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October 10, 2019

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Oil Can't Hold Onto Gains After Mixed EIA Report While Natural Gas Continues To Bleed; Net Oil Imports Fall To An 8-Month Low But Refinery Demand Hits 2019 Low To Counter; EIA Projected To Announce Bearish +102 BCF Natural Gas Storage Injection Today As Traders Desperately Search For A Catalyst


6:00 AM EDT, Thursday, October 10, 2019
In its weekly Petroleum Status Report for September 28-October 4, the EIA announced Wednesday morning that crude oil inventories rose by +3.0 MMbbls. On the one hand, this was smaller than Tuesday's API-expected +4.1 MMbbl build, but it was still the fourth straight injection overall and was nearly double the 5-year average +1.6 MMbbl build. As a result, crude oil inventories rose to 425.6 MMbbls--the highest since August 23--while the storage surplus versus the 5-year average rose to +5.5 MMbbls. Storage levels are up +15.6 MMbbls from this time last year. Supply and demand elements driving the build were a bit of a mixed picture. On the one hand, exports rose +0.5 MMbbls/day from the previous week to 3.4 MMbbls/day, the highest since June 21 and up +0.8 MMbbls/day or +32% year-over-year, while imports were just 6.2 MMbbls/day, 1.2 MMbbls or 16% lower year-over-year. As a result, net imports fell to just 2.8 MMbbls/day, the lowest since February 22. With a favorable pricing structure supporting exports and disfavoring imports, I expect this trend to continue for the rest of the year. On the other hand, however, refinery inputs, amidst multiple nationwide outages, sank to just 15.7 MMbbls/day, down 0.6 MMbbls year-over-year and a new 2019 low, as shown in the Figure to the right. Additionally, domestic production, after sitting around 12.4 MMbbls/day for the better part of the summer, jumped 0.2 MMbbls/day week-over-week to 12.6 MMbbls/day, up 1.4 MMbbls/day year-over-year and a new all-time high. Overall, crude oil supply/demand balance has been a disappointing 2.3 MMbbls/week loose versus the 5-year average over the past month, thanks largely to soft refinery demand. I expect this to tighten up over the next month or so as refinery outages recover, but this is admittedly a rather disappointing number.


Offsetting the bearish crude oil inventory build somewhat, the EIA reported modestly bullish refined product draws. Gasoline stocks fell by -1.2 MMbbls to 228.8 MMbbls, 2.1 MMbbls bullish versus the +0.9 MMbbls/day 5-year average. Distillates tumbled -4.0 MMbbls, double the 5-year average -2.0 MMbbl draw. Gasoline inventories are sitting at a small +5.5 MMbbl or 2.4% surplus versus the 5-year average while distillates are at a more sizable -12.6 MMbbl or 9.0% storage deficit.


Click HERE for more on the latest EIA-reported crude oil storage numbers and supply/demand data.


Following the report, oil prices held steady and even rose to intra-day highs north of $53.75/barrel as investors applauded the large refined product draws. However, as has been the case for the past 2 weeks, gravity proved too strong a force to overcome and WTI steadily sold off and finished the session down 4 cents or 0.1% at $52.59/barrel. Brent eeked out a 8 cent gain to $58.32/barrel, for whatever that's worth. The commodity was weighed down by ongoing global demand concerns --especially as US-China trade talks don't appear to be progressing well--and a lukewarm Petroleum Status Report did nothing to revise that sentiment. After-hours, the commodity took a further dosedive to the south due to oscillations in the US dollar with WTI briefly trading under $51.50/barrel before recovering most of these losses. As bullish as I have been on oil recently, Wednesday's report and subsequent trading action was disappointing. According to my Fair Price model, the commodity is still sharply undervalued by 16% versus a Fair Price of $63.06/barrel based on current inventories alone. As I still expect a series of large draws during the fourth quarter, I am maintaining my $65/barrel upside price target. However, it is becoming increasingly apparent that this will not be reached anytime soon and that the target is a longer term one as, for now, the bears are in control of the trade and there needs to be a large swing in sentiment before prices can sustainably rally.


Meanwhile, the slow bleed continued in the natural gas sector. The front-month November 2019 fell 5 cents or 2.4% to settle at $2.23/MMBTU, the lowest settlement since August 27. The popular 3X ETF UGAZ continued its rollover, with 60% of funds having been transferred from the front-month to the December 2019 contract. That contract closed Wednesday at $2.44/MMBTU, a brutal 21 cent or 9.4% contango. Natural gas continues to be weighed down by the combined impact of record production, larger-than-expected EIA-reported storage injections, and a late October and early November outlook that has changed little and continues to look warmer-than-normal. Like oil, natural gas is trading at a steep undervaluation versus its Fair Price even with the recent transition to a storage surplus versus the 5-year average (-12% versus a Fair price of $2.56/MMBTU). However, thanks to the large contango and expected widening of the storage surplus, natural gas, unlike oil, quickly becomes overvalued by early November. It is for this reason that, despite an outsized 31% year-over-year decline, I would still not be surprised to see further downside in the sector with prices falling perhaps as low as $2.15/MMBTU, especially if the EIA continues to report larger-than-expected storage builds.


Speaking of which, the EIA will release its weekly Natural Gas Storage Report for September 28-October 4 this morning at 10:30 AM EDT. I am projecting a +102 BCF natural gas storage injection, a third straight triple digit build despite record-setting heat throughout the week. Such an injection would be 13 BCF bearish versus the 5-year average and 11 BCF larger than last year's injection. As the Figure to the right shows, it would be the second largest injection in the past 5 years, behind only 2014's +104 BCF build. It would also be the third largest injection all-time for the week, behind only 2014's +104 BCF and 2011's +106 BCF builds. Over the past 25 days for which I have been making projections for the week, this is near the top of the range of projections which have been as low as +82 BCF back on September 20--before the recent spike in Permian takeaway send production to record highs--and +106 BCF late last week. Should a +102 BCF injection verify, natural gas inventories would rise to 3419 BCF while the long-standing storage deficit versus the 5-year average would slump to just -5 BCF. Click HERE for more on last week's projected injection.


With three weeks of larger-than-expected storage injections, investors are undoubtedly heading into today's report with poor sentiment. This does leave the bulls some potential for upside surprise should the EIA report a smaller-than-expected injection, particularly one in the double digits, though any report-driven spike would likely be temporary. I therefore expect that a reported storage injection under +99 BCF would be viewed with relief as, while still bearish, better than expected and could result in a near-term bounce to $2.30/MMBTU--or $2.50/MMBTU for the December 2019 contract. Barring a change to the near-term outlook, I expect that the bears would pounce on such a spike and aggressively add to their short positions. On the other hand, a reported injection of +108 BCF or larger would be further reinforcement of a loosening supply/demand imbalance and would likely result in prices dropping below $2.20/MMBTU near-term. A reported injection between +99 BCF and +108 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.