6:00 AM EDT, Thursday, October 24, 2019
In its weekly Petroleum Status Report for October 12-18, the EIA announced Wednesday morning that crude oil inventories fell by -1.7 MMbbls. The draw came despite another -1.0 MMbbl decline in the Strategic Petroleum Reserve ( SPR) that added additional supply to the market. Not only did the reported draw snap a 5 week streak of inventory builds, but it came in far below Tuesday's American Petroleum Institute (API) expectation of a +4.5 MMbbl build. It was also a strong 5.1 MMbbls bullish versus the 5-year average +3.4 MMbbl build. As a result, crude oil inventories fell to 433.2 MMbbls while the storage surplus versus the 5-year average contracted to +5.2 MMbbls. Additionally, the year-over-year surplus fell sharply to +10.4 MMbbls. With another inventory drawdown likely next week and builds of +3.2 MMbbls and +5.8 MMbbls the next two weeks last year, it is very likely that storage fill flip to a year-over-year storage deficit within the next 14 days. I had discussed in Wednesday's Daily Commentary that I would not be surprised if the EIA reported a smaller build than what the API was expecting--or even a draw. Why? Over the previous four weeks, the EIA had reported that oil inventories had risen by +16.8 MMbbls, a whopping 5.7 MMbbls greater than the API's +11.1 MMbbl expectation for the same period. Historically, this inevitably results in a rebalancing when the EIA reports smaller-than-expected builds and catches up to the API. I expect we saw the beginning of this trend on Wednesday and would not be surprised to see it continue in the weeks to come.
Wednesday's bullish inventory drawdown was driven by the combination of falling imports and rising demand, both from exports and refinery inputs. Imports slid -0.4 MMbbls/day from the previous week to 5.9 MMbbls, remarkably the lowest since February 23, 1996, nearly 24 years ago. Imports are down a massive 1.8 MMbbls/day or 24% from this time last year, highlighting just how aggressive OPEC has been their attempts to rebalance global supply and demand. Domestic production held flat at 12.6 MMbbls/day, up +1.7 MMbbls/day or 16% from 2018. Thus, total supply rose to 18.5 MMbbls/day, down -0.1 MMbbls/day year-over-year as gains in production are nearly offset by losses in imports. On the demand side, after falling to a 2019 low the previous week, refinery inputs rose 0.4 MMbbls/day to 15.9 MMbbls/day, erasing half of the year-over-year deficit. Additionally, exports also jumped 0.4 MMbbls/day from last week to a very strong 3.7 MMbbls/day, the highest since June 21, 2019 and up an exceptional 1.5 MMbbls/day or 69% from 2018. Thus, total demand rose to 19.6 MMbbls/day, up 1.1 MMbls/day year-over-year. You will notice that, with demand averaging 19.6 MMbbls/day and supply 18.5 MMbbls, one would expect a -1.1 MMbbl/day inventory drawdown, or -7.7 MMbbls/day for the week. Obviously, this is considerably higher than the EIA's reported -1.7 MMbbl draw. Once again, the EIA's "Adjustment Factor," that is uses to square reported storage changes from those predicted by supply and demand, was a very high 0.73 MMbbls/day (when accounting for the impact of the SPR release), well below the 52-week average of 0.41 MMbbls/day, likely as a result of overestimating exports or underestimating imports. This, too, will eventually correct downwards some and put further pressure on inventories. Finally, the EIA also reported a strong -3.1 MMbbl gasoline inventory draw (5-year average: -3.0 MMbbls) and a -2.7 MMbbl distillate draw (5-year average: -2.5 MMbbls), both bullish versus their respective 5-year averages.
Click HERE for more on the latest EIA-reported oil inventories and supply/demand data.
Unsurprisingly, oil prices soared following the EIA's storage data. In its first trading day as the front-month contract, December 2019 prices settled near the highs of the day, up $1.49 or 2.7% to $55.97/barrel, the highest close since September 26. Brent oil kept pace, finishing up $1.47 to $61.17/barrel. After weeks of disappointing storage data, there was not much not to like in Wednesday's EIA report. And with the outsized refinery outage and maintenance season wrapping up, exports poised to average over 3.5 MMbbls/day for the next 6+ weeks, I expect supply/demand balance to tighten further and for inventories to fall below 400 MMbbls by the end of 2019. With the draw, my calculated Fair Price based on current inventories jumped to $63.09/barrel, an 11% premium to current prices. With this discount and a tightening supply/demand balance, I feel that upside potential outweighs downside risk in the oil sector and I am maintaining my aggressive $65/barrel upside WTI price target.
Meanwhile, front-month natural gas prices rose 0.4% to settle at $2.28/MMBTU but, for a second straight day, ETF holders did not benefit as the December 2019 contract held by these funds fell 3 cents or 0.9% to settle at $2.42/MMBTU. As a result, UGAZ fell 2.3% and UNG was off 0.7%. Front-month prices seem to be rising as the near-term models have amplified the upcoming shot of arctic air that should arrive by next week with highs 20F-30F colder-than-normal across the Central US with a potential large-scale winter storm across the Upper Midwest. This will boost demand with daily natural gas storage withdrawals possible as early as Halloween. Beyond that, however, it is increasingly apparent that there will be an expiration date to this airmass with both near- and long-term models suggesting a return to at least seasonal--if not above-average--temperatures by as early as the end of the first week of the month. This is reflected in the Figure to the right showing a quick rebound in storage injections to at or above the 5-year average. I expect that it is for this reason that the December 2019 contract--and ETFs that hold these contracts--has remained weak, especially with the 14-cent premium of the December over the November contract. Should the cold air last longer than expected or the EIA report a smaller-than-expected inventory draw today, it is certainly possible that December prices could bounce to perhaps as high as $2.50/MMBTU, but if the rest of November verifies as warmer-than-normal as the long-term models are suggesting, it will be very difficult for the commodity to maintain any momentum and sellers will be quick to pounce on any strength, will a sell-off to $2.25/MMBTU certainly possible.
The EIA will release its weekly Natural Gas Storage Report for October 12-18 this morning at 10:30 AM EDT. 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 while the projected build 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. In the meantime, click HERE for more on this week's projected build.
With much colder weather likely next week--even if it may be relatively short-lived--I do feel that upside potential outweighs downside risk today and that natural gas could be poised to rally should today's reported injection come in smaller-than-expected. I expect that a +86 BCF or smaller withdrawal would be bullish versus expectations with November prices potentially challenging $2.35/MMBTU and December prices $2.45/MMBTU near-term. On the other hand, I feel that a +96 BCF build would be considered unequivocally bearish and suggestive of a looser-than-expected market with November and December prices falling as low as $2.20/MMBTU and $2.40/MMBTU in the next few days, respectfully. A reported build between +86 BCF and +96 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 with a daily injection approaching the 5-year average for the first time this week. Highs will warm slightly across the Eastern Seaboard with most areas along the densely-populated I-95 corridor 5F-10F above-average. Washington, DC and Philadelphia will both approach 70F while New York City and Boston will be comfortable in the mid-60s, a neutral temperature set-up that is very bearish for gas demand. On the other hand, an unseasonable chill will overspread the Heartland. After around 2 inches of snow overnight, Denver will struggle to reach the mid-40s today, 15F cooler-than-normal. The largest anomalies will be found across west Texas where Amarillo, TX will only reach the lower 30s with 2-4 inches of snow possible, a whopping 30F cooler-than-normal. Elsewhere, temperatures will be unseasonably cool with Oklahoma City and Omaha, NE only reaching the upper 40s and St Louis near 50F, each 15F-20F cooler-than-average. This will result in rising heating demand across the entire area. Finally, it will be another blistering day across California with Los Angeles reaching the lower 90s and San Francisco and Sacramento both challenging 90F, all 20F hotter than normal, plenty to boost cooling demand--if the power stays on. Overall, today's forecast mean population-weighted nationwide temperature will fall -1.1F from Wednesday to 58.5F thanks to the Heartland cooldown, a new Shoulder Season low and just 0.5F warmer-than-normal. Total Degree Days (TDDs) will rise to 11.0 TDDs, 1.1 TDDs greater than normal and the 11th most for October 24 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 +10 BCF/day daily natural gas storage injection, 3 BCF smaller than Wednesday and less than 1 BCF bearish versus the 5-year average. By tonight, Realtime inventories will reach 3688 BCF while the storage surplus versus the 5-year average will inch slightly higher to +55 BCF. Inventories will likely finish the day within 100 BCF of their end of the season peak. The year-over-year storage surplus will rise by 3 BCF to +559 BCF. Click HERE for more on today's projected daily storage injection and Realtime natural gas inventories.
October 24, 2019
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