January 4, 2018

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Let's Play Two: EIA Projected To Announce Bullish Natural Gas Storage Withdrawal And Near-Average Crude Oil Drawdown In Twin Inventory Reports Today; Gas Demand Holds Steady Today Well Above-Average As Exceptional Nor'Easter Pounds Eastern Seaboard; Natural Gas Pulls Back While Energy Portfolio Climbs To New 52-Week High

6:00 AM EDT, Thursday, January 4, 2018
After a 4-day short squeeze that sent the commodity soaring more than 15%, natural gas finally pulled back on Wednesday as investors took profits. Prices for the front-month February 2018 contract dropped 5 cents or 1.6% to settle at $3.01/MMBTU. Despite continued bitterly cold temperatures and the forecast for even colder weather this weekend in the wake of a powerful East Coast blizzard, investors, including yours truly, are wary of the increasing likelihood of much milder temperatures beginning late next week. This likely prompted some traders to take profits off the table and to reduce risk after the recent run-up, despite a storage deficit that is near 3-year lows and still growing. With the pullback, the backwardation between the February and April 2018 contracts, which had climbed to a 4-year high on Tuesday, edged slightly lower to 23 cents, down from 27 cents. According to my Natural Gas Fair Price Model, the commodity remains significantly undervalued compared to a Fair Price of $3.87/MMBTU based on currently inventories alone. However, with Backwardation still at multi-year highs, record production likely to continue to climb, and a warming trend to begin in earnest after January 12, an additional pullback to the $2.85/MMBTU level near-term could still be in the cards. Crude oil, meanwhile, soared to a 3-year high on Wednesday as Iran protests boosted geopolitical risk. The commodity jumped $1.26 or 2.1% to $61.63/barrel, the highest close since December 2014. Brent crude kept pace, rising $1.27 to $67.84/barel, also a 3-year high. It will be a busy data-filled Thursday for both oil and natural gas with the EIA releasing its Natural Gas Storage Report at 10:30 AM EDT as normally scheduled as well as its weekly Petroleum Status Report at 11:00 EDT, delayed one day because of Monday's New Year's Holiday.

Thanks to gains across its holdings, my Oil & Natural Gas Portfolio climbed 0.4% on Wednesday to boost gains since May 1 to +31.5%, which is a new all-time high. The portfolio is up more than 5% in the past week as it rebounded from a 2-week pullback. I made a single trade on Wednesday, my second of the week, boosting equities exposure to balance out my more direct exposure to oil and natural gas. Subscribers can view these latest trades, current portfolio holdings, as well as twice-weekly Investing Commentaries on my Portfolio Holdings Page HERE. To learn more about subscribing and helping to support the site, please click HERE.

The EIA will release its weekly Natural Gas Storage Report for the holiday week of December 23-29 this morning at 10:30 AM EDT. I am projecting a -224 BCF natural gas storage withdrawal, an exceptionally bullish 125 BCF larger than the 5-year average -99 BCF. It would be larger than all but one of last winter's weekly withdrawals. As the figure to the right shows, a 5-year historical comparison is not much of a contest with the projected -224 BCF topping 2012's -145 BCF draw by nearly 80 BCF. Unsurprisingly, the 112 BCF projected week-over-week gain from last week's -112 BCF draw was driven nearly entirely by an increase in heating demand via residential, commercial and industrial sources. Electricity demand also increased and as a result, natural gas powerburn rose to average nearly 28 BCF/day, more than 4 BCF/day higher week-over-week. Should a -224 BCF draw verify, natural gas inventories would drop to 3108 BCF while the storage deficit versus the 5-year average would grow to -210 BCF. It should be mentioned that this week's report contains an unusual amount of uncertainty. First, it includes the Christmas holiday on Monday and its difficult-to-predict commercial and industrial demand suppression. Additionally, it is the largest draw that we have seen in the new supply/demand paradigm that we are now in with a huge jump in production and uncertain demand compensation. Click HERE for more on this week's projected withdrawal.

Wednesday's pullback in natural gas likely took some pressure off of the commodity heading into today's report, but with temperatures still forecast to warm beginning next week, a bad miss could still present a selling opportunity. On the other hand, should the projection come in larger-than-expected, it would suggest a tighter market, further increasing the chances that the following week's report exceeds a record -300 BCF, providing some near-term support to the commodity. I expect that a reported storage withdrawal in excess of -230 BCF will be viewed as unequivocally bullish and indicative of a very tight market, likely driving prices back above Tuesday's 1-month highs of $3.06/MMBTU. On the other hand, I expect a withdrawal of smaller than -210 BCF, while still bullish versus the 5-year average, will be viewed as a disappointment, with prices likely to pullback under $3.00/MMBTU. A reported withdrawal between -210 BCF and -230 BCF would be neutral with prices equally likely to rally or retreat.

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. The production data, in particular, will provide an early glimpse at possible freeze-offs associated with the first wave of the broader arctic outbreak.

Meanwhile, the EIA will release its Petroleum Status Report today at 11:00 AM EDT, detailing crude oil and refined product inventories as well as oil production, imports, and exports. It will also cover the week of December 23-29. On Wednesday afternoon, the American Petroleum Institute (API) announced that it was forecasting a -5.0 MMbbl crude oil storage withdrawal. While that sounds impressive, it is actually slightly bearish versus the 5-year average -5.4 MMbbl inventory drawdown. There have been no storage builds during this 5-year period, as shown in the Figure to the right and only 6 in the past 34 years since 1983. Should a -5.0 MMbbl crude oil drawdown verify, oil inventories would decline to 426.9 MMbbls, the lowest since September 25, 2015 while the storage surplus versus the 5-year average would hold nearly steady at +38.0 MMbbls.

It is likely because of this comparatively weak crude oil withdrawal that gasoline inventories are projected to rise by just +1.8 MMbbls versus the 5-year average +5.0 MMbbls. Likewise, distillates are forecast to climb by just +4.3 MMbbls versus the 5-year average +5.6 MMbbls. As a result, Total Petroleum Inventories--crude oil + gasoline + distillates--are projected to climb by +1.1 MMbbls, which is modestly bullish versus the 5-year average +5.3 MMbbls. Should this verify, Total Petroleum Inventories would rise to 791.2 MMbbls while the surplus versus the 5-year average would slide to just +35.8 MMbbls, down from over +200 MMbbls 11 months ago.

Overall, I view the API's forecast as slightly net bullish. However, I expect that the number investors will be most closely watching will be domestic production, especially after last week's surprising 35,000 barrel/day decline. Additionally, I expect that price movement directly related to the report will be confounded by geopolitical concerns surrounding Iran. I continue to feel that WTI oil still has further near-term upside, especially should US inventories continue to decline and geopolitical concerns persist, with the commodity potentially making a run for $65/barrel. I remain long the commodity. However, I feel that, at over $67/barrel, Brent oil is facing greater headwinds with rebounding North Sea supply with the Forties pipeline back in service and the potential for decreased compliance among OPEC members on production cuts the more expensive oil becomes and would be surprised to see the benchmark trade sustainably above $70/barrel, unless a major crisis unfolds in Iran. Check back on my Crude Oil Inventories Page HERE at 11:00 AM EDT for the official EIA numbers.

Natural gas demand will hold steady on Thursday, remaining much above normal as unseasonable and even record cold continues to inundate the eastern seaboard. An exceptionally powerful Nor'Easter will hammer the Eastern Seaboard as well today, putting an exclamation mark on the wintry pattern. For a time yesterday, Winter Storm Warnings stretched from northeastern Florida all the way to the Canadian border. Tallahassee, Fl saw its first measurable snowfall in 28 years while Charleston, SC received 5 inches of snow, its third largest storm on record, for any date. Today, the focus turns to the Mid-Atlantic and Northeast. Blizzard watches have been hoisted for Norfolk and Virginia Beach for only the second time in 30 years as well as for the Eastern Shore, coastal New Jersey, Long Island, Southeastern Massachusetts including Boston, and eastern Maine. As the storm wraps up, its central pressure could fall into the 945-955 mb range, in the top 5% of all Atlantic Extratropical Storms. Washington, DC saw 1-2 inches overnight, Philadelphia will see 2-4 inches through this morning, New York City 3-6 inches, and Boston cashing in near 12 inches. More impressive than the snow will be the wind, which could gust to over 60 mph in Boston and up to 70 mph along the Massachusetts South Shore. This will then be followed by bitterly cold that will be record-setting in many areas.

Ahead of the storm, however, temperatures will merely be seasonally cool today (though wind chills and near-blizzard conditions will make it feel much, much colder) with Philadelphia, New York City, and Boston all in the upper 20s to lower 30s, 5F-10F colder than average. However, the widespread snowfall and subsequent snowpack will ultimately help support bitterly cold temperatures beginning tomorrow. Elsewhere, temperatures will begin cooling again across the Midwest and Ohio Valley with Minneapolis and Chicago both rising into the low single digits and St Louis, Indianapolis, and Pittsburgh only reaching the mid-teens, all 20F-25F colder than average. The Southwest will remain mild, 5F-15F warmer than average regionwide, but low population densities and weak baseline demand means that this area will not impact overall nationwide demand significantly. Overall, the forecast mean population-weighted mean nationwide temperature today will be essentially unchanged, rising 0.2F day-over-day from 30.6F to 30.8F, still an impressive 8.3F colder-than-normal. Total Degree Days will hold steady at 34.0 TDDs, 7.6 TDDs greater than average and the third most for January 4 in the 37 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 -42 BCF/day daily natural gas storage withdrawal, unchanged from Wednesday and 19 BCF bullish versus the 5-year average. At this rate, natural gas inventories will fall to around 2840 BCF while the storage deficit will approach -360 BCF by the end of the day today. Click HERE for more on today's daily storage projection and real-time natural gas inventories.

For the natural gas storage week of December 29-January 5 that ends tomorrow, I am projecting a record -322 BCF natural gas storage withdrawal, an unprecedented 168 BCF bullish versus the 5-year average. It would handily top the previous record -288 BCF from January 2014. Should it verify, the natural gas storage deficit versus the 5-year average would climb to -376 BCF, a 3-year high, while the year-over-year storage deficit will rise to -394 BCF. The EIA will release its official report for this week next Thursday, January 11. I will have much more on this week's projection in Friday's Commentary. Looking ahead to next week, natural gas demand will start the week with a fury as record cold envelops the Northeast on Saturday with a -50 BCF/day withdrawal possible before demand rapidly declines to below-average by Tuesday as conditions at least temporarily modify. Nonetheless, thanks to the early-week chill, I am still projecting a third straight -200 BCF withdrawal for January 6-12.