November 7, 2019

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And Here We Go: Natural Gas Withdrawal Season Begins As Arctic Air Arrives; Oil Falls After Inexplicably Slumping Exports Drive Larger-Than-Anticipated Rise In Inventories; Chesapeake Energy Caught In A Self-Inflicted Death Spiral; EIA Projected To Announce First Bullish Natural Gas Storage Withdrawal Since July In Today’s Report


6:00 AM EDT, Thursday, November 7, 2019
In its weekly Petroleum Status Report for October 26-November 1, the EIA announced Wednesday morning that crude oil inventories rose by +7.2 MMbbls. This was larger than Tuesday’s American Petroleum Institute (API) expectation of a +4.2 MMbbl build and was moderately bullish versus the 5-year average +5.1 MMbbls. With the build, inventories rose to 446.8 MMbbls–the highest since July 12–while the storage surplus versus the 5-year average jumped to +12.5 MMbbls. Inventories are up +15.0 MMbbls compared to this time last year. The primary driver for the bearish build was a significant curtailment in demand. Somewhat inexplicably, exports plunged by 1.0 MMbbls/day week-over-week to a mere 2.4 MMbbls/day, the lowest since a hurricane-related disruption in late July and down 0.1 MMbbls/day year-over-year, as shown in the Figure to the right. It is the first time this year that exports have seen a year-over-year decline. It is unclear where the shortfall came from, given that most guidance was actually showing that exports may have topped 4 MMbbls/day last week for the first time ever. I would not be surprised to see a sharp revision higher in next week’s report given the high number of exported cargoes that need to be accounted for. Additionally, refinery demand dropped 0.2 MMbbls/day week-over-week to 15.8 MMbbls/day, down a steep 0.7 MMbbls/day compared to last year. All told, total demand fell to 18.1 MMbbls/day, 0.7 MMbbls/day lower than 2018, the first year-over-year decline since April. On the supply side, a slump in imports helped to keep the final withdrawal somewhat close to the 5-year average. Imports fell -0.6 MMbbls/day from the previous week to 6.1 MMbbls/day, down a steep 1.5 MMbbls/day year-over-year and at the lower end of the 52-week range. Reported production held flat at 12.6 MMbbls/day, up 1.0 MMbbl/day year-over-year.


Click HERE for more on the latest EIA-reported crude oil inventories.


For such a large storage build, the drop in oil prices was relatively tame, all things considered. I expect that other traders were also skeptical about that big drop in exports. WTI fell by 88 cents or 1.5% to settle at $56.35/barrel while, interestingly, the international price point Brent fell a steeper $1.22 to $61.74/barrel. In addition to the storage miss, investors were rattled about the potential for any delays in the US-China trade deal, which could keep global demand in check. All-told, Wednesday was a rather disappointing day for the bullish oil trader. Oil is still undervalued according to my Fair Price Model by 9.5% versus a Fair Price of $62.19/barrel but, with a loosening market thanks to the recent series of inventory builds, this Fair Price falls under $60/barrel. I remain cautiously bullish, but acknowledge that any move higher will absolutely require a rapid recovery in both exports and refinery demand and for imports to hold near 6 MMbbls/day near-term. I am maintaining my $65/barrel upside price target, but am pushing out my timeframe to 3-4 months.


Meanwhile, natural gas snapped a three-session winning streak on Wednesday, falling 3 cents or 1.2% to $2.83/MMBTU ahead of today’s Storage Report. The drop was largely driven by profit-taking, but the near-term temperature outlook did trend slightly milder throughout the day, particularly in the 10-14 day outlook as the GFS ENS and ECWMF ENS pointed towards a quicker rebound, as shown in the Figure to the right plotting 14-day accumulated gas-weighted degree days (GWDDs). There was, however, no change to what promises to be record-setting cold next week and I am still projecting daily storage withdrawals to top -25 BCF/day, incredible for this early in the season, especially given how loose supply/demand balance is. Nonetheless, I feel that surge in demand has been priced in and I continue to expect a near-term pullback. My downside price target remains an aggressive $2.50/MMBTU, though a secondary spike higher before this sell-off still cannot be ruled out if the models trend back colder again.


Meanwhile, my Oil and Natural Gas Portfolio continued its pullback from year-to-date highs, falling for a third straight session on Wednesday. The Portfolio dropped -0.8% to reduce 2019 gains to +13.1% or +15.3% annualized. The losses were driven for a second straight day by a sharp sell-off in Chesapeake Energy (CHK) following its alarming Earnings Report on Monday in which it reported a “going concern” heading into 2020 due to high debt and low oil and natural gas prices. The stock fell 18% on Tuesday and dropped another 27% on Wednesday, falling below $1/share for the first time since 1999. On Wednesday morning, I did what I should have done a long time ago: I bailed on the trade and booked a large loss at $1.08/share. While the stock could see an oversold bounce, it is too risky a position, with multiple analysts reducing their price targets to $0/share, which may not be far fetched. The company, like many others in the sector, is finally paying the price after years of aggressive borrowing and drilling, regardless of price, that has kept commodity prices suppressed and the company riddled with debt. Otherwise, I remain aggressively short natural gas with a net 12.8% short position via partially offsetting UGAZ and DGAZ positions. My downside price target is $2.50/MMBTU and I have no intention to add to the position at this time. I am long WTI via short DWT by a similar 12.2% position with an upside price target of $65/barrel. Should prices drop under $55/barrel, I will have a low threshold to add to this position. Finally, I did add to my long volatility bet via short SVXY on Wednesday, boosting this position to 13.9% of my holdings, my largest net directional position. This is a hedge against my oil long should equities markets sell off for any reason. I am targeting an upside VIX level of 20. Click HERE for more on my current oil and natural gas holdings.


The EIA will release its weekly Natural Gas Storage Report for October 26-November 1 this morning at 10:30 AM EDT. For the week, I am projecting a +42 BCF storage withdrawal, 14 BCF bullish versus the 5-year average. Remarkably, this would be the first bullish weekly withdrawal since July 13-19, a span of 14 straight bearish reports. It would be the second smallest injection for the October 26-November 1 period, behind only 2017’s +29 BCF. Should it verify, natural gas inventories would climb to 3738 BCF while the storage surplus versus the 5-year average would fall to +38 BCF and the year-over-year surplus would fall -20 BCF to +539 BCF. Click HERE for more on this week’s projection.


Once again, I feel that investors will be more likely to fret about the near-term temperature outlook than today’s storage number, but with the former now largely priced in, a significant bearish miss could help catalyze a pull-back in the sector. I expect that a reported injection of +45 BCF or larger, while still bullish, would be viewed as disappointing versus expectations and could result in prices falling under $2.75/MMBTU near-term. On the other hand, I feel that it would take an injection of +35 BCF or smaller to re-launch the bullish sentiment of the past week and drive prices back to the recent highs of $2.90/MMBTU. A reported injection between +35 BCF and +45 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 sharply today as arctic air expands and shifts southward across the Plains. Highs in Chicago, IL will struggle to break the freezing mark today–a brutal 20F colder-than–normal–while St Louis, MO will only see the mid-30s, typical of January and nearly 25F below-average. The chill will reach hundreds of miles to the south with Oklahoma City only reaching 40F and Dallas, TX the low-50s, 15F-20F below-average. While highs will be generally seasonable for one more day along the Eastern Seaboard (upper 50s for most of the I-95 corridor from Washington, DC to Boston), arctic air will have penetrated into the interior Northeast by this morning. Buffalo, NY will only see the mid-30s and Pittsburgh, PA the low 40s, 10F-15F below-average. Overall, today’s forecast mean population-weighted nationwide temperature will fall 2.3F from Wednesday to 51.2F, 2.5F cooler-than-normal. Total Degree Days (TDDs) will rise to 15.6 TDDs, 2.5 TDDs greater than normal and the 8th most for November 7 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 -3 BCF/day daily natural gas storage withdrawal, down 6 BCF from Wednesday’s +3 BCF/day injection and 7 BCF bullish versus the 5-year average. I project that storage levels peaked near 3747 BCF yesterday and that today will mark the intraweek beginning of the Withdrawal Season. By tonight, projected Realtime inventories will fall to 3744 BCF while the storage surplus versus the 5-year average will fall sharply to +18 BCF on its way to flipping back to a deficit by this weekend. The year-over-year surplus will fall to +509 BCF. Click HERE for more on today’s daily storage injection and Realtime natural gas inventories.