October 3, 2019

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Oil Falls To Near 2-Month Lows After EIA Reports Surprise Crude Inventory Build--But Don't Wave The Wide Flag Just Yet; Natural Gas Extends Record-Setting Losing Streak; EIA Expected To Announce Second Straight Triple-Digit Storage Injection Today; Are Sellers Exhausted Yet?

6:00 AM EDT, Thursday, October 3, 2019
In its weekly Petroleum Status Report for September 21-27, the EIA announced Wednesday morning that crude oil inventories rose by a very disappointing +3.1 MMbbls. On the one hand, this was a relatively small 2.6 MMbbls bearish versus the 5-year average, but, on the other, it was a massive 9.0 MMbbl bearish miss versus Tuesday's American Petroleum Institute (API) expectation of what would have been a strong -5.9 MMbbl draw. It was the third straight inventory build following draws in 11 out of the previous 13 weeks. With the build, crude oil inventories rose to 422.6 MMbbls, the highest since August 30. The storage surplus versus the 5-year average climbed to +4.1 MMbbls while the year-over-year surplus jumped to +18.6 MMbbls, while the year-over-year surplus actually contracted slightly due to last year's mammoth +8.0 MMbbl build. There were multiple reasons for the bearish and larger-than-expected build. Most notably, refinery inputs slid by -0.5 MMbbls/day from the previous week to 16.1 MMbbls/day. This is the lowest since March 29 and, while refinery inputs are expected to fall this time of year, demand is down a steep -0.6 MMbbls/day from the same week last year, as shown in the Figure to the right. Also on the demand side, oil exports fell by 0.1 MMbbls/day week-over-week to 2.90 MMbbls/day. This is still up 1.1 MMbbls/day from 2018. As a result, total oil demand at 18.88 MMbbls/day is still up a slight 0.6 MMbbls/day or 3.1% year-over-year. On the supply side, imports held nearly flat at a favorable 6.29 MMbbls/day, down a robust 1.67 MMbbls/day from 2018, more than canceling out the 1.3 MMbbl/day year-over-year gain in domestic production, which once again held near all-time highs at 12.4 MMbbls/day. Overall, total supply/demand balance was right at 1.0 MMbbls/day tight versus 2018. Click HERE for more on the latest oil inventories and supply/demand data.

Unsurprisingly following the surprise inventory build, oil prices tumbled on Wednesday, extending a multi-week rout. WTI fell 98 cents or 1.8% to $52.64/barrel while Brent slid $1.20 to $57.69/barrel. It was the lowest settlement for both price points since August 8. WTI prices are now down 16.4% since the spike following the Saudi oil plant attacks. Despite the steady selling, I am not overly concerned and continue to feel that the commodity is undervalued. Regarding the API versus EIA disconnect, I suspect this an issue of timing due to the API receiving its data at the beginning of the week compared to data through the previous Friday for the EIA. For this reason, it is possible that some exports that the API is counting may not be counted by the EIA until next week's report, leading to an inflated draw. Regardless, I continue to expect record exports, particularly in November and December, that will drive inventory draws during the traditional injection season. While not strictly shown in my projections due to the near-term loosening of the supply/demand imbalance, I still expect inventories to fall below 400 MMbbls before the end of the year. Even without this expected future decline in stocks, WTI is already trading at a robust undervaluation versus its Fair Price based on current inventories. The commodity is undervalued by nearly 17% from a Fair Price of $63.23/barrel based on current inventories. For this reason, I remain bullish on the sector, am maintaining a $65/barrel upside price target, and will further add to my already robust DWT position on a break under $52/barrel.

Meanwhile, natural gas extended its record-setting losing streak to a remarkable 12 straight sessions. The front-month November 2019 contract slid 4 cents or 1.6% to settle at $2.25/MMBTU, the lowest close since August 27. The commodity continues to be plagued by record production, higher-than-expected EIA-reported inventory draws, and a mid-Shoulder Season temperature outlook that looks consistently warmer-than-normal. However, over the past 24 hours, the 14-day temperature forecast has trended somewhat colder near-term, increasing accumulated total gas-weighted degree days (GWDDs) for the period, as shown in the Figure to the right, particularly from the GFS ENS model. This, combined with an undervaluation that is now approaching 14% and an overcrowded short position, lends me to feel that further downside risk will be limited. Inventories and a still generally mild long-term outlook do not necessarily support a sustained rally, but I do expect selling pressure will soon be exhausted leading to a period of rangebound trading as the commodity establishes a bottom between $2.15-$2.30/MMBTU that will long term set up the commodity as very undervalued, particularly should the winter wind up colder-than-normal. But we aren't there just yet.

The EIA will release its weekly Natural Gas Storage Report for September 21-27 this morning at 10:30 AM EDT. Following 3 straight larger-than-expected storage injections, natural gas traders will likely be on edge heading into this report. At this time, I am projecting a +107 BCF storage injection. Such a build would be 24 BCF bearish versus the 5-year average and 16 BCF larger than last year's +91 BCF injection. Not only would it be the second largest injection in the last 5-years behind only 2014's +110 BCF build, a +103 BCF build would also be the second largest injection all-time for the week dating back to 1994. Should it verify, natural gas inventories would rise to 3312 BCF while the storage deficit versus the 5-year average would slide to just -23 BCF. Inventories would finish the week +460 BCF compared to last year. Click HERE for more on my projection for this week.

After 3 weeks of larger-than-expected injections, investors seem to be going into this week's report almost resigned to another bearish miss. For this reason--and all of those discussed in the previous paragraph--I see potential for a quick pop should the EIA's number come below expectations. I feel that a reported injection of less than +106 BCF would be viewed as a favorable versus expectations with prices topping $2.30/MMBTU near-term. Whether prices can sustain above that level for more than a day or two is another matter. On the other hand, I feel that it would take a reported injection of +112 BCF or larger to be considered unequivocally bearish versus expectations with prices likely to fall under $2.20/MMBTU. A reported injection between +106 BCF and +112 BCF would be neutral versus expectations with prices equally likely to rally or pull back.

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.