August 9, 2018

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EIA Projected To Announce Slightly Bullish +50 BCF Natural Gas Injection Today, But Investors Anticipating Another Beat As Commodity Rallies To 6-Week High; Crude Oil Tumbles After Sluggish Refinery Demand Drives Weak Storage Drawdown; Strong Gas Demand Continues Today With Exceptionally Bullish Injection Expected This Week

6:00 AM EDT, Thursday, August 9, 2018
In its weekly Petroleum Status Report for July 28-August 3, the EIA announced Wednesday morning that crude oil inventories fell by -1.3 MMbbls. While this was a welcome return to storage drawdowns' after last week's ugly injection and near the 5-year average -1.9 MMbbls, it was significantly weaker than the API's Tuesday forecast of a -6.0 MMbbl draw. With the storage withdrawal, crude oil stockpiles fell to 407.4 MMbbls while the storage deficit versus the 5-year average fell just slightly to -4.2 MMbbls. The year-over-year deficit, on the other hand, fell more than 5.2 MMbbls to -68.0 MMbbls.

The return to an inventory drawdown after last week's build was driven by crude oil exports which jumped over 500,000 barrels/day to 1.8 MMbbls/day, although this is still nearly 1.2 MMbbls below this summer's all-time high of 3.0 MMbbls/day. Additionally, crude oil domestic production fell another 100,000 barrels/day last week to 10.8 MMbbls/day as weekly numbers begin to more closely align with official monthly data. Nonetheless, production is still up 1.38 MMbbls/day from 2017. On the other hand, despite the hot summer and low unemployment numbers, crude oil refinery inputs--a metric of domestic demand--have remained unsupportive. Input was 17.6 MMbbls/day last week, essentially flat from 2017, as it has been for the past month, as shown in the Figure to the right. With the narrowed Brent-WTI spread, exports are unable to counter the gain in production alone and the sector needs to see gains in refinery inputs if inventories are to fall below 400 MMbbls anytime soon.

Click HERE for more on Wednesday's EIA Petroleum Status Report and supply/demand data.

Unsurprisingly, following the disappointing report, crude oil extended early-session losses to finish the day down a steep $2.23/barrel to settle at $66.94/barrel, the lowest close since June 21, one day after the commodity had netted a 2-week high. It was the largest single-day loss in 3 weeks. Even with the rebound in exports and drop in production, this was a bearish report. Weak refinery inputs suggests that the summer driving season is at an end and with bearish geopolitical headlines piling on, it is unlikely a recovery in exports and near-average storage draws alone will be sufficient to buoy WTI back above $70/barrel near term. Long-term, I remain bullish on the sector as I believe production will struggle to move higher and that exports will represent an increasingly important source of demand in the years to come. However, at this time, it is hard to justify a large bullish position, or adding to one on this dip. I would only recommend starting a new bullish stake or adding to an existing one should WTI break $65/barrels and, even then, would plan on holding onto the trade for an extended period of time. If there is one silver lining, it is that the crude oil futures market remains in a prolonged state of backwardation, as shown in the Figure tot he right, with the September 2019 contract closing at $62.99/barrel, a 5.9% discount to the September 2018 contract, which would favor long term long ETF holders.

Natural gas, meanwhile, was a continued bright spot in the energy sector, which is rather out of character. Ahead of today's EIA Storage Report, prices rose for a fifth straight day on Wednesday, climbing 5 cents or 1.8% to $2.95/MMBTU, the highest close since June 27. As it has for the past week, the rally was driven by a bullish near-term temperature outlook through late August and a dawning realization among investors that inventories could finish at their lowest level since 2005 heading into an uncertain winter withdrawal season. The commodity is fast approaching my price target of $3.00/MMBTU. Above this level, I expect fuel switching away from natural gas to increasingly become an issue, would could limit the extent of the rally and I would be surprised to see the commodity reach $3.10/MMBTU near-term.

My Oil & Natural Gas Portfolio took it on the chin on Wednesday, falling -1.2% on the day thanks to a big earnings miss from one of my positions. I sold the entirety of said position Wednesday morning, realizing an ugly loss of more than 40% loss on the trade, which fortunately was a small position. The position should have been closed weeks ago and represents a failure of discipline on the part of yours truly. Regardless, the portfolio is now up +17.0% through the first 152 trading days of 2018, or +28.2% annualized. 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 July 28-August 3 this Thursday at 10:30 AM EDT. I am projecting a +50 BCF storage injection, which would be a neutral to slightly bullish 3 BCF smaller than the 5-year average. While up 15 BCF from the previous week, I view this as a victory for the bulls in that it is as low as it is given production at record levels and much-below average temperatures across the Deep South, one of the primary sources of cooling demand during the summer, throughout the week. Mean population-weighted nationwide temperatures cooled around 1F week-over-week to 77.4F last week, still around 0.2F warmer than normal. A +50 BCF injection would be tied for 3rd smallest injection in the past 5 years, as shown in the Figure to the right, with 2015 and behind the +19 BCF and +28 BCF injections of 2016 and 2017, respectively. Should a +50 BCF injection verify, natural gas inventories would rise to 2358 BCF while the storage deficit versus the 5-year average would inch higher to -568 BCF. The year-over-year deficit, meanwhile, would fall 22 BCF to -666 BCF. Click HERE for more on this week's projected storage injection.

Despite the projected slightly bullish build, I expect that there will be considerable pressure on today's report to outperform expectations given the recent rally and the fact that each of the past 3 weeks have ended with bullish surprises. With a report that merely meets expectations, investors may reflexively sell due to a perceived loosening of the market. As a result, I feel that it will take a reported injection of build of smaller than +45 BCF to be viewed as unequivocally bullish, satisfying investor expectations of another bullish beat, which would be sufficient to drive prices back to $3.00/MMBTU. On the other hand, a reported injection of over +52 BCF would be viewed as a bearish disappointment with prices likely to at least temporarily pullback, to perhaps under $2.90/MMBTU. An injection between +45 BCF and +52 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 hold nearly unchanged today as temperatures remain above-average across the Eastern Seaboard and West Coast. New York City and Boston will again top 90F today, each 10F warmer-than-normal. Further south, Washington, DC and Philadelphia will also see the low 90s, between 5F-10F hotter-than-average. Across the West, Heat Advisories and Excessive Heat Warnings are widespread. Highs will reach the low 100s from Boise to Spokane while Portland will reach the upper 90s, all 10F-15F above-average and near record levels. Across the Heartland, highs will be seasonally cool to downright below-average with the core of the cold located across North Texas and the Southern Plains. Highs in this region will be in the upper 80s, 5F-10F below-average. Overall, the forecast mean population-weighted nationwide temperature today will be nearly unchanged at 81.0F today versus 80.8F on Wednesday. Forecast Total Degree Days will be 16.3 TDDs, the third most for August 9 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 +5 BCF/day daily natural gas storage injection, unchanged from Wednesday and a bullish 3 BCF smaller than the 5-year average +8 BCF/day build. Gas demand could rise slightly on Friday to finish the week with a +4 BCF/day build expected. For the full week of August 4-10, I am projecting an exceptionally bullish +32 BCF injection, 24 BCF bullish versus the 5-year average and the second smallest build for the period in the last 5 years. I will have more on this week's projection in Friday's Commentary, but in the meantime, see more on my Storage Page HERE.