August 29, 2019

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Investors Sell-The-News After EIA Reports Massive -10 MMbbl Inventory Drawdown As Net Imports Sink To Summer Lows; EIA projected To Announce Neutral +59 BCF Natural Gas Storage Injection Today--But Traders Are Expecting Another Beat; Gas Demand To Hold Steady Today As Autumn Comes To The Central US While The Coasts Stay Warm

6:00 AM EDT, Thursday, August 29, 2019
In its weekly Petroleum Status Report for August 17-23, the EIA announced Wednesday morning that crude oil inventories plunged by -10.0 MMbbls. While this was slightly less than Tuesday's American Petroleum Institute (API) expectation of a -11.1 MMbbl draw, it was still a massive 7.4 MMbbls bullish versus the 5-year average -2.6 MMbbl. It was, by far, the largest draw for the August 17-23 period all-time, nearly doubling the 2nd place -5.9 MMbbls from 1998. With the draw, crude oil inventories fell to 427.8 MMbbls, the lowest since October 26, 2018. The storage surplus versus the 5-year average contracted sharply to a tiny +6.9 MMbbls while the long-standing year-over-year surplus declined to +22.0 MMbbls, the lowest since mid-March. The bullishness of the drawdown was driven largely by crude oil imports--or the lack thereof. Imports fell to just 5.9 MMbbls/day, down a huge 1.6 MMbbls/day or 21% from last year, the lowest since February 22, and in the top 5 lowest since 2000. Additionally, exports jumped to 3.0 MMbbls/day, the highest in a month and up 1.2 MMbbls/day or 70% higher than a year ago. As a result, net imports (imports minus exports) dropped to a very soft 2.9 MMbbls/day, among the lowest ever recorded and down a massive 2.8 MMbbls/day from last year. This import/export-driven tightening of the supply/demand imbalance easily overwhelms the oft-discussed gains in domestic production which, with output at a new all-time high of 12.5 MMbbls/day last week, stand at a "mere" 1.5 MMbbls/day higher than 2018. This all being said, due to the certain randomness of the timing and departure of oil tankers, this level of tightness is not sustainable but, in the current environment, the probability of such an event has increased.

Meanwhile, the EIA also announced inventory draws in both refined products with both gasoline and distillate stocks falling an equal -2.1 MMbbls, both bullish versus their respective 5-year averages of -0.3 MMbbls and +0.8 MMbbls, respectively. Gasoline inventories, at 232.0 MMbbls, are holding at a modest +7.7 MMbbl surplus versus the 5-year average while distillates, at 136.1 MMbbls, are at a similar -5.2 MMbbl deficit.

Click HERE for more on the latest crude oil inventories and supply/demand data.

In anticipation of the report, oil prices surged with WTI topping $56/MMBTU in early-morning electronic trading. Despite the huge draw, investors treated it like a sell-the-news event and the price point finished the day up a more modest 85 cents or 1.6% to $55.78/barrel. Brent gained 98 cents to $60.49/barrel. The draw pushed my Fair Price based on current inventories alone up to $62.89/barrel, an 11.6% undervaluation from current prices. And with supply/demand balance tightening and projected inventories continuing to fall through the end of the year, this Fair Price climbs towards $64/barrel, as shown in the Figure to the right. At this time, I am maintaining my $65/barrel WTI price target and feel that anything under $55/barrel is a reasonable entry point for the aggressive investor with the caveat that should there be any escalation of the US-China trade war, prices could still sell off as fundamentals get thrown out the window for a while in the ensuing panic.

Meanwhile, choppy trading in the natural gas sector continued on Wednesday in the wake of Monday's 3.6% gain and Tuesday's losses. The front-month September 2019 contract closed up 5 cents or 2.2% to settle at $2.25/MMBTU. The contract expired at the close of trading and will be replaced by the October 2019 contract, which closed at $2.22/MMBTU in a rare state of backwardation.

The EIA will release its weekly Natural Gas Storage Report for the week of August 17-23 this morning at 10:30 AM EDT. I am projecting a +59 BCF injection for the week, a slight 2 BCF bearish versus the 5-year average but a rare 7 BCF smaller than last year's +66 BCF injection. Daily builds were mostly at or smaller than the 5-year average for much of the week as intense heat baked Texas and much of the densely-populated East Coast, before rapidly rising to finish out the week with Friday's injection climbing to +12 BCF/day, 4 BCF larger than the 5-year average as temperatures cooled. Powerburn averaged a strong 40.2 BCF/day on the week, up 3 BCF/day from 2018. LNG feedgas demand averaged 5.1 BCF/day during the week, nearly doubling during the course of the week to all-time highs as Sabine Pass and Corpus Christi both returned from maintenance and flows to Cameron hit new highs. This is up 2.1 BCF/day from 2018. Countering these gains in demand, natural gas production averaged 92.4 BCF/day, up a massive 7.4 BCF/day year-over-year. Overall, a +59 BCF injection would be the third smallest in the last 5 years, but would be far behind the twin +34 BCF injections in 2016 and 2017. Should it verify, natural gas inventories would rise to 2856 BCF while the storage deficit would contract slightly to -101 BCF. Storage would finish the week up +362 BCF year-over-year. Click HERE for more on last week's projected storage injection.

Having reported smaller-than-expected injections each of the past two weeks, this week's rally in natural gas is certainly at least partially dependent on the EIA coming through with another solid number today. I feel that it will take a reported injection of +55 BCF or larger to be considered unequivocally bullish versus expectation and sufficient to drive prices above $2.30/MMBTU near-term. On the other hand, an injection of +65 BCF or larger would be bearish versus expectations and could quickly erase the goodwill built up these past two weeks leading to prices dropping back under $2.20/MMBTU. A reported injection between +55 BCF and +65 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 hold steady today as warm temperatures across the East and West Coast today are countered by a large area of early Autumn-like temperatures across the Central US. Boston will reach the low 80s today--5F above-average--while Boise, ID, Salt Lake City, UT, and Albuquerque, NM could all reach the mid-to-upper 90s, 5F-10F warmer-than-normal. Between these areas, however, its all below-average. The largest anomalies will be across the far northern Plains with Billings, MT and Bismarck, ND only limping to near 70F, 10F below-average. Elsewhere, a broad area of readings in the mid-to-upper 70s will dominate from Minneapolis to Chicago to Detroit to Pittsburgh, all around 5F cooler-than-normal. Overall, today's forecast mean population-weighed mean nationwide temperature will edge higher by 0.3F from Wednesday to 75.2F, right at the long-term normal. Total Degree Days (TDDs) will hold steady at 10.4 TDDs, 1.4 TDDs fewer than normal and the 10th fewest for August 29 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, flat from Wednesday and 2 BCF bearish versus the 5-year average. Powerburn will likely hover near yesterday's +39 BCF/day, up 4 BCF/day from 2018. LNG feedgas demand will rebound back to near all-time highs, rising 0.3 BCF/day from Wednesday to 6.5 BCF/day today, up 3.3 BCF/day from 2018. With only one more day remaining in the storage week, LNG export demand is all but assured of hitting a new weekly record high. We are currently on pace to hit 44.3 BCF for the week of August 24-30, up 8.7 BCF from last week and 23.8 BCF from 2018. By tonight, look for Realtime natural gas inventories to reach 2931 BCF as the storage deficit versus the 5-year average falls to -83 BCF. Of note, the 5-year average topped 3000 BCF overnight, a level that 2019 projected inventories will not reach until next Wednesday, September 4. Inventories did not reach 3000 BCF last year until October 9. Click here for more on today's projected daily storage injection and Realtime natural gas inventories.