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September 12, 2019

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Oil Falls On Global Demand Fears & Supply Speculation Despite Exceptionally Bullish EIA-Reported Crude Oil Inventory Drawdown; Oil Storage Expected To Fall Below 375 MMbbls By Years-End, Supporting a $65/Barrel Fair Price; EIA Expected To Announce A Slightly Bearish +82 BCF Natural Gas Storage Injection Today As Rally Starts To Run Out Of Steam


6:00 AM EDT, Thursday, September 12, 2019
In its weekly Petroleum Status Report for August 31-September 6, the EIA announced that crude oil inventories tumbled by -6.9 MMbbls. This was very close to the API's Tuesday forecast of a -7.2 MMbbls and was exceptionally bullish versus the 5-year average +1.3 MMbbl storage build. With the build, storage levels tumbled to 416.1 MMbbls, the lowest since October 5, 2019. Additionally, the long-standing storage surplus versus the 5-year average flipped to a storage deficit of -3.6 MMbbls. Even the year-over-year surplus contracted to just +19.9 MMbbls, a new 2019 low. The bullishness of the draw was driven by strong exports that averaged 3.3 MMbbls/day last week, up 0.2 MMbbls/day from the week before and a robust 1.5 MMbbls/day from 2018. Additionally, imports averaged just 6.7 MMbbls/day, down a slight 0.2 MMbbls/day from the previous week and off 0.9 MMbbls from the previous year. As a result, net imports (imports minus exports) slid to just 6.7 MMbbls/day, down a whopping 2.3 MMbbls/day from 2018. This more than cancels out the 1.5 MMbbl/day year-over-year growth in domestic production, which last week held steady at 12.4 MMbbls/day. The EIA also reported a large 0.672 MMbbl/day or 3.4 MMbbl per week "Adjustment Factor," which is how it squares discrepancies in its supply/demand numbers and reported storage changes. This means that, purely by adding supply and demand elements together, inventories would have declined by a massive -10.3 MMbbls, rather than the reported -6.9 MMbbls. Either way, the crude oil supply/demand imbalance is quite tight right now, averaging 6.6 MMbbls per week tight over the past month. Were this remarkable tightness able to persist, I project that inventories could fall below 350 MMbbls by the end of 2019, as shown in the Figure to the right. This would results in a storage deficit of over -100 MMbbls. While this is a hyper-bullish outlook that would require a remarkable string of inventory draws, I do feel that domestic storage levels will drop to at or below 375 MMbbls by the end of the year.


Click HERE for more on the latest EIA-reported crude oil inventory data.


Despite the huge draw, oil prices dropped on Wednesday with WTI easing $1.65 or 2.9% to $55.75/barrel and Brent sliding $1.57 to $60.81/barrel, the lowest close since September 4. The sell-off was driven primarily by speculation that Donald Trump will be easing sanctions on Iran now that hawkish John Bolton is out as National Security Advisor. Additionally, the EIA did report a somewhat disappointing gasoline draw (-0.7 MMbbl) and distillate build (+2.7 MMbbls), which may have dulled the impact of the storage report somewhat. Nonetheless, I feel that oil is very undervalued here, a sentiment supported by my Fair Price Model. Based on current inventories alone, the commodity is trading at a 13.8% undervaluation versus a Fair Price of $64.17/barrel, which rises to $75/barrel by the end of the year in the hyper-bullish scenario discussed above. For this reason, I remain a buyer of WTI on dips, as evidenced yesterday when I boosted my short DWT exposure by 3% to a robust 14.0% of my holdings in my Oil & Natural Gas Portfolio. At this time, I am maintaining my $65/barrel 2019 price target on the commodity.


Meanwhile, while volatile oil was being torn apart by bearish global sentiment and bullish domestic storage numbers, natural gas finally pulled back after its recent rally, dipping 3% or 1.1% to $2.55/MMBTU. Once again, this was driven more by profit-taking than an abrupt change in the near-term temperature outlook, which continues to look remarkably hot for mid-September, although the early October forecast is beginning to look somewhat mild, which, by that time, would be bearish for natural gas.


The EIA will release its weekly Natural Gas Storage Report for August 31-September 6 this morning at 10:30 AM EDT. I am projecting a +82 BCF natural gas storage injection, 9 BCF larger than the 5-year average and 14 BCF bearish versus 2018. As the Figure to the right shows, such an injection would be the third largest in the last 38 years, behind only 2017's +84 BCF and 2014's +92 BCF builds. Should it verify, natural gas inventories would rise to 3022 BCF while the storage deficit versus the 5-year average would contract to -73 BCF and the year-over-year surplus would inches up to +397 BCF. Click HERE for more on this week's projected injection.


With the temperature-driven rally starting to run out of some steam, I feel that there is more down downside on an EIA-reported miss today than upside for a smaller-than-expected injection as investors look for an excuse to take profits or start adding back their shorts. I expect that a +88 BCF or larger injection will be viewed as unequivocally bearish versus expectations with prices likely to pull back to $2.45/MMBTU near-term. I expect that it will take a +75 BCF or smaller build to be considered sufficiently bullish versus expectations to drive prices back above the recent highs of $2.60/MMBTU. A reported injection of +75 BCF to +88 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.


Longer term, I continue to feel that natural gas is somewhat overextended at current levels with the storage deficit expected to continue to contract and inventories to top out near 3700 BCF this November, nearly 500 BCF larger than 2018. My near-term downside target is $2.35/MMBUT to $2.40/MMBTU.