October 18, 2019

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Natural Gas Holds Gains After Neutral EIA Storage Report As Early November Outlook Continues To Trend Colder; Oil Rises Despite Very Bearish Inventory Build On Brexit Deal; Natural Gas Demand To Soar On Cooldown, But Loosening Supply/Demand Imbalance & Building Surplus To Cap Any Rallies Long-Term; Oil Market Set To Tighten Considerably Later This Month

6:00 AM EDT, Friday, October 18, 2019
In its weekly Natural Gas Storage Report, the EIA announced Thursday morning that natural gas inventories rose by +104 BCF. This was the third triple digit injection in the last four weeks after there were no such builds during the Fall of 2018. On the one hand, this was 2 BCF smaller than my +106 BCF projection--the second straight week in which the reported build came in under my projection--but it was still a bearish 23 BCF larger than last year's injection. Three out of the five storage regions reported bearish injections, led by the South Central Region's +39 BCF build, 12 BCF larger than the 5-year average +27 BCF, which has to be disappointing given how hot it was across the Region during the week. With the build, the Region's storage deficit versus the 5-year average slipped to just -8 BCF (and seems destined to flip to a surplus within the next 2 weeks) while the year-over-year surplus ballooned to a Region-high +216 BCF. Additionally, the East and Midwest Regions saw big +26 BCF and +35 BCF injections, respectively, 7 BCF and 5 BCF bearish versus their 5-year averages. Both Regions are at a surplus versus their 5-year averages. On the other hand, the tiny Mountain and Pacific Regions reported pretty neutral +2 BCF (5-year average: +2 BCF) and +0 BCF injections (+4 BCF), respectively. Overall, natural gas inventories rose to 3519 BCF while the long-standing storage deficit finally flipped to a +14 BCF surplus (officially, anyways). Year-over-year inventories stand at +494 BCF. Click HERE for more on the latest EIA-reported crude oil inventories.

Following the morning storage data, the EIA released its weekly supply/demand data. Note that this data covered October 10-16 rather than the October 5-11 of the Storage Report. Most noteworthy was that natural gas production set a new all-time record high, averaging a massive 94.0 BCF/day. This is a huge 7.7 BCF/day larger than last year, as shown in the Figure to the right. With Canadian imports down only 0.5 BCF/day year-over-year at 4.2 BCF/day, total supply is up a massive 7.2 BCF/day year-over-year, the largest surplus since April. On the demand side, most components are up slightly year-over-year led by LNG exports which, at 6.6 BCF/day, have posted a sizable 3.8 BCF/day gain versus 2018. Additionally, Powerburn averaged 30.0 BCF/day, up 0.8 BCF/day year-over-year and LNG exports to Mexico posted 5.3 BCF/day, up 0.5 BCF/day from 2018. On the other hand, residential/demand averaged just 12.6 BCF/day, down 3.1 BCF/day from 2018 thanks to limited cold air across major population centers even as the northern Plains were getting pounded with the first major winter storm of the season. This has to be somewhat concerning heading into the heating season.

Looking at the temperature-adjusted supply/demand imbalance, the market continues to loosen, falling another 0.6 BCF/day from the previous week to -2.3 BCF/day loose versus the 5-year average. This means that, for any given temperature, I calculate that the day's storage injection would be 2.3 BCF/day bearish versus the storage injection for the same day with the supply/demand balance for the 5-year average. That is, an unseasonably chilly mean nationwide temperature that would have driven, for example, a bullish +4 BCF/day daily injection were supply/demand balance right at the 5-year average, would result in a +6.3 BCF/day build this year, still bullish, but fighting a clear headwind. This is a better metric of market health than the absolute supply/demand imbalance as a bearish imbalance can be masked by an anomalously hot weak during the summer or cold week during the winter. As the Figure to the right shows, this temperature-adjusted imbalance has loosened over each of the past 5 weeks as summer powerburn has faded and production has set new records on a nearly weekly basis. As the Figure shows, the temperature-adjusted supply demand imbalance faced a similarly large bearish imbalance last year. However, this year differs significantly in that inventories are 500 BCF larger than last year and are already at a surplus versus the 5-year average. The combination of a large temperature-independent imbalance plus a storage surplus is a decidedly bearish combination that will make difficult a sustained rally, even should temperatures be consistently colder-than-normal. Click HERE for more on the latest natural gas supply/demand data.

Following the report, natural gas finished the day up 2 cents or 0.7% to $2.32/MMBTU. The December 2019 contract--held by UGAZ and partially by UNG--end up just over a penny at $2.52/MMBTU. This blunted volatility is not terribly surprising for what ended up being a rather neutral report versus expectations, though still solidly bearish historically. Investors remain glued to the near-term temperature outlook, which still looks impressively cold into early November. Thursday's run of the long-term ECMWF-EPS even suggests that the cold could extend into the middle of the month. As a result, projected end-of-season natural gas inventories have plunged over the past two weeks. As the Figure to the right shows, this projection has slid by nearly 100 BCF from a peak of 3866 BCF on October 5 to under 3760 BCF. Yet despite all of this, natural gas is up barely 10 cents from its recent lows. With storage up 500 BCF from last year, it honestly doesn't matter that much if inventories top 3800 BCF or only 3700 BCF. There is virtually no chance of any sort of storage crunch this winter and, thanks to the loosening supply/demand balance discussed above, I am projecting that inventories may not even fall below 2000 BCF by next Spring. Near-term, given the building cold--somewhat reminiscent of last year's early-season arctic blast that sent natural gas to nearly $5.00/MMBTU--I would not be surprised to see the commodity continue to rally. The short trade is exceptionally overcrowded with over 70% of money manager positions held short per the CFTC and I feel that many of these traders are looking nervously at the forecast. It will take little additional cooling to trigger even a small short squeeze. Long-term, however, I still feel that the market is more than adequately supplied and short sellers will likely aggressively build their positions into any rally. At this time, I am maintaining my upside price target of $2.60/MMBTU for the December 2019 contract, above which I will likely transition from net long to short.

Meanwhile, the EIA also released its weekly Petroleum Status Report for October 5-11 on Thursday morning, delayed a day due to Monday's Columbus Day Holiday. The agency announced that crude oil inventories rose by +9.3 MMbbls for the week, the fifth straight weekly build. On the one hand, this was smaller than Wednesday's American Petroleum Institute's (API's) expectation of a +10.5 MMbbl injection, but it was still more than double the 5-year average +4.4 MMbbls. With the build, inventories rose to a 2-month high of 434.9 MMbbls while the storage surplus versus the 5-year average jumped to +10.3 MMbbls. Inventories are up +18.5 MMbbls year-over-year. The bearishness of the build was driven largely by refinery demand which, due to multiple outages across the nation, slid another 0.2 MMbbls/day last week to just 15.4 MMbbls/day, down 0.9 MMbbls/day year-over-year and a fresh 52-week low. On the other hand, the import/export balance remained rather favorable. Imports inched up 0.1 MMbbls/day to 6.3 MMbbls/day, but remain down 1.3 MMbbls/day year-over-year while exports fell -0.2 MMbbls/day but held at 3.3 MMbbls/day, up a robust 1.5 MMbbls/day year-over-year. Domestic production held at 12.6 MMbbls/day, up 1.7 MMbbls/day year-over-year. It is worth mentioning that if you add up all of the elements of supply and demand (12.6 + 6.3 - 15.4 -3.3) , you would calculate an expected daily storage build of just +0.21 MMbbls/day, or +1.5 per week, 3 MMbbls bullish versus the 5-year average and a massive 7.8 MMbbls smaller than the EIA's reported build. This adds up to an "adjustment factor" of 0.94 MMbbls/day, the technique that the EIA uses to square observed inventory changes and those predicted from the supply/demand balance. This is at the very top of the maximum range of adjustment factors and was likely due to an overestimation of exports or an underestimation of imports. Typically, such a large adjustment results in a flip-flop as cargos are all accounted, and this further supports my expectation of a series of large inventory draws coming up. Finally, it is also worth noting that, as a consequence of the aforementioned refinery outages, the EIA did result sizable gasoline and distillate draws. Gas stock fell -2.6 MMbbls (5-year average: -1.1 MMbbls) while distillates slid -3.8 MMbbls (5-year average: -0.9 MMbbls) cutting the bearishness of the Total Petroleum Build to "just" 0.4 MMbbls. Click HERE for more on the latest oil and refined product inventory data.

Despite the bearish inventory data, geopolitics trumped fundamentals on Thursday. News of a Brexit deal that could potentially boost global oil demand allowed the commodity to shake off early-session weakness and actually rally on the day. WTI finished up 57 cents or 1.1% to $53.93/barrel while Brent gained 49 cents to $59.91/barrel. To me, this was a surprising, but pleasant, result. Even with the build, the commodity is still undervalued according to my Fair Price Model, trading 14% below a Fair Price of $62.46/barrel. On the other hand, the supply/demand imbalance has averaged an ugly 3.4 MMbbls/week bearish versus the 5-year average over the past 4 weeks. I belief the market will rapidly tighten in the weeks to come and am almost reluctant to publish the graphic to the right, but should the market remain this loose, my calculated Fair Price will rapidly decline to under $60/barrel in the next 6 weeks and to around $57.50/barrel by the end of the year. However, so confident am I that the supply/demand imbalance is going to tighten, I am not adjusting my upside price target of $65/barrel, though the path there will certainly not be a straight line. I have no plans to add to my DWT short position--providing long exposure--at this time, unless WTI dips under $50/barrel.

Natural gas demand will fall today as temperatures moderate across the Great Lakes and Eastern Seaboard. Highs will warm to generally within 5F of normal across the I-95 corridor with Washington, DC, Philadelphia, New York City, and Boston all reaching the lower-60s. Across the Western Lakes, highs will warm to above-average with Minneapolis reaching the low 60s--nearly 10F warmer-than-normal--while Kansas City will approach 70F, 5F above-average. Across the Deep South, a developing area of subtropical low pressure is likely to become Tropical or Subtropical Storm Nestor today as it races northward towards a Saturday landfall across the upper Gulf Coast, bringing heavy rains and gusty winds. The system is moving fast enough and is sufficiently weak that it will have minimal impact on Gulf Coast production, LNG exports, or powerburn demand. Overall, today's forecast mean population-weighted nationwide temperature will hold nearly flat from yesterday at 57.5F, 2.3F cooler-than-normal. On the other hand, Total Degree Days (TDDs) will fall to 8.8 TDDs, still a slight 0.2 TDDs greater than normal and the 14th most for October 18 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 +12 BCF/day daily natural gas storage injection, 1 BCF larger than Thursday's build and 2 BCF bearish versus the 5-year average. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories. For the full week of October 12-18 that ends today, I am projecting a +89 BCF natural gas storage injection, 16 BCF bearish versus the 5-year average and 27 BCF greater than last year. As the Figure to the right shows, it would be the second largest injection in the last 5 years, behind only 2014's +94 BCF injection. It would also be the third largest build all-time for the week, behind only 2014 and the +97 BCF injection from 2011. Despite the bearishness of the projection, +89 BCF is actually the lowest projection I have made for the week since September 29 and the projection has been as large as +112 BCF back on October 4 thanks to a transition to cooler temperatures throughout most of the week. Should a +89 BCF injection verify, natural gas inventories would rise to 3608 BCF while the storage surplus versus the 5-year average would top +30 BCF. Year-over-year gains would top +521 BCF. The EIA will release its official storage numbers for the week next Thursday, October 24, at 10:30 AM EDT. In the meantime, click HERE for more on this week's projected build.