December 7, 2017

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EIA Projected To Announce Exceptionally Bearish -6 BCF Natural Gas Storage Draw For December 2-8 In Today's Report; Gas Demand Surges On Arctic Outbreak With Bullish Daily Withdrawals Likely Through December 16, But Moderating 10-15 Day Outlook Continues To Fuel Sell-Off; Crude Oil Drops 3% On Large Gasoline Build

6:00 AM EDT, Thursday, December 7, 2017
Ahead of today's weekly Storage Report, natural gas snapped its two-day losing streak yesterday, rising 1 cent or 0.3% to settle at $2.92/MMBTU. Thanks to rebalancing from the previous day, the popular ETF UNG finished with a small -0.3% loss while the 3x ETF UGAZ similarly underperformed, falling -0.5%, thanks to rebalancing from the previous session. The recent pullback under $3.00/MMBTU continues to be driven less by near-term forecasts for demand--which remain robust due to the presence of arctic air across the major demand centers of the Midwest and eventually the East--but by a combination of expectations for warming during the last week of December and by fears that record domestic production could lead to a bearish supply/demand imbalance by the spring. Crude oil, meanwhile, tumbled $1.66 or 2.9% to settle at $55.96/barrel, its lowest close since November 16, following a neutral-to-bearish EIA Petroleum Status Report, which I will discuss below. Brent oil kept pace with WTI, dropping $1.64 to $61.22/barrel, meaning that the Brent-WTI spread hovers near $5.26/barrel. My Oil & Natural Gas Portfolio rose +0.4% on the day to snap its own 2-day losing streak and boosting gains since May 1 back to +30.4%, within 1% of a 2017 high. Additionally, yesterday evening the total subscriber count passed 100 for the first time. Thank you to everyone who has pledged since May! It is your contributions that allow the site to continue to operate and expand. I hope that the portfolio and commentaries have been beneficial and look forward to your support into 2018 as I work to continue improving the site. Click HERE to learn more about subscribing to gain access to my portfolio holdings which is updated live throughout the day, trades, and twice-weekly investing commentaries.

In its weekly Petroleum Status Report, the EIA announced Wednesday morning that crude oil inventories declined by -5.6 MMbbls for the week of November 25-December 1. This was right at the API's -5.5 MMbbl Tuesday evening forecast and was 2.7 MMbbl bullish versus the 5-year average -2.9 MMbbl draw. The storage drawdown was also the fifth largest for November 25-December 1 in the last 34 years since 1983. It was the largest weekly withdrawal since the week ending September 29. The bullish draw was driven largely by oil demand to refineries which rose 0.19 MMbbls/day from the previous week to 17.2 MMbbls/day, up 0.8 MMbbls/day or 4.8% year over year, as well as oil imports which fell by -0.13 MMbbls/day to 7.2 MMBBls/day, down 1.1 MMbbls or 13.2% year-over-year. Oil exports were nearly flat at 1.36 MMbbls/day, which lies in the middle of its recent range. Domestic production once again set a new high, up 25,000 barrels/day week-over-week to 9.71 MMbbl/day, if you trust these preliminary EIA supply numbers, which have recently been subject to downward revision. Click HERE for more on crude oil inventories.

Despite the strong crude oil drawdown, refined product data was considerably less bullish. While distillate stocks only rose +1.6 MMbbls (5-year average: +3.2 MMbbls), gasoline inventories soared by +6.8 MMbbls to 220.9 MMbbls (5-year average: +3.2 MMbbls). After gasoline stocks had fallen below the 5-year average in early November, Wednesday's build pushed the storage surplus back up to +4.8 MMbbls. The strong refinery input demand--17.2 MMbbls/day, up 4.8% year-over-year--likely contributed to both the bearish gasoline build as well as the strong crude oil withdrawal, with the two neatly canceling themselves. Click HERE for more on refined product inventories. As a result of builds in distillate and gasoline stocks, Total Petroleum Inventories--crude oil + gasoline + distillates--rose by +2.8 MMbbls, just under the 5-year average +3.6 MMbbls. With the small build, Total Petroleum Inventories rose to 798.4 MMbbls while the surplus versus the 5-year average contracted slightly to +54 MMbbls.

Despite the bullish crude oil withdrawal and neutral Total Petroleum Inventories withdrawal, I interpreted Wednesday's report as neutral-to-bearish. The recent rally in oil has been predicated on a continued contraction of the long-standing storage surplus. The Figure to the right plots the Total Petroleum Inventories storage surplus versus the 5-year average for the past year. As the Figure shows, this surplus contracted rapidly and consistently for the first 11 months of the period, but over the past few weeks, the contraction has stalled. A sustained rally requires continuous re-fueling and this flattening of the contraction rate is somewhat foreboding. Additionally, all that is maintaining the status quo in oil supply/demand balance is strong oil exports and weak oil imports which together are nearly 2 MMbbl/day bullish compared to the same period last year. This bullish trend is being driven by a wide Brent-WTI spread. Should this spread decline, exports will likely drop and imports rise, which, thanks to record US production, could rapidly loosen supply/demand balance and lead to a rebounding surplus. While crude oil could climb to $60/barrel in the coming weeks, I am concerned that, at least near term, it will be unable to hold the level. With Wednesday's trading action, investors seem inclined to agree.

Turning now to natural gas, the EIA will release its weekly Natural Gas Storage Report for November 25-December 1 this morning at 10:30 AM EDT. I am projecting an exceptionally bearish -6 BCF weekly withdrawal. Such a draw would be an enormous 63 BCF bearish versus the 5-year average -69 BCF draw and 37 BCF smaller than last year's withdrawal. As the Figure to the right shows, it would be the smallest withdrawal for the November 25-December 1 period in the last 5 years by a huge 28 BCF margin. It would also be the third weakest draw in the full 23 year period for which EIA data is available. The exceptionally bearish projected withdrawal was driven by unseasonably mild temperatures throughout the week that averaged 51.0F, nearly 6F warmer than the 45.4F average. This crushed residential and commercial demand--the two primary sources of heating demand--which I estimate averaged just 24.5 BCF/day last week, down more than 3 BCF week-over-week and down 2 BCF/day year-over-year. As I've mentioned previously, with natural gas production likely averaging over 76 BCF/day for a second straight week, up more than 5 BCF/day year-over-year, serious declines in res/com demand, which are needed to compensate for the record supply, will be absolutely devastating for supply/demand balance. It is for this reason that the fate of season-ending inventories will depend more than usual on temperatures this winter. Should the -6 BCF draw verify, natural gas inventories will "fall" to 3687 BCF while the storage deficit versus the 5-year average will continue its collapse, dropping to -44 BCF. The year-over-year deficit will likely see a serious decline, falling to -272 BCF, the lowest in over a year.

Without a doubt, today's storage withdrawal--or potential injection, I suppose--will be bearish. However, it will also likely be the most bearish remaining in 2017 and will occur at a transition point when natural gas is surging as arctic air has finally arrived. For this reason, should the reported draw come in larger than expected, it could serve to prompt at least a temporary relief rally. I expect that a reported double-digit draw of -10 BCF or larger will be viewed as a bullish surprise, despite the draw still being undoubtedly bearish, and could spur a near-term push back to $3.00/MMBTU. On the other hand, should the EIA report a storage injection of any kind, watch out below. This could be the final nail in natural gas' coffin for the remainder of 2017. With production reaching new highs and the late-December forecast looking milder, a December storage injection could prompt enough panic-selling to drop prices to $2.75/MMBTU or below.

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.

Of note, submissions for week 6 of my Natural Gas Storage Contest will open at 12:00 PM EDT today following the EIA's Storage Report. Entrants will be submitting projections for the natural gas storage week of December 2-8 that ends on Friday and their price projection for the close of trading next Thursday, December 14. Entries for week 6 will be open through next Tuesday although, as usual, earlier submissions are awarded larger bonus multiples. Rankings through the first 5 weeks of the contest will be up this evening. Total entries exceeded 100 earlier this week, so I expect tight competition. Good luck to all. Click HERE to review the rules, to submit your pick when Week 4 submissions become available, and to view the fourth set of rankings tonight.

Natural gas demand will soar to its highest level since March 2017 today as much colder-than-average temperatures dominate the center of the nation. The largest anomalies today will be across south Texas and along the Gulf Coast. El Paso, Tx will only see the upper 30s today while San Antonio will be lucky to reach the mid-40s, both 20F colder than normal. East of El Paso heading towards the Big Bend region, upwards of 6 inches of sleet and snow is possible by the end of the day. Further east, highs from Houston to New Orleans will only be in the upper 40s to near 50F, 15F colder than normal. Away from the immediate Gulf coast in areas such as Baton Rouge, a cold rain this morning could even transition to a rain/sleet/snow mix as arctic air settles in. Across the northern Plains and Midwest, smaller anomalies but a deeper chill will be likely with Kansas City, Chicago, and Indianapolis only rising into the upper 20s to near 30F, 10F colder than average, while Minneapolis and Sioux Falls SD only see the upper teens to lower 20s. Across the major demand centers of the Northeast, temperatures will be seasonably near average for another day with Philadelphia to Boston all climbing into the upper 40s, within 5F of average. Overall, thanks to the unseasonable cold across the Heartland, the forecast mean population-weighted nationwide temperature will fall nearly 5F day-over-day to 41.2F today, 2.2F colder than normal. Total Degree Days will rise to 24.0 TDDs, 1.4 TDDs greater than normal and the 14th most TDDs for December 7 in the last 37 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 very bullish -22 BCF/day daily natural gas storage withdrawal today, 9 BCF larger than yesterday, 20 BCF larger than Monday, and 11 BCF bullish versus the 5-year average -11 BCF/day. After dropping to just -1 BCF on Tuesday, the natural gas storage deficit versus the 5-year average will likely be back into double digits by the end of the day today. Click HERE for more on today's projected daily storage withdrawal and intraday natural gas inventories.

Natural gas demand will remain elevated on Friday with a daily storage withdrawal exceeding -22 BCF/day. However, the late-week surge in demand will not be enough to cancel out the brutally bearish first four days of the week and I am projecting a preliminary -59 BCF withdrawal for the entire week of December 2-8, 19 BCF bearish versus the 5-year average and a huge 73 BCF bearish versus last year's withdrawal. It would be the third largest withdrawal in the past 5-years behind 2013's -139 BCF and last year's -132 BCF, but would be the 6th most bearish for the December 2-8 frame in the full 23 year period of record. I will have a more detailed discussion on this week's storage draw in Friday's commentary, but in the meantime you can view more data on my Weekly Storage Page HERE. As impressive as today's and tomorrow's demand will be, investors are already looking well ahead. As the Figure to the right shows, natural gas demand will remain exceptionally strong through around December 16th with daily withdrawals generally at or over -20 BCF/day. As a result, the natural gas storage deficit versus the 5-year average could once again climb to -100 BCF by mid-December. However, beginning in the third week of December, most of the models, including the American GFS and European ECMWF, are now consistently predicting that the trough current dominating the weather pattern across the East will lift north and be replaced across the Plains by a large ridge of high pressure and a southerly flow, returning temperatures to above-average. As shown in the Figure to the right, this could drive daily withdrawals back to or below the 5-year average. It is this increasingly confident forecast despite very strong demand for the next 10 days that has been driving the recent natural gas sell-off. As long as this warming trend persists, it is likely that natural gas will continue to come under selling pressure, no matter how undervalued the commodity is for its given storage deficit. I expect that it will take the emergence of another arctic outbreak in the model forecast before natural gas will see a bounce.