February 7, 2019

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Undervalued Natural Gas Tries To Bottom As Models Trend Colder; EIA Projected To Announce Bullish -246 BCF Storage Withdrawal In Today's Report, Likely The Largest Of The Season; Crude Oil Rises After Smaller-Than-Expected Inventory Build; One More Day Of Bearish Gas Demand Today Before Arctic Air Races Eastward On Friday

6:00 AM EDT, Thursday, February 7, 2019
In its weekly Petroleum Status Report, the EIA announced Wednesday morning that crude oil inventories rose by +1.3 MMbbls during the week of January 29-February 4. As we are currently in the refinery maintenance season, this small a build was actually modestly bullish versus the 5-year average of +6.1 MMbbls. With the build, domestic inventories rose to 447.2 MMbbls while the storage surplus versus the 5-year average contracted for a second straight week, falling to +25.9 MMbbls. The small build was driven by both supply and demand factors. Exports jumped +0.93 MMbbls/day from the previous week to 2.87 MMbbls/day, up a robust 1.6 MMbbls/day year-over-year, while imports were soft and nearly flat for a second straight week at 7.15 MMbbls/day, down 0.75 MMbbls/day from 2018. Imports from Saudi Arabia, in particular, were very soft yet again at 0.61 MMbbls/day, nearly 50% below the 4-month average of 0.92 MMbbls/day. This is in line with the Kingdom's pledge to cut US exports, suggesting that this trend of low Saudi imports could be sustainable. Additionally, imports from Venezuela fell to 0.34 MMbbls/day, the lowest since August 2018 and a possible signal that unrest in that country is beginning to impact exports to the US, speculation towards which has been a major driver of the recent WTI rally. Refinery demand is nothing to write home about at 16.63 MMbbls/day, down 0.16 MMbbls/day year-over-year, and production was flat, but at an all-time high of 11.9 MMbbls/day, up 1.65 MMbbls/day from 2018. It is worth noting that there is a considerable mismatch between the EIA's reported storage build and its supply/demand data. Adding up imports, exports, refinery demand, and production, I calculate that supply/demand was mismatched with a -0.46 MMbbl/day or a -3.2 MMbbl weekly storage drawdown instead of the reported +1.6 MMbbl build. This has resulted in a correction factor--the EIA's attempt to account for this mismatch--of -0.64 MMbbls/day. Most likely, the EIA is either overestimating exports or underestimating imports and I would not surprised to see one or the other revised lower or higher, respectively, next week. Nonetheless, even the reported +1.6 MMbbl build is still quite bullish and indicative of a tightening market. As the Figure to the right shows, based on current supply/demand balance, I am projecting that crude oil inventories will peak near 465 MMbbls in late April at the end of the refinery maintenance season, down from a projection of over 500 MMbbls from several weeks ago, while the current storage surplus could flip back to a deficit by mid-May. Click HERE for more on current crude oil inventories.

Overall, this was a bullish storage report and investors responded to it as such. WTI reversed early-session losses to finish up 35 cents or 0.7% at $54.01/barrel while Brent rose 71 cents to $62.69/barrel. Given the bullish trend in recent weeks of soft imports and smaller-than-expected storage builds, I am becoming less convinced that the commodity is going to suffer a significant pullback unless worldwide equities markets fall to pieces. According to my Fair Price Model, crude oil is currently undervalued by a modest 11% versus a Fair Price of $60.56/barrel based on current inventories. But with supply/demand balance tightening, this Fair Price rises to over $65/barrel as shown in the Figure to the right. Therefore I feel that starting or adding to a long position under $54/barrel with a long-term price target of $60/barrel as reason.

Meanwhile, natural gas has leveled off after its precipitous late January and early February decline and traded flat yesterday, settling at $2.66/MMBTU. I was a little bit surprised at the commodity's lack of a stronger bounce yesterday, especially as the near-term computer models--the GFS and its Ensembles and the ECMWF and its Ensembles--trended colder, driving forecast gas-weighted degree days for the next two weeks higher, as shown in the Figure to the right. As a result, my forecast end-of-season storage level has fallen under 1200 BCF while my projected Fair Price based on early-March storage levels is back above $4.00/MMBTU. While the forecast temperatures might not be quite cold enough to be as bullish a catalyst as the bulls seem to be wanting, I continue to feel that upside potential continues to outweigh downside risk at these levels. While it is reasonable to be reluctant to go long based on the overwhelming negative sentiment, at minimum, I would recommend taking what are likely very large profits on short positions at these levels. My upside price target for the remainder of the withdrawal season remains a conservative (compared to my calculated Fair Prices anyways) $3.00/MMBTU.

While my oil and natural gas ETF holdings were largely flat yesterday, my Energy Portfolio fell victim to losses in its equity holdings, falling -0.7% on Wednesday. This reduced 2019 year-to-date profits to +3.8% or +38% annualized. Despite the Portfolio pulling back 4% in the past two weeks, I remain comfortable and confident in my positions. My net long natural gas exposure stands at a robust 10.7% of my holdings with a 15.3% DGAZ short partially countered by a 4.6% UGAZ short so as to boost leverage-induced decay exposure. While this is close to my maximum toleratedexposure of 12%, at this time I plan to continue holding given what I feel is an undervalued commodity, as discussed above. My largest equity holding at 11% of my holdings remains Cheniere Energy (LNG). While Asian natural gas prices have fallen steeply in 2019, which is bearish for the company's profit margin, the fact that US prices have fallen in parallel should continue to support the company. Additionally, despite a near-term decline, the company is rapidly increasing LNG output with its Sabine Pass and Corpus Christi Plants both operational. My price target remains $75/share. My second largest equity holding at 8% of my holdings, Kinder-Morgan (KMI), is a midstream company and owner of the largest natural gas pipeline network in the US, as well as the new Elba Island LNG export plant. With the company working to build access and relieve the bottleneck in the Permian Shale, I like the company--and its 4% dividend--with a price target of $25/share. The only position that I am somewhat skeptical of is my tiny short oil position via a short UWT position with 2.3% of my holdings. Should oil dip under $54/barrel in the coming days, I will have a low threshold to close this position out for a tiny profit. I will then even consider immediately flipping long. Click HERE for more on my current oil and natural gas holdings.

The EIA will release its weekly Natural Gas Storage Report for January 26-February 1 this morning at 10:30 AM EDT. This week covered the massive arctic outbreak across the Plains and Midwest and will likely be the largest of the 2018-2019 heating season. At this time, I am projecting a -246 BCF withdrawal, a massive 96 BCF bullish versus the 5-year average and 130 BCF larger than last year's -116 BCF draw. As the Figure to the right shows, it would be the second largest draw for the week in the last 5 years, behind only 2014's -256 BCF withdrawal. The mean population-weighted nationwide temperature last week was a mere 35.3F, 4.5% colder-than-normal and 3.6F colder than the previous week. On the supply side, production remains stuck under 88 BCF/day and it is certainly possible mid-week freeze-offs took it even lower short-term, further tightening supply/demand balance. Should a -247 BCF draw verify, natural gas inventories would fall to 1951 BCF while the storage deficit versus the 5-year average would rise to -424 BCF, up 125 BCF in the last two weeks. The year-over-year deficit would widen sharply to -144 BCF after briefly flipping to a storage surplus three weeks ago. Click HERE for more on last week's projected withdrawal.

With natural gas oversold and searching for a catalyst, I feel that a larger-than-expected withdrawal today could trigger at least a short-term bounce higher. I expect that a reported draw of larger than -250 BCF would be viewed as unequivocally bullish, pushing natural gas prices over $2.75/MMBTU. On the other hand, if the short-term temperature models hold steady, I feel that it would take a very ugly draw to push prices under $2.60/MMBTU. I expect it would take a draw of under -238 BCF to be considered a serious enough disappointment to prompt a sell-off. A reported withdrawal between -238 BCF and -250 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 remain exceptionally week for one more day before much colder temperatures finally rush eastward on Friday. But for today, highs will reach the mid 60s as far north as Pittsburgh, PA--nearly 30F warmer-than-normal--while Philadelphia and New York City rise into the mid-50s, 10F warmer-than-normal. Further south, it will feel like late Spring with Raleigh, Charlotte, and Nashville all pushing 80F, 30F warmer-than-normal and at-or-above record highs for the date. On the other hand, another modest snowstorm across the northern Plains and Midwest will be associated with an arctic cold front, behind which readings will be 15F-25F colder-than-normal. This includes Oklahoma City which will reach the upper 30s, Omaha and Kansas City in the teens, and Bismarck, ND which won't climb above 0F. Overall, the expansion of arctic air across the Heartland will be largely countered by rising temperatures across the East and Ohio Valley. Today's forecast mean population-weighted nationwide temperature will be nearly flat day-over-day at 49.3F, a balmy 8.4F warmer-than-normal. However, Total Degree Days will inch slightly higher to 18.2 TDDs, still 6.5 TDDs fewer than normal and the 7th fewest for February 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 -11 BCF/day daily natural gas storage withdrawal, less than 1 BCF larger than yesterday's draw and still less than half the 5-year average -23 BCF/day. By tonight, look for Realtime natural gas inventories to be near or just below 1900 BCF (depending on today's EIA storage report) while the storage deficit versus the 5-year average will likely bottom near-term near -345 BCF. The year-over-year deficit will likely bottom near -45 BCF. Click HERE for more on today's projected daily storage withdrawal and Realtime natural gas inventories. By Friday, look for natural gas demand to soar as the aforementioned arctic cold front races east to near the Appalachians. As a result, I project that demand will soar more than 15 BCF/day from today with a -27 BCF/day daily storage withdrawal to wrap up the week, 4 BCF bullish versus the 5-year average. This will push my projected weekly draw to -83 BCF, meaning that tomorrow's draw alone will drive more than 1/3rd of the weekly draw. Nonetheless, the draw will still be a massive 77 BCF bearish versus the 5-year average, but will likely be the last bearish withdrawal for at least the next 2-3 weeks. Stay tuned for more in Friday's commentary, but in the meantime click HERE for full details on my natural gas storage page.