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March 7, 2019

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Natural Gas Succumbs To Profit-Taking Ahead Of Today's Expected Third Straight Bullish EIA Storage Report; Crude Oil Ends Lower, But Recovers From Steep Early-Session Losses After Large Gasoline Draw Counters Crude Build; Realtime Natural Gas Inventories To Fall Under 1200 BCF Today For Only The Ninth Time On Record


6:00 AM EDT, Thursday, March 7, 2019
In its weekly Petroleum Status Report for the week of February 23-March 1, the EIA announced Wednesday morning that crude oil inventories rose by +7.1 MMbbls. While this is a significant 15 MMbbl weekly swing after last week's record -8.6 MMbbl draw and it sounds like a huge number, a +7.1 MMbbl build is actually just 0.6 MMbbl larger than the 5-year average +6.5 MMbbl build. We are in the heart of the refinery maintenance off-season right now and weekly builds are to be expected. With the build, crude oil inventories rose to 452.9 MMbbls while the storage surplus versus the 5-year average edged slightly higher to +16.2 MMbbls.

The large week-to-week swing was driven by a sharp rise in imports which climbed 1.1 MMbbls from last week's 2-decade to 7.0 MMbbls/day, still 1 MMbbls/day lower than the same week last year. Also contributing to the build, exports fell a robust 0.6 MMbbls/day week-over-week to 2.8 MMbbls/day but remain up 1.3 MMbbls/day from last year. Production held flat at a record 12.1 MMbbls/day, up 1.7 MMbbls/day from last year while refinery demand was 16.00 MMbbls/day, flat versus 2018. However, if you add all of these components of supply/demand balance together, you would arrive at a weekly build of just +2.2 MMbbls, rather than the observed +7.1 MMbbls, driving an abnormally large correction factor of 0.7 MMbbls/day. Most likely, exports were overestimated or imports were underestimated. This will likely be sorted out in the next 1-2 weeks. On the more bullish side of things, the EIA reported that refined product inventories declined more than expected. Gasoline stocks fell -4.2 MMbbls versus the API's forecast of a -0.4 MMbbl draw and the 5-year average -2.7 MMbbls. Gasoline inventories are a mere 6.7 MMbbls above the 5-year average and flipped to a year-over-year deficit of 0.3 MMbbls. Distillate stocks declined by -2.4 MMbbls versus the 5-year average -0.9 MMbbls and are at a small -3.8 MMbbl storage deficit versus the 5-year average. This means that Total Petroleum Inventories (crude + gasoline + distillates) rose just +0.5 MMbbls, 2.4 MMbbls bullish versus the 5-year average +2.9 MMbbls.


Some investors--bears most likely--were quick to jump over the 15 MMbbl week-over-week weakening of supply/demand imbalance as evidence that natural gas fundamentals are softening. However, as imports and exports play an increasing rose in supply/demand balance in this market, it is important to look at the inventory picture over the past few months, rather than a single week's report. After inventories bottomed ahead of the refinery maintenance season on January 11 at 437.1 MMbbls, storage levels have risen a mere +15.9 MMbbls less than half the 5-year average +32.2 MMbbls during this period. And over the past month, inventories have averaged 2.4 MMbbls/week tight versus the 5-year average. While there have been some large builds during this period, there has been a stair-stepping trend towards a tighter market. At this rate, I project that the crude oil storage surplus will continue to contract and could flip to deficit as early as the last week of April, as shown in the Figure to the right. Additionally, inventories could fall back under 400 MMbbls by August for the first time since September 2018. Click HERE for more on the latest and projected oil inventories as well as supply/demand data.


Crude oil opened Wednesday's session with losses that approached 2% to near $55.50/barrel. In the wake of the EIA's report, WTI actually clawed back, most likely due to the larger-than-expected gasoline drawdown, and finished the day down 34 cents or 0.6% to $56.22/MMBTU. Brent oil, on the other hand, was less influenced by the domestic report and settled up 13 cents or 0.2% to $65.99/MMBTU. Despite the bearish oil build, crude oil remains heavily discounted according to my Fair Price Model based on historical price/storage data. According to this model, the commodity is undervalued by 8% versus a Fair Price of $60.94/barrel. And should supply/demand balance remain where it is presently moving forward, this Fair Price tops $65/barrel by June, as shown in the Figure to the right. This $65/barrel level remains my WTI price target for 2019. I took advantage of Wednesday's dip under $56/barrel and added to my short DWT position, boosting WTI long exposure in my Oil & Natural Gas Portfolio. I increased the position by around 30% to 7.2% of my holdings. Should WTI fall under $55/barrel, I will probably add to it incrementally with a target maximum position size of 12% of my holdings should WTI reach $52/barrel.


Meanwhile, one day after reaching a new 5-week high after a month-long grinding rally, natural gas gave up all of Tuesday's gains and then some yesterday. The front-month contract fell 5 cents or 1.5% to settle at $2.84/MMBTU. The reason for the decline was not immediately obvious. Most likely, cautious investors who had been holding long watching this rally play out without much conviction finally decided to take profits. Additionally, while not the most closely-watched model, the long-term CFSv2 model did see a considerable warming trend for weeks 4-6 over the past 24 hours. Otherwise, the near-term GFS and ECWMF ENS models actually trended slightly colder, further enhancing a shot of arctic air for the March 15-25 time frame and boosting projected daily withdrawals to as high as 15 BCF/day during that span. As a result, my projected end-of-season minimum storage level continued to fall and stood near 960 BCF Wednesday evening, within 140 BCF of 2014's 5-year minimum and the fifth lowest all time. Overnight, natural gas prices gave up evening electronic gains and this EOS projection will likely rise as the 00Z GFS ENS run trended milder. Click HERE for more on the near- and low-term temperature outlook on my Advanced Modeling Page and HERE for more on my end-of-season natural gas storage outlook. Based on these changes, I am maintaining my price target of $2.90/MMBTU, above which I will look to exit my long position and consider flipping to a small short swing position, especially should today's 44-day ECMWF-EPS model run be consistent with the warming CFSv2.


The EIA will release its weekly Natural Gas Storage Report for February 23-May 1 this morning at 10:30 AM EDT. For the week, I am projecting a -146 BCF withdrawal, 37 BCF bullish versus the 5-year average and 86 BBCF smaller than last year's draw. It will be the third straight bullish withdrawal. As the Figure to the right shows, such a withdrawal would be the third largest in the last 5 years behind only 2015's -220 BCF draw and 2014's -158 BCF draw. The bullishness of the expected withdrawal was driven by unseasonably cold temperatures throughout last week with a mean population-weighted nationwide temperature of 42.4F, nearly 3F colder-than-normal compared to the 45.2F long-term normal. Demand was also given a boost by LNG feedgas demand which totaled 37.0 BCF this week, up 4.0 BCF from last week and is a new all-time weekly high. Should a -146 BCF withdrawal verify, natural gas inventories will fall to 1393 BCF while the storage deficit versus the 5-year average climbs to -461 BCF. The year-over-year deficit, meanwhile, will rise to -240 BCF. Click HERE for more on last week's projected withdrawal.


Barring a huge upside or downside miss, I expect today's storage numbers have been long priced in and would be surprised to see a big move based off the reported draw alone. However, should an upside or downside miss be concordant with overnight near-term computer model trends, the draw could certainly facilitate a move. I expect it would take a reported withdrawal of -155 BCF or larger to be considered unequivocally bullish with prices likely to eclipse my $2.90/MMBTU price target. A draw under -140 BCF, while still bullish, would be viewed as underwhelming and could facilitate a break under $2.80/MMBTU should computer models trend milder as well. A reported withdrawal between -140 BCF and -155 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 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 fall for a second straight day today but will remain well above-average. After spending the past week in the Deep Freeze, the Great Plains will finally start to see some moderation. Across the Dakotas and Minnesota, highs will reach into the 20s to even lower 30s in some areas, still 10F-15F colder than average, but up to 30F warmer than last weekend's readings. Further south, spring-like warmth will overspread much of Texas, the nation's largest natural gas-consuming state. El Paso could reach the low 80s while Dallas and San Antonio both see the mid-70s, all 10F-15F warmer-than-normal. It will be another chilly day across the Eastern Seaboard with Washington, DC only reaching the lower 40s, Philadelphia and New York City the mid-30s, and Boston the upper 20s, all 10F-15F colder than normal. Overall, the forecast mean population-weighted nationwide temperature today will rise 4.5F thanks to the warm-up across the plains and South, but will remain 7.5F colder-than-normal. Total Degree Days (TDDs) will fall to 25.0 TDDs, 6.4 TDDs greater than normal and the 5th most for March 7 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 -29 BCF/day daily natural gas storage withdrawal, 10 BCF smaller than Wednesday's draw but still a very bullish 15 BCF larger than the 5-year average. The day's draw will be boosted by LNG feedgas demand which, based on early cycle pipeline data, will rise to a new record high of 5.45 BCF/day as demand to Sabine Pass tops 4.0 BCF/day. By this afternoon, projected Realtime natural gas inventories will fall under 1200 BCF and will finish the day near 1190 BCF. It will be only the ninth time on record that natural gas inventories have dropped below 1200 BCF. The storage deficit versus the 5-year average will climb to near -580 BCF. Click HERE for more on today's projected storage withdrawal and Realtime natural gas inventories. Look for tomorrow's withdrawal to fall under -20 BCF/day as temperatures rapidly moderates, particularly across the Great Lakes. Presently, for the full week of March 2-8, I am projecting an exceptional, record-setting -224 BCF withdrawal that would be the first -200 BCF draw over -200 BCF on record. I will have more on this week's projected withdrawal in Friday's commentary.