May 9, 2019

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A Good Day For Commodities: Natural Gas Jumps Nearly 3% In Best Day Since February While Oil Climbs After Surprise EIA-Reported Bullish Inventory Drawdown; EIA Projected To Announce Slightly Bearish +85 BCF Natural Gas Storage Injection; Gas Demand To Hold Steady Today As Unseasonal Heartland Chill Is A Double-Edged Sword

6:00 AM EDT, Thursday, May 9, 2019
In its weekly Petroleum Status Report for April 27-May 3, the EIA announced Wednesday morning that crude oil inventories fell by -4.0 MMbbls. This was dramatically better than the API's forecast of a +2.8 MMbbl build and was modestly bullish versus the 5-year average -2.1 MMbbls. It was the only the second draw in the last 7 weeks and the largest since a -9.6 MMbbl draw on March 15. With the drawdown, crude oil inventories fell to 466.6 MMbbls while the storage surplus versus the 5-year average narrowed to just +8.9 MMbbls. However, inventories are still a robust 32.8 MMbbls higher year-over-year.

The bullishness of the draw was driven almost entirely on the shoulders of imports which tumbled by 0.72 MMbbls/day week-over-week to a mere 6.7 MMbbls/day. As shown in the Figure to the right, this is down 0.6 MMbbls/day year-over-year and the ninth time so far in 2019 that imports have fallen below the 7.0 MMbbl/day level. Additionally, domestic production fell by 0.1 MMbbls/day week-over-week from all-time highs to 12.2 MMbbls/day, though it remains up 1.5 MMbbls/day from 2018. Despite oil prices that are down nearly 15% year-over-year, refinery demand continues to lag at just 16.4 MMbbls/day, down 80,000 barrels/day from 2018. Additionally, exports fell by 0.3 MMbbls/day to 2.32 MMbbls/day, up 0.45 MMbbls/day from 2018, though year-over-year gains have narrowed in recent weeks, perhaps in response to a tighter Brent-WTI spread. Overall, this is was a solid report. On the one hand, it is concerning that the bulls seem to be dependent on imports below 7.0 MMbbls/day--likely unsustainable long-term--but it is also encouraging in that refinery demand has significant upside potential over the next 6 weeks.

Click HERE for more on the latest crude oil inventories.

Unsurprisingly, following the EIA's report, oil prices moved higher and finished the session up 72 cents or 1.2% to $62.12/barrel, recovering nearly all of Tuesday's losses. Brent was up a more modest 49 cents to $70.37/barrel. According to my Fair Price model, the storage drawdown flipped the commodity back to slightly undervalued, a 1% discount versus a Fair Price of $62.54/barrel. However, thanks to large inventory builds in recent week, supply/demand is averaging 1.2 MMbbls/week loose versus the 5-year average. As result, the commodity flips back to overvalued with a Fair Price falling to near $60/barrel by the end of the summer, as shown in the Figure to the right. However, should the market tighten up as the driving season kicks into gear, the commodity could quickly become long-term undervalued. Of course, given recent geopolitical events, the sector is being driven by more than just domestic fundamentals. Sanctions on Iran (and that nation's recent belligerence) and Venezuela continues to support the bullish case while a US-China trade deal that suddenly appears to be on life support supports lower prices. At this time, I am holding firm and maintaining a $65/barrel WTI price target. However, this will require US imports to remain suppressed and some sort of positive resolution the US-China trade deal. Otherwise, we will be looking at Brent falling under $70/barrel and WTI under $60/barrel very quickly.

Meanwhile, natural gas turned sharply higher on Wednesday, rising 7 cents or 2.9% to settle at $2.61/MMBTU. It was the largest daily gain since February 25. The rally appears to be driven by the combination of a slight improvement in the 14-day gas-weighted degree day outlook (GWDD) as well as a sudden and mysterious 2 BCF/day daily decline in domestic production from all-time highs near 90 BCF/day to 88 BCF/day. Were such a drop sustainable, it would indeed be quite bullish for the sector. However, given its suddenness, I am quite skeptical and, with a string of triple digit storage builds still likely, I am not altering my near-term bearish sentiment and am targeting a front-month contract under $2.50/MMBTU.

The EIA will release its weekly Natural Gas Storage Report for April 27-May 3 this morning at 10:30 AM EDT. Despite an early-week spike in demand thanks to unseasonably cold--and even snowy--conditions across the Midwest, I am projecting an eighth straight bearish weekly injections thanks to a late week surge in injections and the underlying loose supply/demand balance. I am projecting a +85 BCF storage injection, the lowest weekly build in a month, but still 15 BCF bearish versus the 5-year average and 2 BCF larger than last year's injection. The reason for the large week-over-week drop in injection from last week's +123 BCF build was significantly cooler temperatures throughout the week with the mean population-weighted nationwide temperature falling around 0.6F week-over-week. However, as the Figure to the right shows, such a build would still be tied for the largest injection in the last 5 years with last year and 2015. It would also be the sixth largest for the week all-time dating back to 1994. Should a +85 BCF injection verify, natural gas inventories would rise to 1547 BCF while the storage deficit versus the 5-year average would contract to -303 BCF and the year-over-year surplus will rise to +128 BCF. Click HERE for more on last week's storage injection.

With Wednesday's spike, investors will be closely eyeing today's report to provide further support for a sustained rally or another larger-than-expected build which could drive a reversion back towards $2.50/MMBTU. I feel that it would take a reported build of over +90 BCF to be viewed as a bearish disappointment and consistent with a looser-than-expected market that would drive a pullback. On the other hand, a reported injection under +82 BCF--while still slightly bearish--would be viewed as unequivocally bullish versus expectations and could drive prices towards $2.65/MMBTU near-term. A reported build between +82 BCF and +90 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 rise for a third straight day today as unseasonably cold temperatures dominate the Great Plains, though the same airmass will also suppress early-season cooling demand across Texas. Highs today in Denver will struggle into the lower 30s while the nearby mountains see excess of 2 feet of snow while Oklahoma City and Omaha will both be stuck in the 50s, all 20F-25F colder-than-normal and plenty cold enough for some late-season heating demand. At the same time, highs across the western half of Teas will be 10F-20F colder-than-normal with Dallas only reaching the low 70s and El Paso the upper 70s, both around 10F colder-than-normal and enough to suppress powerburn cooling demand in the nation's largest natural gas-consuming state. In the warm sector ahead of the large Plains storm, highs will reach the mid-70s as far north as Detroit and Buffalo, both 10F-15F warmer-than-normal. Warming temperatures across this region but the cooldown across the Plains with largely cancel out with today's forecast mean population-weighted nationwide temperature holding flat at 65.2F, 1.2F warmer-than-normal. Total Degree Days (TDDs) will likewise only inch negligibly higher today to 8.6 TDDs, 1.7 TDDs greater than normal and the 12th most for May 9 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 +15 BCF/day daily natural gas storage injection, down less than 1 BCF from Wednesday's build and 2 BCF bearish versus the 5-year average. LNG feedgas demand will continue its recent trend of holding just below all-time highs at 5.4 BCF/day today. By tonight, I project that Realtime natural gas inventories will be near 1644 BCF while the storage deficit versus the 5-year average will fall to near -282 BCF. The year-over-year surplus will hold steady at +137 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.