July 5, 2019

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EIA Disappoints In Dual Storage Reports, But Oil & Natural Gas Both Finish Higher; Natural Gas Supply/Demand Imbalance Continues To Tighten On Strong Powerburn & Record LNG Exports, Boosting Undervaluation & Setting Up Potential Short Squeeze; 16-Week Bearish Streak Likely To Be Snapped With Slightly Bullish Natural Gas Storage Injections Expected For The Next 2 Weeks

6:00 AM EDT, Friday, July 5, 2019
In a busy day for the EIA, the agency reported oil and natural gas inventory data that disappointed versus expectations, yet both commodities managed to finish in the black. Thanks to the 4th of July holiday, the EIA released its Natural Gas Storage Report for June 22-28 a day earlier than normal, announcing that storage levels rose by +89 BCF for the week. On the one hand, this was the smallest injection since the week ending May 3. However, it was still 19 BCF bearish versus the 5-year average--the 16th straight bearish report--and a disappointing 7 BCF larger than my +82 BCF projection. With the build, natural gas inventories rose to 2390 BCF while the storage deficit versus the 5-year average contracted down to -152 BCF and the year-over-year surplus rose to +249 BCF. Click HERE for more on the latest natural gas inventories. Despite the larger-than-expected injection, I calculate that the temperature-adjusted natural gas supply/demand imbalance continues to tighten. The year-over-year imbalance tightened by another 0.2 BCF/day from the previous week to -1.9 BCF/day loose versus 2018. This means that, for any given temperature, I would expect the daily natural gas storage injection to be 1.9 BCF/day larger--or bearish--compared to the same temperature with 2018 supply/demand fundamentals. This is a key metric measuring the underlying health of the natural gas sector which filters out the week-to-week variability of temperature and is used to make accurate long-term storage and price projections. While the temperature-adjusted supply/demand balance is still bearish, it is quickly tightening. As shown in the Figure to the right, the year-over-year imbalance has tightened each of the past 5 weeks and is at its lowest since late March. This tightening trend has been driven by cheap natural gas prices that have kept domestic production in check and have boosted powerburn to average 3 BCF/day higher than year-ago levels over the past month despite cooler temperatures and fewer cooling degree days. Additionally, LNG exports have risen to record highs in the past 2 weeks, averaging 3 BCF/day higher than year-ago levels. These factors have helped to tighten down the supply/demand imbalance over the past 6 weeks and have prevented the year-over-year storage surplus from skyrocketing as temperatures have been otherwise neutral-to-unfavorable, especially relative to last year. Should the tightening trend continue--and I expect it will--and we start to see sustained summertime heat, look for the potential for a quick switch to a string of bullish inventory builds.

Investors may have recognized this potential as well because, despite the bearish and larger-than-expected injection, natural gas prices rose 5 cents or 2.2% to $2.29/MMBTU, reversing a recent downturn that had taken prices back towards 3-year lows. At this time, I am looking past the relatively disappointing storage injection and remain bullish on the sector. This sentiment is based on several factors. First, the near- and long-term temperature outlook has trended hotter over the past several days, led by the ECMWF ENS and its long-term ECMWF-EPS element, which is forecasting the potential for a sustained period of warmer-than-normal late July temperatures in its Thursday run. Second, the natural gas short trade is exceptionally overcrowded. According to the latest CFTC data, just 32% of money manager positions are held long, less than half the 52-week average 69% and the lowest since 2016. This is setting the stage for a short squeeze should the temperature outlook warm and the fundamental supply/demand imbalance continue to tighten. Finally, even with 16 straight bearish storage injections, the commodity is still steeply undervalued according to my Fair Price Model which compares current prices and storage levels to historical data points. Based on current inventories alone, the commodity is undervalued by a steep 17% versus a Fair Price of $2.73/MMBTU, as shown in the Figure to the right. While this Fair Price does fall should the supply/demand imbalance remain loose, I would not be surprised to see it continue to tighten, maintaining a consistent discount versus the Fair Price. For these reasons, I am aggressively long the commodity in my Portfolio and am maintaining what could be a conservative $2.60/MMTBU summertime price target on natural gas.

Meanwhile, the EIA also released its weekly crude oil Petroleum Status Report as regularly scheduled Wednesday morning. The agency announced that inventories fell by -1.1 MMbbls. While this was a third straight weekly decline in inventories, the draw was bearish versus the 5-year average -3.0 MMbbl and came in well below Tuesday's American Petroleum Institute (API) -5.0 MMbbl expectation. The smaller-than-expected draw--especially in comparison to the previous week's blow-out -12.8 MMbbl plunge--was driven by a rise in imports and a drop in exports. Imports rose 0.93 MMbbls/day from the previous week to 7.6 MMbbls/day while exports slid by -0.78 MMbbls from a record high to 3.0 MMbbls/day. As a result, net imports surged by 1.7 MMbbls on the week. Additionally, refinery input demand remained weak yet again, falling 50,000 barrels/day during the height of the summer driving season to 17.3 MMbbls, trailing laast year by a steep 0.36 MMbbls/day, as shown in the Figure to the right. With the draw, crude oil inventories fell to 468.5 MMbbls while the storage surplus versus the 5-year average rose to +27.9 MMbbls. Click HERE for more on the latest EIA-reported crude oil inventories.

Like natural gas, investors overlooked the smaller-than-expected draw and oil finished the day in the black. WTI rose $1.09 or 1.9% to settle at $57.34/barrel while Brent gained $1.42 to $63.82/barrel. While some of the rally may have been due to a third straight inventory draw, I also suspect that some of the buying was bargain-hunting following the previous session's exaggerated 4% decline. Nonetheless, I feel that inventories are poised to decline further in the weeks to come as refinery demand rises and imports pull back under 7 MMbbls/day. According to my Fair Price Model, oil is undervalued by a modest 5% versus a Fair Price of $60.32/barrel based on current inventories alone, as shown in the Figure to the right. But because inventories have averaged 1.0 MMbbls/week tight versus the 5-year over the past month, this Fair Price rises to $62/barrel by the end of the summer. I would not be surprised to see the supply/demand imbalance tighten further and to see a rise in this Fair Price. As a result, I am maintaining a $65/barrel 2019 price target on WTI and remain modestly long oil in my portfolio via short DWT with a plan to boost exposure should prices dip under $56/barrel near-term.

Natural gas demand will rise today as temperatures across the eastern third of the nation rise, even as the Rockies and Northern Plains remain unseasonably chilly. Highs will reach the mid-to-upper 80s as far north as Boston while Philadelphia and Washington, DC will likely see 90F warmth again today. Further inland, Columbus, OH and Chicago could also reach 90F. Readings will be 5F-10F hotter-than-normal regionwide. Across the Southern Plains, highs will be within 5F of normal, including the major natural gas consuming state of Texas. On the other hand, across the northern Plains and Rockies, readings will be 10F-20F cooler-than-normal throughout the region with highs only in the 60s and 70s across the Dakotas, Montana, and Wyoming. Nonetheless, these are relatively sparsely-populated areas compared to the sultry East and will contribute less towards nationwide natural gas demand. Overall, today's forecast population-weighted mean nationwide temperature will warm 0.4F from Thursday to 79.0F, 2.0F hotter than normal. Total Degree Days (TDDs) will rise to 14.4 TDDs, 0.6 TDDs greater than normal and the 9th most for July 5 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, down around 0.5 BCF from Thursday and 2 BCF bullish versus the 5-year average. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. For the full week of June 29 to July 5, I am projecting a +66 BCF natural gas storage injection which, after 16 straight bearish reports, would be 5 BCF bullish versus the 5-year average. As the Figure to the right shows, such a build would be the third largest in the past 5 years, but would be a mere 13 BCF larger than the 5-year minimum build of +53 BCF in 2016. The (potential) bullish build was driven by strong powerburn cooling demand (despite not particularly hot nationwide temperatures) that averaged 38.4 BCF/day, up 1.4 BCF/day from 2018, according to my Realtime Powerburn Calculations. Should a +66 BCF injection verify, natural gas inventories would rise to 2456 BCF while the storage deficit versus the 5-year average would rise to -157 BCF. The EIA will release its official storage numbers for the week next Thursday, July 11, at 10:30 AM EDT, back on a normal schedule. Click HERE for more on this week's projected injection.

Looking ahead to next week, look for temperatures to be seasonally warmer than normal throughout the week. Initially, natural gas demand will fall over the weekend as the unseasonably chilly temperatures across the Rockies today spread into the Great Plains and Midwest. As a result, by Monday, daily injections could rise from a slightly bullish +7 BCF/day to near the 5-year average +9 BCF/day, as shown in the Figure to the right. Look for gas demand to rebound by mid-week as the Eastern Seaboard and the Plains begin to warm up with daily injections again falling back towards +7 BCF/day. With above-average temperatures and very strong powerburn, I am expecting a second straight slightly bullish injection for the week of July 6-12. At this time, I am projecting a +56 BCF build, 7 BCF smaller than the 5-year average, boosting the storage deficit versus the 5-year average to -165 BCF. Click HERE for more on next week's projected storage injection.