July 6, 2018

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EIA Projected To Announce Slightly Bearish Natural Gas Storage Injection In Today's Storage Report; Bullish Injections Return For 4th Of July Week, Buoyed By Record Heat, Temporarily Overcoming New Production Highs; Crude Oil Retreats After EIA Reports Surprising Storage Build As Total Supply Rises To Record & Demand Retreats

6:00 AM EDT, Friday, July 6, 2018
One week after an historic -9.9 MMbbls crude oil inventory drawdown that sent WTI oil prices surging towards $75/barrel, the EIA came back to earth on Wednesday, announcing a surprise +1.3 MMbbl storage build for the week of June 23-29. This was nearly 6 MMbbl larger than both Tuesday's API forecast of a -4.5 MMbbl draw and the 5-year average -4.0 MMbbl draw. With the build, inventories rose to 417.9 MMbbls while the storage deficit versus the 5-year average contracted down to -9.7 MMbbls.

The unexpected storage injection was driven by weakening demand and building imports. Refinery demand fell by 160,000 barrels/day week-over-week from an all-time high to 17.65 MMbbls/day, still up 510,000 barrels/day from last year. Exports, meanwhile, fell from their own all-time high, tumbling 660,000 barrels/day or 22% to 2.34 MMbbls/day. Despite the decline, exports were still up 1.57 MMbbls/day or 204% from 2017. One explanation for the falling exports might be the abrupt contraction in the WTI-Brent spread. After peaking at over $11/barrel in early June, the spread has tumbled over the past three weeks or so to just $4.45/barrel at Thursday's close. This reduces profitability of transporting cheaper US crude overseas and may have contributed to bringing exports back down to earth. Overall, total demand, which includes refinery inputs and exports, fell by a steep 830,000 barrels/day as shown in the Figure to the right. Demand remains up a robust 2.08 MMbbls/day year-over-year, which is sufficient to counter gains in domestic production, itself flat on the week at 10.9 MMbbls/day once again, but up 1.56 MMbbls/day from 2017.

While domestic production has been flat, crude oil imports have been on the rise, climbing another 700,000 barrels/day last week to a 2018-high of 9.06 MMbbls/day. Imports are now up a huge 1.31 MMbbls/day year-over-year. These gains may have also been driven by a narrowing of the Brent-WTI spread as it is less unfavorable to transport foreign oil into the US. As a result, total supply--which includes imports and production--stands at 19.96 MMbbls/day, up 2.88 MMbbls/day or 16.8% year-over-year, as shown in the Figure to the right. As far as I can tell, this is a record total supply mark. With total demand up only 2.08 MMbbls/day from 2017 as discussed above, the market averaged 800,000 barrels/day loose last week.

Undoubtedly, this was a bearish report and stands in stark contrast to last week's wall-to-wall bullish report. As a result, I would not be surprised to see WTI prices correct near-term should this week's single data point become a trend, perhaps falling as low as $70/barrel. Investors at large seemed to feel the same way on Thursday as WTI slid $1.20 or 1.6% to close at $72.94/barrel, the lowest close since June 27. Meanwhile, ahead of today's delayed EIA Storage Report, natural gas resumed its pullback, falling another 3 cents or 1.2% to $2.84/MMBTU. Despite the ongoing heatwave across the eastern two-thirds of the nation, investors remain concerned about record domestic production that is handily overmatching gains in powerburn demand as well as the prospect of a more seasonable late July and August. My Oil & Natural Gas Portfolio inched higher by 0.1% on Wednesday to push 2018 gains to +18.2% through the first 128 trading days of the year, or +35.9% annualized. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

The EIA will release is weekly natural gas storage report for June 23-29 this morning at 10:30 AM EDT, delayed one day because of the 4th of July holiday. I am projecting a +75 BCF storage injection, 5 BCF bearish versus the 5-year average +70 BCF build. Despite a late week surge in warmth that brought daily builds to single digits by Friday, the first half of the week was seasonally mild and, with natural gas production rising to a new record high of 80.9 BCF/day through Wednesday, up a massive 9.6 BCF/day year-over-year, the market remained sufficiently loose to drive the slightly bearish injection. A +75 BCF build would be the third largest injection for the June 23-29 period in the last 5 years, ahead of only 2014's +98 BCF and 2015's +79 BCF builds. Should a +75 BCF injection verify, natural gas inventories would rise to 2149 BCF while the storage deficit versus the 5-year average would dip back under -500 BCF, which seems to be the new line in the sand, to -496 BCF. The year-over-year deficit, meanwhile, would slide more steeply to a still-robust -720 BCF.

While natural gas is caught in a vortex of negative sentiment, a smaller-than-expected storage injection could at least temporarily prompt a relief rally, while a larger-than-expected would merely further fuel the fire of alarmism of an imbalanced natural gas market. I expect that a storage injection of smaller than +70 BCF will be viewed as a bullish surprise, indicating a tighter-than-anticipated supply/demand balance, and could trigger a rally back towards $2.90/MMBTU. On the other hand, a reported injection of over +80 BCF would be further evidence of a loosening market balance despite otherwise relatively favorable weather conditions and could prompt a breakdown to under $2.75/MMBTU near-term. A reported build between +70 BCF and +80 BCF would be neural with prices equally likely to rally or pull back. Overall, I believe that the momentum remains in the bear's favor. Even should today's report come in on the lower side of the above guidance and natural gas trades higher, I believe that this would only represent another selling opportunity. There remains a feeling of inevitability to this market, that natural gas prices at least need to truly breakdown and wash out any weak longs remaining from the winter, which means testing $2.75/MMBTU by the end of the summer, before any sort of bottom can be established.

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 dip slightly today but will remain comfortably above-average as above-average temperatures persist across the Southeast and West. Heat Advisories are up for parts of Montana today as Billings could top out near 100F, 15F warmer-than-normal. Excessive Heat Warnings are flying for Phoenix today where afternoon highs could approach a blistering 115F, around 8F warmer-than-normal. Further west, Los Angles will reach the low-to-mid 90s, nearly 20F warmer-than-normal while much of California's Central Valley will reach the 90s (Sacramento) or low 100s (Fresno), generally 5F-10F warmer-than-normal. Above-average readings will hang on along the Southeast and immediate East Coast with New York City again approach 90F, 5F warmer-than-normal. In contrast, seasonally cooler temperatures will overspread much of the Plains and Midwest today with Detroit only reaching the upper 70s, Chicago the low 80s, and Houston near 90s, all around 5F cooler-than-normal. Overall, the forecast mean population-weighted nationwide temperature will drop under 80F for the first time this week, falling 0.9F from Thursday to 79.7F today, still 2.6F hotter than normal. Forecast Total Degree Days today will dip to 15.1 TDDs, 1.3 TDDs greater than normal and the 7th most for July 6th in the last 37 years dating back to 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 +9 BCF/day daily natural gas storage injection, 1 BCF larger than yesterday but still 2 BCF bullish versus the 5-year average +11 BCF/day build. For the natural gas storage week of June 30-July 6 ending today, I am projecting a +56 BCF injection, 21 BCF bullish versus the 5-year average. The bullish build was driven by record heat across much of the nation throughout the week driving powerburn demand to near 40 BCF/day, but was blunted by the 4th of July holiday and its suppression of commercial and residential demand as well as record production topping 81 BCF/day. Should this projection verify, natural gas inventories would rise to 2206 BCF while the storage deficit versus the 5-year average would widen to -516 BCF or -19%. Click HERE for more on this week's projected injection, to be announced officially by the EIA next Thursday, July 13 at 10:30 AM EDT.