October 5, 2017

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EIA Projected To Announce Bullish +48 BCF Weekly Natural Gas Inventory Build In Today's Storage Report; Gas Demand Holds Near Seasonal Levels Today As Temperatures Remain Very Mild; Crude Oil Drops To 3-Week Low Despite Larger-Than-Expected Crude Oil Storage Drawdown As Exports Surge To A Record High

6:00 AM EDT, Thursday, October 5, 2017
In its weekly Petroleum Status Report for September 23-29, the EIA reported Wednesday morning that crude oil inventories fell by -6.0 MMbbls. This was well above Tuesday's API forecast of a -4.5 MMbbl draw and 7.7 MMbbls bullish versus the 5-year average +1.7 MMbbl build. It was the third largest drawdown for the September 23-29 period in the last 33 years, behind only -8.5 MMbbl and -8.7 MMbbl draws in 2002 and 1990, respectively. With the draw, crude oil inventories fell to 465 MMbbls, which is once again approaching a 2 year low, 3 MMbbls ahead of the 2017 pre-Hurricane Harvey minimum of 462.2 MMbbls. The storage surplus versus the 5-year average declined to +84.8 MMbbls, still 10 MMbbls larger than the pre-Harvey minimum of +75 MMbbls. While the EIA reported that gasoline inventories rose by +1.6 MMbbls, it was a far smaller build than the API-forecast of a +4.2 MMbbl deluge and only slightly above the 5-year average +0.8 MMbbl build. Distillate stocks fell by -2.6 MMbbls, a much larger draw than the API-forecast -0.6 MMbbl draw and on par with the 5-year average. Overall, Total Petroleum Inventories (Oil + Gasoline + Distillates) tumbled by -7.0 MMbbls, very bullish versus both the API forecast of a -0.5 MMbbl draw and the 5-year average -0.2 MMbbl draw. At 819.3 MMbbl, Total Inventories are at a 2017 low and the storage surplus versus the 5-year average dropped to 86.3 MMbbls, down 117 MMbbls since the record high +203 MMbbls in February 2017. Click HERE for more on crude oil inventories.

The large crude oil storage draw was driven almost exclusively by exports, which surged to a new all-time high of 1.98 MMbbls/day last week. This was likely due to a wide WTI-Brent oil price spread that reached as high as $7/barrel last week. Over the last month since this spread has ballooned, exports have surged from a 6-month average of 0.7 MMbbl/day as shown in the Figure to the right meaning that exports alone accounted for upwards of 9.1 MMbbls/week of additional crude oil demand last week turning what could have been a +3 MMbbl weekly build into the observed -6 MMbbl draw. With the WTI-Brent spread remaining over $5/barrel, I expect exports to remain comfortably over 1 MMbbl/day for the foreseeable future, perhaps even exceeding 2.0 MMbbls/day in the next week or two. Click HERE for more on crude oil demand and exports.

On the other hand, the EIA reported that domestic production rose by a further 14,000 barrels/day week-over-week. Since Hurricane Harvey briefly shuttered Gulf of Mexico rigs in late August dropping output to around 8.8 MMbbls, production has returned with a vengeance, climbing each of the past 4 weeks to reach 9.56 MMbbls/day last week, a new 2017 high and less than 0.5 MMbbl/day from a new all-time high. Production is now up a whopping 1.1 MMbbls/day year-over-year, countering much of the bullish impact of crude oil exports. The Figure to the right plots daily production over the past year compared with the year-ago period. It is worth noting that this chart does suggest that production growth appears to be slowing. In fact, the entirety of last week's small 14,000 barrel/day gain was driven by Alaskan output while the all-important lower 48 production was unchanged week-over-week. Click HERE for more on crude oil production and supply.

Overall, I considered this report to be very bullish. It hit all the metrics that I care about right now: 1) Crude oil inventory drawdown; 2) Total Petroleum Inventory drawdown; 3) Record crude oil exports; 4) Stable-ish domestic production. Investors, however, didn't all agree. Oil opened down around -0.5% and immediately rose to +0.5% in the minutes immediately following the EIA's announcement before fading fast and closing down 44 cents or 0.9% at $49.98/barrel. It was the lowest settlement--and first sub-$50/barrel close--since September 19. Brent crude fell a lesser 20 cents to $55.80/barrel, meaning that the WTI-Brent spread is now once again approaching $6/barrel. Why then drop then? It is unclear. Brent and WTI may have fallen due to news reports that Libya was poised to restart its largest oil field after gunmen shut it down last weekend. However, that wouldn't explain WTI falling more steeply than Brent. While the report was undeniably bullish across the board, the tight domestic supply/demand balance right now is basically a one-trick pony. It is driven entirely by the recent surge in exports without which, as mentioned above, the observed -6 MMbbl draw could have been a +3 MMbbl build. I therefore suppose investors may fear that if and when the WTI-Brent spread narrows back down, the market will quickly revert to a much looser state as exports drop. However, this is something of a self-refuting prophecy. By bidding US oil down, the more likely this spread is to remain elevated, the higher exports are likely to be, and the tighter the US market will remain. Regardless, I interpret Wednesday's report as favorable and I remain bullish on the commodity and feel that any price under $50/barrel represents a good buying opportunity. After integrating data from the report, crude oil is now 22% undervalued versus its Fair Price of $63.76/barrel based on current inventories alone, which grows to average a 37% undervaluation over the next 8 months should the oil market remain tight. Based on this analysis, my 6-month price target for oil remains at $60/barrel.

Turning now to natural gas, the commodity finally staged a small relief rally after a nearly 9% 10-day pullback, rising 5 cents or 1.6% ahead of today's Storage Report to close at $2.94/MMBTU after trading up as much as 2.5% early in the session. The etiology for the rally is unclear, particularly as the temperature pattern, if anything, looked slightly more bearish Wednesday morning than Tuesday. More likely is that investors are either taking profits on short positions, bottom-fishing, or looking towards what is likely to be an exceptionally bullish storage report today. The EIA will release its weekly Natural Gas Storage Report for September 23-29 this morning at 10:30 AM EDT. I am projecting a +48 BCF injection, which would be an epic 43 BCF bullish versus the 5-year average +91 BCF storage build, the largest weekly bullish margin since March 17. It would be by far the smallest injection for the September 23-29 timeframe in the last 5 years, beating second place, 2016's +76 BCF build by nearly 30 BCF and halving the 5-year high +109 BCF build from 2014, as shown in the Figure to the right.

While the previous week's bullish +58 BCF build was driven by record high LNG exports that tightened up temperature-independent natural gas demand in only a modestly favorable temperature environment, last week's bullish injection was driven by heat, heat, and more heat. A remarkable late-summer surge of warmth boosted natural gas powerburn to levels typically seen in July, setting record highs from the Mississippi River eastward. Temperatures reached the 90F threshold from Minneapolis, Mn to the East Coast Megalopolis, up to 30F warmer than average in some areas. Burlington, VT reached 91F on Sunday, beating the previous daily record high of 84F by an unheard of 7F margin at a site where temperature records date back 126 years. Just as impressive as the magnitude of the heat was its duration. Chicago, Il saw temperatures top 90F for six days in a row, setting a record for the latest consecutive streak of 90F heat and setting daily record high temperatures for 5 out of 6 of these days. The mean population-weighted nationwide temperature for September 23-29 averaged 73.8F, just over 7F warmer than normal. I estimate that natural gas powerburn for the week averaged 33.1 BCF/day on the week, nearly 3 BCF/day higher than last year and served as the primary driver of demand. Should a +48 BCF verify, natural gas inventories would rise to 3514 BCF while the storage surplus versus the 5-year average would transition to a -2 BCF storage deficit, for the first time since January 20, 2017. Click HERE for more on last week's projected injection.

Despite Wednesday's oversold rally, natural gas remains steeply undervalued by 12% versus its Fair Price of $3.35/MMBTU based on current inventories alone. However, bears remain adamant that domestic production will result in a supply/demand mismatch favoring a return to storage surpluses and lower prices. With these competing forces, I continue to favor rangebound trading until we get out of the Shoulder Season and get a taste of early-winter temperatures. Given that natural gas is currently at the lower limits of said range, I expect that there is certainly room for upside should today's injection come in smaller than projected. I would view an injection of under +45 BCF to be unequivocally bullish with prices likely to move back towards $3.00/MMBTU in the near term while, on the other hand, an injection of over +50 BCF would be bearish versus expectations and could result in the commodity trading under $2.90/MMBTU, although I do feel any such losses would be limited and not sustainable. An injection of between +45 and +50 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 injection 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 inch higher today, holding near seasonal levels as temperatures remain mild. High temperatures along the densely-populated I-95 corridor from Washington, DC to Boston will be unseasonably mild today with highs in the lower 80s from Washington (10F warmer than average) to Boston (15F warmer than average). Further inland across the Ohio Valley and Deep South, highs will be more seasonable with highs around 80F south and the mid-70s north, 5F-10F warmer than normal. The Intermountain West and northern Plains will remain cool with highs 5F-10F below average from the Dakotas to Montana to Utah with low-elevation highs generally in the 50s to lower 60s. Not all of the West will be cool, however, with Phoenix, Az expected to see triple-digit heat today, upwards of 10F hotter than normal, prompting some late-season powerburn demand. In other weather-related news, Tropical Depression 16 has formed across the far southern Caribbean. The storm is likely to become Tropical Storm Nate today, and possibly Hurricane Nate over the weekend as it tracks north, brushing Central America and heading towards a landfall somewhere along the upper Gulf Coast from Louisiana to Florida's Big Bend early next week. Stay tuned for more. Overall, the forecast mean population-weighted nationwide temperature today is 69.4F, 0.8F warmer than yesterday and an impressive 5.5F warmer than normal. However, Total Degree Days will reach just 6.9 TDDs today, 0.4 TDDs fewer than normal. Click HERE for more on today's temperature and degree day outlook. Despite the large warmer-than-average anomaly, the fact that we are in the heart of the Shoulder Season means that these departures will be insufficient to generate much in the way of cooling demand except across the far southern reaches. As a result, I am projecting a +12 BCF/day daily natural gas storage injection today, 1 BCF smaller than yesterday and near the 5-year average. For the week of September 30-October 6 ending tomorrow, I am projecting a near-average +86 BCF natural gas storage injection. More on this on Friday.