September 6, 2019

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Inexplicable: Natural Gas Rallies Despite Disappointing EIA-Reported Storage Injection While Oil Fades After -4.8 MMbbl Draw Crushes Expectations; Oil Remains A Strong Buy At These Levels While Natural Gas Looks To Pullback Even As September Outlook Looks Unseasonably Warm; Gas Demand To Fall Today As Hurricane Dorian Brushes Mid-Atlantic & Northeast

6:00 AM EDT, Friday, September 6, 2019
In its weekly Natural Gas Storage Report for August 24-30, the EIA announced Thursday morning that natural gas inventories rose by +84 BCF. This was 6 BCF larger than my +78 BCF projection and a disappointing 18 BCF bearish versus the 5-year average +66 BCF. It was the second largest injection for the week in the last 5 years, just ahead of 2015's +89 BCF. Overall, with most analyst's calling for a low-to-mid-70s BCF build, it is one of the more disappointing storage builds of the cooling season so far. Four out of the five storage regions saw bearish builds. The East Region led the way with a +32 BCF injection, a steep 9 BCF greater than its 5-year average followed closely by a +13 BCF injection in the South Central Region, 8 BCF bearish in a region that was seeing weekly withdrawals last month. The Midwest saw the largest absolute injection at +37 BCF but a more modest 4 BCF bearish versus its 5-year average. Only the tiny Pacific Region saw a bullish number, albeit a strong -2 BCF storage withdrawal, 5 BCF bullish. With the +84 BCF nationwide injection, natural gas inventories rose to 2941 BCF while the storage deficit versus the 5-year average shrank to -82 BCF or -3% while the year-over-year surplus grew to +383 BCF or +15%. All five storage regions are at a year-over-year surplus, bookended by a small +15 BCF YoY gain in the Mountain Region and a massive +148 BCF increase in the South Central Region. Only the Midwest Region is at a surplus (+11 BCF) versus its 5-year average while the South Central Region is coming in at a robust -38 BCF deficit.

Click HERE for more on the latest EIA-reported natural gas inventories.

Following its morning storage data, the EIA followed up in the afternoon with its weekly natural gas supply/demand data though this was for a different time period--August 29-September 4--than the storage data (August 24-30). The agency reported that domestic production rose to another all-time high of 92.5 BCF/day, up +0.2 BCF/day from last week and a steep 7.3 BCF/day higher year-over-year, as shown in the Figure to the right. Some of this gain in supply is countered by continued lackluster imports from Canada which averaged just 4.2 BCF/day, 0.8 BCF/day lower than 2018, cutting year-over-year gains in total supply to "just" 6.5 BCF/day. On the demand side, powerburn demand fell 0.9 BCF/day from the previous week to 36.3 BCF/day, a rare 0.6 BCF/day lower than last year, the first time that powerburn has been lower than 2018 since early August. However, the losses in powerburn were made up for in gains in residential/commercial demand which, at 9.0 BCF, was up 1.4 BCF/day year-over-year, boosting total US consumption to 66.7 BCF/day, up 0.4 BCF/day from 2018. Additionally, LNG feedgas demand held near all-time highs at 6.3 BCF/day, essentially double last year's mark. Click HERE for more on the EIA's latest supply/demand data.

Immediately following the EIA's reported injection, natural gas unsurprisingly fell sharply more than 2% to under $2.40/MMBTU. However, in a very strong display of strength by the bulls, the commodity rallied in the face of the disappointing report and briefly turned positive around the lunch hour. Ultimately, natural gas finished the day down a scant penny or 0.4% to $2.44/MMBTU, still a stronger close than I would have expected. As usual, natural gas continues to be driven by investor speculation regarding what promises to be one of the hottest Septembers on record in the US, which investors expect will boost late season cooling demand. As the Figure to the right shows, it is indeed true that both the GFS and ECMWF ENS short term models have been consistently calling for 14-day accumulated degree days to be much above-average. Still, with production at record levels and powerburn demand starting its seasonal fade even with the expected warmth, this will still only equate to weekly storage injections that near the 5-year average, if even that. For this reason, with natural gas at or above my $2.40/MMBTU upside price target, I feel that the commodity is due for a pullback, perhaps as low as $2.25/MMBTU should the October temperature outlook trend mild, suppressing early-season heating demand.

Meanwhile, thanks to Monday's Labor Day Holiday, the EIA also released its weekly Petroleum Status Report, just 30 minutes after the natural gas data. In it the EIA reported that crude oil inventories fell by a very bullish -4.8 MMbbls for the same August 24-30 period. This was well above both Tuesday's API-expected +0.4 MMbbl build and the 5-year average +1.3 MMbbls. With the draw, crude oil inventories tumbled to 423.0 MMbbls, the lowest since October 19, 2018, a time when WTI prices were trading at $69.12/barrel, a 23% premium over current prices. The bullishness of the draw was driven by strong exports that held over 3 MMbbls/day for a second straight week at 3.06 MMbbls/day--double one year ago--and relatively soft imports that, at 6.9 MMbbls/day are down 0.81 MMbbls/day from 2018 despite rising 1.0 MMbbls/day from last week. At this time, I expect crude oil inventories to keep dropping from the remainder of September. As demand associated with the summer driving season fades in October, stocks may climb slightly, but then I expect steep withdrawals in November and December that could take inventories to nearly 380 MMbbls, a more than 50 MMbbl year-over-year storage deficit, as shown in the Figure to the right.

If natural gas staged a somewhat surprising rally after a disappointing storage number, oil prices inexplicably sold off despite a very strong one. Immediately following the EIA's Status Report, WTI prices jumped over 2% to $57.60/MMBTU. For the remainder of the session, however, prices steadily sold off and WTI finished the day up a very disappointing 4 cents or 0.1% to $56.30/barrrel. Brent did slightly better, up 25 cents to $60.95/barrel, but it, too, pulled back sharply from session highs. Thanks to the strong report, I feel confident that oil is undervalued here. Based on current inventories alone, the commodity is trading at a 11.2% discount to a Fair Price of $63.63/barrel, according to my model. However, with the supply/demand imbalance tight and storage likely to fall under 400 MMbbls by the fourth quarter, this Fair Price tops $68/barrel by the end of the year, an 18% discount, as shown in the Figure to the right. For this reason, I feel WTI is a buy at these levels, even after Wednesday's 4% rally. If I wasn't already holding a nearly 11% short DWT exposure--providing around 33% long oil exposure--in my Oil and Natural Gas Portfolio, I would be an aggressive buyer under $56/MMBTU. I am maintaining a $65/barrel 2019 price target for WTI. Looking ahead to 2020, I could easily see prices topping $70/barrel in the first quarter.

Natural gas demand will dip slightly as Hurricane Dorian grazes the Mid-Atlantic and Northeast, keeping temperatures cool with intermittent showers and wind. Washington, DC, Philadelphia, and New York will only reach the mid-70s today, 5F-10F cooler-than-normal, while Boston may not even reach 70F, 10F below-average. The upper Midwest will remain seasonally cool as troughing persists across the area. Chicago and Detroit will only see the mid-70s while Indianapolis may top 80F, each up to 5F below-average. Once again, it will be up to Texas and the Deep South to bring the heat to make up for this shortfall, and they will deliver. Dallas could reach triple digits while Oklahoma City hits the upper 90s and even St Louis crackles 90F, all around 10F above-average. The heat will spread eastward across the Florida peninsula, bringing areas missed by Dorian highs in the upper 90s from Tallahassee to Jacksonville. Overall, today's forecast mean population-weighted nationwide temperature will cool by -0.3F from Thursday to 74.4F, though this is still 1.0F warmer-than-normal. However, Total Degree Days (TDDs) will fall to 9.9 TDDs, 0.4 TDDs fewer than normal and the 18th fewest TDDs for the data 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, up around 0.5 BCF/day from Thursday and 2 BCF/day bearish versus the 5-year average. Click HERE for more on today's projection injection and Realtime natural gas inventories. For the full storage week of August 31-September 5--that includes the Labor Day Holiday--I am projecting a +79 BCF natural gas storage injection, 6 BCF larger than the 5-year average and 10 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 3020 BCF while the storage deficit versus the 5-year average contracts to 76 BCF and the year-over-year surplus inches up to +393 BCF. The EIA will release its official storage numbers for the week on Thursday, September 12, at 10:30 AM EDT. Click HERE for more on this week's projected injection. Looking ahead to next week, look for a nearly neutral injection, currently projected near +83 BCF as cool temperatures across the Plains and Midwest are opposed by building warmth across the East. More on that on Monday.