May 8, 2019

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Natural Gas Bounces While Crude Oil Remains Caught Between Geopolitical Extremes; EIA Forecast To Announce Bearish Oil Inventory Build Today As Bullish Case Continues To Weaken; Gas Demand Inches Higher Today On Unseasonable Heartland Chill, But Second Triple Digit Weekly Injection Remains On Track

6:00 AM EDT, Wednesday, May 8, 2019
Natural gas bounced from a 2-week low on Tuesday, rallying 0.5% to settle at $2.54/MMBTU. The bounce was driven by a combination of dip-buying and a slight rise in the 14-day forecast gas-weighted degree days (GWDDs) thanks to unseasonably chilly temperatures across the Heartland, as shown in the Figure to the right. Despite this, nothing has really changed from a fundamental standpoint. The market remains oversupplied by around 3.5 BCF/day relative to 2018 and the late May and June temperature outlook continues to look cooler-than-normal, suppressing cooling demand and likely resulting in a string of 5 or more straight bearish storage injections. It is fort his reason that I remain bearish on the sector with a downside price target of $2.50/MMBTU.

Meanwhile, oil prices continue to be caught between geopolitical extremes with possible threatening military action by Iran and ongoing sanctions on that country and Venezuela favoring the bulls and a possible rise in US tariffs on China fanning a trade war favoring the bears. The bears won on Thursday as a 500 point slide in the Dow Jones dragged oil down with it. WTI fell 85 cents or 1.4% to $61.40/MMBTU while Brent dropped a steeper $1.36/barrel to $69.88/barrel.

The EIA will release its weekly Petroleum Status Report covering the week of April 27-May 3 this morning at 10:30 AM EDT. While the geopolitical landscape seems to be driving near-term price movements in the sector, bullish or bearish hard data could certainly override the speculative nature of geopolitics. After Tuesday's close, the American Petroleum Institute (API) announced that it was forecasting a +2.8 MMbbl rise in crude oil inventories, an ugly 4.9 MMbbls bearish versus the 5-year average -2.1 MMbbl withdrawal. Should such a build verify, storage levels would rise to 473.4 MMbbls, the highest since August 24, 2017. The storage surplus versus the 5-year average would grow to +15.7 MMbbls while the year-over-year surplus would rise to +39.7 MMbbls. The bearishness of this forecast is blunted only slightly by the API's forecast of a bullish -2.8 MMbbl gasoline storage drawdown (5-year average: -0.3 MMbbls) and a neutral -0.8 MMbbl distillate draw (5-year average: -1.2 MMbbl). Nonetheless, Total Petroleum Inventories (crude oil + gasoline + distillates) are expected to fall by -0.8 MMbbls, 2.7 MMbbls bearish versus the 5-year average -3.6 MMbbl draw, as shown in the Figure to the right.

Should the EIA's official numbers be in-line with the API, it will become increasingly difficult to justify the long case for oil. Investors--including yours truly--continue to hold out for rising summer time demand as the driving season gets underway which, with gasoline stocks below the 5-year average, is not unreasonable. At this time, I am maintaining a $65/barrel WTI price target, but this is subject to revision based on inventory reports over the next 2-3 weeks.

Check back on my Crude Oil Inventories Page HERE after 10:30 AM EDT for the EIA's official storage numbers.

My Oil & Natural Gas Portfolio rose to a new 2019-high for a third straight day on Tuesday, climbing +0.3% to push 2019 year-to-date gains to +13.6%, or +38.9% annualized, a shown in the Figure to the right. I made a single trade yesterday, covering my volatility long trade via short SVXY and realizing a +10% profit. This was intended as a hedge against oil, which did its job. But with the VIX topping its long-term average of 20, downside risk begins to outweigh upside potential and I took the hedge off. My oil long via short DWT is tiny at just 3.3% of my holdings after recent profit-taking. Should the commodity dip under $60/barrel and I begin to re-accumulate, I will have a low threshold to add more short SVXY, especially if the VIX falls back under 15. At this time, I am continuing to hold my natural gas short trade via short UGAZ (partially offset by short DGAZ to take advantage of leverage-induced decay) with a price target of $2.50/MMBTU. Click HERE for more on my current oil and natural gas holdings.

Natural gas demand will rise for a second straight day today as unseasonably chilly temperatures expand across the Great Plains. Highs will only reach the upper 30s to lower 40s from Denver, CO to Minneapolis, MN where a complex storm system will bring a heavy, cold rain and even some wet snow. Similar anomalies will be found across much of the Dakotas, Montana, and Wyoming. Further east on the warm side of this sprawling Spring storm, temperatures will be much more seasonable with 80s reaching as far north as Kentucky and 70s into Indianapolis and Pittsburgh. For the major demand centers of the I-95 corridor, highs will be generally within 5F of normal in the low 70s for Washington, DC and Philadelphia, upper 60s in New York City, and lower 60s in Boston. Overall, today's forecast mean population-weighted nationwide temperature will cool by -0.3F from Tuesday, thanks to the unseasonable chill across the Plains but, at 65.3F, will remain 1.5F warmer-than-normal. Total Degree Days (TDDs) will rise to 8.1 TDDs, 1.1 TDDs greater than normal and the 11th most for May 8. 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 +15 BCF/day daily natural gas storage injection, 1 BCF smaller than Tuesday's build but still 2 BCF bearish versus the 5-year average. By tonight, projected Realtime natural gas inventories will be just under 1630 BCF while the storage deficit versus the 5-year average contracts down to -283 BCF. Click HERE for more on today's projected daily injection and Realtime natural gas inventories. For the remainder of the week, look for gas demand to hold roughly steady with +15 BCF/day daily builds expected for Thursday and Friday. I am still looking at an ugly +112 BCF weekly injection for May 4-10, 23 BCF bearish versus the 5-year average and the single largest build for the week all-time.