March 8, 2018

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EIA Projected To Announce Bearish Natural Gas Storage Withdrawal In Today's Report For February 24-March 2, But Bullish Triple Digit Draws Now Expected For The Next Two Weeks As Temperature Outlook Trends Colder; Crude Oil Sells Off Despite EIA Reporting Slightly Bullish Inventory Build As Domestic Production Surges

6:00 AM EDT, Thursday, March 8, 2018
In its weekly Petroleum Status Report for February 24-March 2, the EIA announced Thursday morning that crude oil inventories rose by +2.4 MMbbbls. This was an improvement on both Tuesday's American Petroleum Institute (API) forecast and the 5-year average, both at +5.7 MMbbls. As a result, crude oil inventories rose to 425.9 MMbbls, but the crude oil storage surplus dwindled to just +2.4 MMbbls, the smallest surplus since October 3, 2014. Over the past 4 weeks, crude oil inventories have averaged 2.9 MMbbls tight per week versus the 5-year average meaning that it is reasonable to expect that inventories will, after nearly three-and-a-half years, finally flip to a storage deficit by next week's report. Additionally, the year-over-year storage deficit rose to -102.5 MMbbls, which is the largest year-over-year improvement in inventories on record, dating back to 1983.

Drilling down to the supply/demand details, the EIA reported that domestic oil production saw another large jump, rising 86,000 barrels week-over-week to a new all-time high of 10.37 MMbbls/day. Oil production is up an enormous 1.281 MMbbls/day year-over-year, as shown in the Figure to the right. Additionally, crude oil imports rose 720,000 barrels/day week over week--which is pretty typical for this time of year--to 8.00 MMbbls, but is still down 240,000 barrels/day year-over-year. As a result, total supply (US production + imports) is up 1.08 MMbbls/day year-over-year. On the demand side, refinery inputs and US exports both rose 5,000 barrels/day to 15.94 MMbbls/day and 1.50 MMbbls/day, respectively. Refinery inputs are up 0.44 MMbbls/day year-over-year while exports are up 0.60 MMbbls from 2017. Thus, total demand is up 1.04 MMbbls/day year-over-year nearly exactly countering the 1.08 MMbbl/day gain in domestic supply, as discussed above. Should 2018 continue to match 2017 supply/demand balance, expect inventories to flip to a storage deficit within the next week or two, with this deficit potentially reaching 50 MMbbls by the end of the summer.

Despite the narrowing storage surplus, investors were spooked by the surge in production, fearing that the currently favorable supply/demand balance could turn bearish. Additionally, the departure of the White House's chief economic advisor and steadying hand, Gary Cohn, triggered fears of the potential reality of a trade war and its impact on crude oil demand. As a result of these influences, WTI crude oil sold off on Wednesday, falling $1.45 or 2.3% to settle at $61.15/barrel. Brent oil saw a similar decline, dropping to $64.34/barrel. Despite the sell-off, I remain a long-term oil bull with a 6-month price target of $70/barrel although I will be a bit more cautious in my trading strategy as the surge in production is, admittedly, cause for concern. Natural gas, meanwhile, rose for a third straight day ahead of today's EIA Storage Report, climbing 3 cents or 1% to $2.78/MMBTU. It was the highest close for the front-month contract since February 7. The rally continues to be driven by a mid-March forecast that continues to trend colder with bullish storage withdrawals now expected for each of the next 3 storage weeks beginning this Friday. Despite the favorable near-term temperature outlook, I remain concerned that this rally is nothing more than a bull trap and, after congratulating them on their timing, would advise those aggressively long the commodity to strongly consider taking profits on the their positions on this rally. Unlike early in the winter when a spike in demand can prompt a significant and sustained move higher on fears of a wire-to-wire chill a la 2013-2014 and even earlier this year, there is only so much that a late-season cold snap can do for inventories with the Shoulder Season fast approaching. My Oil & Natural Gas Portfolio took it on the chin on Wednesday, falling -0.7% on the day, the second largest decline of 2018 so far. Returns since May 1, 2017 fell to +40.0% while year-to-date gains in 2018 so far dropped to +7.1%, or +39.6% annualized. Despite the daily loss, I remain comfortable with all of my positions and have no plans to alter my broad trading strategy and, if anything, will plan to boost my positions near-term. 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 its weekly Natural Gas Storage Report for the week of February 24-March 2 this morning at 10:30 AM EDT. I am projecting a preliminary -57 BCF inventory drawdown for the week, an ugly 72 BCF smaller than the 5-year average -129 BCF. The bearish projected withdrawal was driven by consistently warmer-than-average temperatures throughout the week that suppressed natural gas heating demand. The population-weighted mean nationwide temperature averaged 51.6F last week, more than 7F warmer-than-average. Withdrawals were negatively impacted by US production which likely grew to a new record high of 78.5 BCF/day last week, up 0.4 BCF/day week-over-week and 7.4 BCF/day year-over-year. Natural gas demand did get a boost from LNG feedgas demand which rose 4.5 BCF week-over-week to 22.0 BCF after flows to the new Cove Point export plant jumped and Sabine Pass deliveries rebounded. Should a -57 BCF withdrawal verify, natural gas inventories would fall to 1625 BCF while the storage deficit versus the 5-year average would contract to -300 BCF on the dot. The year-over-year deficit hold steady at -683 BCF before surpassing -700 BCF yesterday. As the Figure to the right shows, a -57 BCF draw would be the tied for the smallest in the last 5 years with 2017's -57 BCF draw. In contrast, 2015 saw a massive -216 BCF withdrawal.

The investor response to today's storage report could go either way. With prices at a 5-week high, a disappointing withdrawal that was already bearish to start with could certainly result in a quick pull back in natural gas prices. However, with withdrawals likely to flip back to bullish draws over the next few weeks as the forecast has trended colder, a larger-than-expected withdrawal today could help support a continued rally, even with the draw likely to be bearish versus the 5-year average no matter what. I feel that a reported withdrawal of larger than -65 BCF will be viewed as a bullish surprise and could support natural gas pries over $2.85/MMBTU, although I would be very surprised to see prices sustainably above $3.00/MMBTU any time soon. On the other hand, I expect a withdrawal of under -55 BCF to be viewed as a bearish disappointment, with prices retreating back under $2.75/MMBTU. A reported withdrawal between -55 BCF and -65 BCF would be neutral with prices equally likely to rally or pull back.

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 rise to a weekly high today as a powerful Nor'Easter leaves a dose of winter-like temperatures in its wake. After dropping 20 inches of snow yesterday in the Philadelphia, New York City, and Boston suburbs, high temperatures in these cities will only reach the mid-40s today, around 5F colder-than-normal. Larger anomalies will be found across the Southeast and Ohio valley where Atlanta, Nashville, and St Louis will only reach the 40s to lower 50s, around 10F colder than average. And across the northern Plains and Midwest, Chicago won't clear the mid 30s and Minneapolis will be stuck in the 20s, 10F-15F below-average. Overall, the forecast mean population-weighted nationwide temperature today will fall to 43.9F, 1.3F colder than Wednesday and 3.3F colder-than-normal. Total Degree Days total will rise to 21.1 TDDs, 2.6 TDDs greater than normal and the 11th most for March 8 in the last 37 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 -19 BCF/day natural gas storage withdrawal for today, 5 BCF bullish versus the 5-year average -14 BCF/day draw. As a result, natural gas inventories will fall to around 1555 BCF early this morning, at which point the year-over-year storage deficit will climb over -700 BCF for the first time in 4 years. Additionally, by this evening, the natural gas storage deficit versus the 5-year average will come very close to once again topping -300 BCF just a week after falling below the threshold. Click HERE for more on today's projected daily storage withdrawal and more on realtime natural gas inventories.

Gas demand will drop to near the 5-year average on Friday with a -14 BCF/day daily withdrawal expected as temperatures begin to rebound across the southern Plains. However, thanks to the late-week surge in demand, particularly on Wednesday and Thursday, I am projecting a -100 BCF weekly natural gas storage withdrawal for the week of March 3-9, 3 BCF bullish versus the 5-year average and a strong 45 BCF larger than last year's withdrawal. Should such a withdrawal verify, natural gas inventories would fall to 1524 BCF while the storage deficit versus the 5-year average would hold steady near -304 BCF. The year-over-year deficit, meanwhile, would soar to -725 BCF. Click HERE for more on this week's projected withdrawal. Looking ahead to next week, natural gas demand will remain strong as a persistent trough across the East Coast keeps temperatures across major demand centers well below-average. As a result, I am projecting that demand will be above the 5-year average throughout the week with daily withdrawals approaching -20 BCF/day on at least two days next week, more than double the 5-year average -9 BCF/day. Projected daily natural gas withdrawals for March 10-16 are shown in the Figure to the right. For the week, I am projecting a bullish -105 BCF storage withdrawal, 52 BCF larger than the 5-year average. This would drive natural gas inventories down to 1421 BCF, the lowest inventory level since May 23, 2014. The natural gas storage deficit would rise to -354 BCF. Interestingly, the year-over-year storage deficit would actually contract to -692 BCF thanks to last year's even larger -136 BCF draw, the largest in the last 5 years for the period. Click HERE for more on next week's projected natural gas storage withdrawal. After next week, there will likely be two more weekly withdrawals, barring a dramatic warm-up or arctic blast, before the injection season begins. At this time, I am projecting season-ending inventories near 1355 BCF, down nearly 100 BCF from my projection a week ago as the temperature outlook has trended colder. It would be the lowest season-ending level since 2014's 824 BCF mark and 346 BCF smaller than the 5-year average. Click HERE for more on long-term projected inventories.