November 9, 2017

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EIA Projected To Announce Bullish +14 BCF Weekly Storage Injection In Today's Report; Gas Demand To Rise Today As Arctic Airmass Pushes Southeast Before Peaking On Friday; Crude Oil Falls After Surprise Inventory Build Even As Refined Products Decline; Submissions For Week 2 Of Celsius Energy's Storage Contest Open Today

6:00 AM EDT, Thursday, November 9, 2017
Crude oil closed with a second straight small loss on Wednesday, settling down 39 cents or 0.7%, following a day of volatile trading in the wake of the EIA's weekly Petroleum Status Report. In the report, which covered October 28-November 3, the EIA announced that crude oil inventories rose by +2.2 MMbbls to 457.1 MMbbls, which was considerably higher than Tuesday's API forecast of a -1.6 MMbbls drawdown and around 0.3 MMbbls bearish versus the 5-year average +1.9 MMbbl build, a rarity in recent months. However, this disappointing build was countered by larger than expected and bullish drawdowns in refined products. Gasoline inventories fell by -3.3 MMbbls (5-year average: -1.4 MMbbls) while distillates dropped by -3.4 MMbbls (5-year average: -1.4 MMbbls). With the drawdowns, both gasoline and distillate stocks are at storage deficits versus their respective 5-year averages of -0.2 MMbbls and -3.4 MMbbls, respectively. Overall, Total Petroleum Inventories (crude oil + gasoline + distillate stockpiles) declined by -4.5 MMbbls, modestly bullish versus the 5-year average -0.9 MMbbl draw, though not nearly to the same degree as we've seen over the past two months. Click HERE for more on crude oil inventories and HERE for more on refined products.

Just as interesting as the net builds and withdrawals are some of the individual components of supply and demand, two of the most important of which seemed to be at least a temporary victory for the bears last week. After setting and re-setting all-time records in recent weeks, domestic crude oil exports plunged by 1.26 MMbbls/day or 59% last week to just 0.87 MMbbls/day, the lowest since the week of September 2-8. It was the largest weekly drop on record for exports, on an absolute basis. Average daily crude oil exports are shown in the Figure to the right. With exports having averaged 1.82 MMbbls/day over the past 5 weeks, last week's decline resulted in a total 7 MMbbls of lost demand compared to this 5-week average. This contributed to flipping what could have been a -4.8 MMbbl crude oil drawdown--which would have been a 23-year high for the date--to the observed +2.2 MMbbl build. It is unclear what led to the step decline. The Brent-WTI spread, which has averaged over $5/barrel over the past several weeks and created a favorable environment for exports, was near 2017 highs for most of last week, even approaching $7/barrel to end the week, which one would expect to continue driving strong exports. Given the continued premium of Brent to WTI, I feel that this week will prove to be an anomaly with exports recovering next week, with the Brent-WTI spread closing Wednesday at a very bullish $6.68/barrel. Should exports recover, I expect crude oil withdrawals to ramp up as well. Click HERE for more on crude oil exports.

Of more significant concern is news that crude oil domestic production may have risen to an all-time record high last week, with the EIA reported a 67,000 barrel/day gain in production to 9.62 MMbbls/day, topping the 9.61 MMbbls/day set back in the summer of 2015. I say "may have" because these numbers are preliminary and the EIA has been forced to consistently revise down its final production numbers over the past year. Regardless, outside of two hurricane-induced disruptions, production has been on a steady upswing and is up more than 0.9 MMbbls/day versus 2016, as shown in the Figure to the right. Fortunately for the bulls, the yearly gain in supply has so far been more than countered by yearly gains in domestic demand (+0.5 MMbbl/day year-over-year and, more recently, record exports as discussed above (+0.5-1.6 MMbbl/day), allowing the crude oil storage surplus to continue to contract. Click HERE for more on domestic oil production.

Immediately following the EIA's report, WTI prices dropped 1.3% before staging a sharp early-afternoon rebound, briefly trading up nearly 1%. This rally, too, was faded and the commodity finished with its second straight loss. I'm actually surprised the commodity didn't drop more. While the report as a whole was net bullish, crude oil builds are generally frowned upon regardless of gasoline and distillate stocks and investors have already been very skittish about production such that I would have expected a larger response, especially given recent gains that have driven the commodity to an overbought status. Nonetheless, despite the storage build and (potentially) record production, I remain cautiously bullish on crude oil, though with a very close eye on an expected recovery in exports next week. This being said, I would not be surprised to see oil prices pull back and establish a new baseline as investors use yesterday's storage report as an opportunity to take profits. My 6-month price target remains $60/barrel for WTI.

Natural gas, meanwhile, rose for a fourth straight day, gaining 2 cents or 0.7% to settle at $3.18/MMBTU ahead of today's EIA Natural Gas Storage Report. The rally to what is the highest close since May 26 continues to be driven by a quick-moving shot of arctic air that will likely drive the season's first weekly storage withdrawal of 2017-2018 season this week. Before we get there, however, the EIA will be releasing its Storage Report for the week of October 28-November today at 10:30 AM EDT. For the week, I am projecting a +14 BCF weekly natural gas storage injection. Such an injection would be 31 BCF bullish versus the 5-year average +45 BCF injection and a massive 40 BCF bullish versus last year's +54 BCF injection. As the Figure to the right shows, a +14 BCF build would be tied with 2012 for the smallest injection for the October 28-November 3 period in the last 5 years. It would also be the 5th most bullish injection in the full 23 years for which EIA data is available, which have ranged from an exceptional -33 BCF withdrawal in 2002 to an ugly +69 BCF injection in 2014. The expected 51 BCF week-over-week decline in injection after the pervious week's +65 BCF build was driven by a rise in natural gas demand which averaged near 77 BCF/day for the week, up nearly 8 BCF week-over-week, due primarily to gains in residential/commercial heating demand. On the other hand, domestic production continues its rapid growth, averaging over 75 BCF/day for the first time ever and, alarmingly, up nearly 5 BCF/day year-over-year. LNG feedgas demand to Sabine Pass also took a small mid-week hit before recovering late in the week, to tally 19.7 BCF in total weekly demand, down 1.4 BCF from last week's record demand. Should a +14 BCF storage injection verify, natural gas inventories would rise to 3790 BCF while the storage deficit versus the 5-year average would grow to -71 BCF or -2%, the lowest since January 2017. Meanwhile, the year-over-year deficit will jump to -220 BCF, beginning what could be a run that takes this deficit to -290 BCF by late November. Click HERE for more details on this week's forecast build.

While the EIA-reported injection today is likely to be bullish, it will face considerable pressure to outperform to prevent a "sell-the-news"-type pullback. With natural gas up nearly 8% inside of a week, temperatures poised to moderate by the middle of next week, and natural gas production at record highs, I feel that even a small miss in today's injection number will be used as an excuse to take profits, even though the commodity remains steeply undervalued according to my Fair Price model, with natural gas trading at a nearly 9% discount versus a Fair Price of $3.47/MMBTU based on current inventories alone. I expect it would take an injection of smaller than +8 BCF to be viewed as bullish and prompt a further rally towards $3.20/MMBTU while an injection of larger than +15 BCF would be viewed as a disappointment, prompting a pullback towards $3.10/MMBTU. An injection between +8 BCF and +15 BCF would be viewed as neutral with prices equally likely to rally or pullback. However, given these discounts from Fair Price and steep year-over-year declines in inventories, I expect that any pullback would be unlikely to take the commodity back under $3.00/MMBTU unless the forecast for December trends markedly milder.

Check back at 10:30 AM EDT for the official EIA storage injection 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.

Additionally, Week 2 of my Natural Gas Storage Contest will open for submissions following the EIA's storage report at 12 pm EDT today. Entrants will be submitting their projection for the natural gas storage week of November 3-9 that ends on Friday and their price projection for the close of trading on November 16, the day that the EIA will release its official numbers for this week. Rankings through the first week of the contest will be available by this evening. Good luck to all. Click HERE to review the rules, to submit your pick when Week 2 submissions become available, and to view the first set of rankings.

Natural gas demand will inch higher today as a glancing blow of arctic air associated with the Polar Vortex moves eastward across the Northern Plains bringing much colder-than-average temperatures and boosting heating demand. Highs will only be in the teens and 20s from the Dakotas to Minnesota to Wisconsin, including Minneapolis, whose forecast high of 27F will be 20F colder than normal. Chicago will be on the edge of the arctic air and the city's forecast high of 43F is only 10F colder than normal. Elsewhere across the Heartland, highs will generally be 5F-10F colder than normal with highs in the 50s across Texas to the 30s and 40s across Kansas, Nebraska, and Iowa. Across the Northeast, highs will generally be seasonal today ahead of the arctic cold front with readings peaking in the low-to-mid 50s from Philadelphia to Boston, within 5F of normal. Overall, the forecast mean population-weighted nationwide temperature will be nearly flat day-over-day, cooling around 0.1F to 50.7F, 2.3F colder than normal. Total Degree Days will rise to 15.3 TDDs, 1.6 TDDs greater than normal and the 10th most for November 9 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 -6 BCF/day daily storage withdrawal today, 1 BCF greater than yesterday and nearly 8 BCF bullish versus the 5-year average +2 BCF/day build. Click HERE for more on today's projected daily withdrawal and intraday natural gas inventories. The peak of the arctic air will arrive on Friday as the cold front clears the Northeast. Most areas will be 15F-25F colder than normal with some spots challenging record lows and daily low maximums. The daily withdrawal for Friday could exceed -10 BCF/day, indicative of exceptional demand. It will be interesting to monitor pipeline flows on the Rover Pipeline which transports gas out of the Marcellus Shale in the central Appalachians to see if there are even any freeze-offs due to the cold. As a result of the late week arctic blast, I am now projecting an exceptionally bullish -12 BCF natural gas storage withdrawal for November 3-9, 24 BCF bullish versus the 5-year average and an enormous 45 BCF bullish versus last year. More on this week's projection in Friday's commentary, but click HERE for more data.

The past week should serve as a cautious reminder of overemphasizing the long-term outlook at the expense of the underlying fundamentals. Until last weekend, most medium and long-term outlooks had been calling for a prolonged period of warmth for much of the nation throughout November. It was only over the past few days that the intensity of the upcoming glancing blow from the Polar Vortex became evident. And with inventories already more than 200 BCF below year-ago levels, investors quickly were forced to reassess their positions and many were caught flat-footed, prompting the sharp rally. A dip driven by excessive faith in a long-term forecast should considered a buying opportunity--and vice-versa for a rally driven by excessive faith in an artic intrusion--when that dip results in a large disconnect from a supply/demand-supported Fair Value. A dip driven by fears over record production is more reasonable, but even then supply should not be examined in a vacuum. Yes, production is up considerably year-over-year, but LNG feedgas demand, powerburn electricity demand, and heating demand are all expected to see year-over-year gains that should negate much if not all of the gains in production. This should limit downside risk, especially with supplies already considerably lower year-over-year. Don't put all of your eggs in one basket--be it the eternal fall basket, the polar vortex basket, or the drill baby drill basket. Stay focused on the forest, not the trees. Natural gas price is ultimately determined by long-term supply/demand balance, not short-term spikes and troughs in demand.