29 this morning at 10:30 AM EDT. I am projecting a +17 BCF storage injection, the first of the season and 40 BCF bearish versus the 5-year average. As the Figure to the right shows, such a build would be the first for the final week of March in the last 5 years. The bearish build was driven by temperatures that were warmer-than-normal throughout the week, particularly its final 2 days. The week's mean population-weighted nationwide temperature averaged 52.4F, 2.9F warmer than the previous week and 1.8F warmer-than-normal. The storage week was also negatively impacted by the onset of maintenance at Cheniere Energy's Sabine Pass LNG export plant that resulted in total weekly LNG Feedgas Demand falling 8.6 BCF week-over-week to 27.2 BCF, the lowest since the fist week of February. Should a +17 BCF storage injection verify, natural gas inventories would rise to 1124 BCF while the storage deficit versus the 5-year average would contract to -511 BCF. The year-over-year deficit would fall a steep 50 BCF to -235 BCF. Click HERE for more on this week's projected storage injection.

At this will be the first injection of the Shoulder Season, it will provide important early information about market supply/demand balance now that heating demand is rapidly exiting stage left--even if sluggish investors don't immediately respond. I expect that a reported injection over +20 BCF will be viewed as a looser-than-expected market and natural gas could fall under $2.60/MMBTU. On the other hand, a reported build of +13 BCF or smaller would be a bullish surprise and could fuel a move above $2.75/MMBTU should the temperature outlook continue to cooperate. Overall, given the recent pullback and improving temperature outlook, I feel that upside potential outweighs downside risk today.

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 third straight day today as mild temperatures remain anchored in place across the Mid-Atlantic. Highs today will reach 70F in Washington DC--10F warmer-than-normal--while further wet 70F warmth could reach as far north as Louisville, KY and Cincinnati, OH. Central Texas will also see a bubble of warmth today with Dallas, San Antonio, and Houston all topping 80F, up to 10F warmer-than-normal. Elsewhere east of the Rockies, highs will generally be within 5F of normal. Overall, today's forecast mean population-weighted nationwide temperature will warm 1.8F from Wednesday to 56.6F, a new 2019 high and 2.2F warmer-than-normal. Total Degree Days will fall to just 10.1 TDDs--a 2019 low--2.0 TDDs fewer than normal and the 12th fewest for April 4 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 +8 BCF/day daily natural gas storage injection for today, around 0.5 BCF/day larger than Wednesday and 7 BCF bearish versus the 5-year average. By tonight, projected Realtime natural gas inventories will be near 1136 BCF while the storage deficit versus the 5-yea average will be around -502 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. Gas demand will hold nearly steady on Friday with another bearish +7 BCF/day or +8 BCF/day injection. This will push the weekly build to near +18 BC, or a slight 13 BCF bearish versus the 5-year average. I will have much more on this week's build in Friday's Commentary, but in the meantime, click HERE for more.