June 5, 2019

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Oil & Natural Gas Both Bounce, But Rally Underwhelms As US Equity Indices Surge Over 2%; EIA Forecast To Announce Another Bearish Crude Oil Storage Build Today As Bulls Can't Catch A Break; Gas Demand To Begin Recovery Today Thanks To Building Heat Across the Central US

6:00 AM EDT, Wednesday, June 5, 2019
Oil and natural gas both saw small bounces on Tuesday, but given the Dow Jones rose over 500 points and other indices were up over 2%, such gains seemed rather underwhelming. Natural gas edged up 0.5% to $2.42/MMBTU, rebounding off Monday's 3-year low. Even with the gain, natural gas prices are still down a steep 18% year-over-year. And despite the discount, the commodity continues to face downward pressure from June temperatures that are likely to be consistently below-average, at least through the final week of the month. Natural gas bulls are placing their hopes in large year-over-year gains in LNG feedgas demand and cheap prices driving fuel switching that will boost cooling demand. Nonetheless, the near-term prospects for the commodity will be closely dictated by the temperature outlook for the rest of the month. Should forecasts trend colder, expect downside to around $2.30/MMBTU while prices could bounce to $2.60/MMBTU should temperatures begin to recover sooner than currently forecast. It is for this reason that I feel upside potential outweighs downside risk, though I expect that it will be a rocky road to a sustainable rally and would not be surprised to see a period of rangebound trading as the commodity establishes a bottom.

Meanwhile, crude oil saw a somewhat stronger move higher--although it had more to recover from in the wake of May's nearly 20% drop. WTI rose 23 cents or 0.4% to settle at $53.48/barrel while Brent jumped 69 cents or 1.1% to $61.97/barrel. This was an oversold bounce--fueled by a surge in equities--not one driven by news. The same bullish and bearish arguments hold today as held last week. The first and foremost concerns among the bulls continue to be concerns over the US-China trade war and global demand growth as well as bloated and persistently building US inventories. Bulls point to sharp curtailments in OPEC and Venezuelan exports as well as an unusually large Adjustment factor in recent EIA weekly data as signs that the market is inherently tight and inventories are poised to start falling soon. For better or for worse, I continue to support the bullish camp and feel that the recent sell-off has gone too far too fast. However, before prices will be able to mount a sustainable rally, I fear there may be further near-term downside.

That is because the EIA is scheduled to release its weekly Petroleum Status Report covering the week of May 25-31 this morning at 10:30 AM EDT, detailing domestic inventories and supply/demand balance. After the close of Tuesday's trading, the American Petroleum Institute (API) announced that it was forecasting yet another bearish build in crude oil inventories, this time on the order of +3.6 MMbbls, nearly 3.9 MMbbls bearish versus the 5-year average -0.3 MMbbl draw. It would be the largest build for the week in the last 5 years and the fifth largest all-time since 1983. Should it verify, crude oil inventories would rise to 480.1 MMbbls, the highest since July 28, 2017. At that time, for whatever it's worth, WTI was trading at $49.71/barrel, a 6.9% discount to current prices. This suggests that perhaps the latest sell-off was more appropriate than I am giving it credit for, though 2017 bears were not facing the significant efforts by OPEC to curb imports to the US, ongoing sanctions on Iran and Venezuela, and record domestic exports. Moving on, if the bulls were hoping to get any reprieve from refined products, they were again mistaken. While the API is forecasting a slightly bullish +1.4 MMbbl gasoline inventory build (5-year average: +1.8 MMbbl), it is also calling for a huge +6.3 MMbbl build in distillates versus the +2.8 MMbbl 5-year average. As a result, Total Petroleum Inventories (crude oil + gasoline + distillates) are forecast to rise by +11.3 MMbbls, 7.0 MMbbls bearish versus the 5-year average 4.3 MMbbls. While I expect to see another large Adjustment Factor, attempting to square what will likely be a considerably more bullish supply/demand balance with bearish inventory builds, there is little for the bulls to get excited about in this report. Investors felt the same way as prices immediately fell by more than 50 cents to under $53/barrel in the wake of the API data, though prices rebounded slightly in overnight trade back above that level. Should the EIA officially report comparable numbers, I would not be surprised to see prices tumble to new lows. However, anything better than expected--even a small build--could trigger a rebound in the sector as the commodity remains steeply oversold.

Meanwhile, my Oil & Natural Gas Portfolio took advantage of the rally throughout the energy sector to rise +1.0% on Wednesday. The rally boosted 2019 year-to-date gains back up to +10.7% through the first 106 trading days of the year--still down nearly 4% from the year's highs less than 2 weeks ago--or +25.4% annualized. I made no trades on the day, nor have I made any on the week so far. Despite the recent volatility throughout the sector, I remain relatively aggressively long both oil and natural gas, for better or worse. My long oil holding via short DWT remains my largest net directional position at a sizable 11.6% of my holdings. Despite my assertion that the commodity is undervalued, I have no immediate plans to add to my position at these levels so as to minimize risk. My natural gas net long position stands at a more moderate 6.3% of my holdings, with a 12.3% DGAZ short partially offset by a 6.0% UGAZ short. Should natural gas trade under $2.30/MMBTU, I will consider cautiously adding to this position, boosting it to 10%-12% of my holdings. Both of these positions are long term and I would not be surprised to see some further near-term downside. However, I am short the 3X ETFs which should result in profits from leverage-induced decay. Additionally, should WTI reach my price target of $65/barrel and natural gas top $2.60/barrel, I calculate that, with the addition of my other equity holdings, year-to-date gains would top +20%. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will begin to rebound today as temperatures heat up across the central US. St Louis and Kansas City will both top 90F, Des Moines will approach that level, and Chicago will reach the mid-80s, all around 10F hotter-than-normal. Even larger anomalies are possible across the far northern Plains and Rockies where Bismarck, Omaha, and Billings, will all reach well into the 80s, all 10F-15F above-average. However, this heat will be countered by below-average temperatures across Texas, the nation's largest natural gas-consuming state. Highs will generally be around 5F below-average state-wide with Dallas and Houston reaching the mid-to-upper 80s and San Antonio and El Paso approaching 90F. Nonetheless, thanks to the warm-up across the Central US, today's forecast mean population-weighted nationwide temperature will warm by 3.1F to 74.0F--a new 2019 high--and will be 3.2F hotter than normal. Total Degree Days (TDDs) will rise to 9.5 TDDs, 0.8 TDDs greater than normal and the 9th most for June 5 in the last 38 years. 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 +15 BCF/day daily natural gas storage injection, 2 BCF smaller than Tuesday's build but still 2 BCF bearish versus the 5-year average +13 BCF/day build. By tonight, projected Realtime natural gas inventories will reach 2060 BCF while the storage deficit versus the 5-year average will fall to -231 BCF. The year-over-year surplus, meanwhile, will rise to +192 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. Look for natural gas demand to continue rising on Thursday and Friday as the heat across the central US expands eastward. Projected daily storage injections will fall to just above the 5-year average at +14 BCF/day. Nonetheless, I am still projecting a fourth straight triple digit storage build for the first week of June.