Prices Fall on Sixth Consecutive Triple-Digit Injection

Prices Fall on Sixth Consecutive Triple-Digit Injection

Natural gas storage inventories increased 115 Bcf for the week ending June 14, according to the EIA’s weekly report. This injection is well above the market expectation, which was an inventory increase of 104 Bcf.

Working gas storage inventories now sit at 2.203 Tcf, which is 209 Bcf above inventories at the same time last year and 199 Bcf below the five-year average.

At the time of writing, the July 2019 contract was trading at $2.200/MMBtu, dropping $0.076 from yesterday’s close. Prices were up around ~$0.02/MMBtu before the report release, but the bearish release caused prices to quickly fall.

For the sixth consecutive week, the EIA has reported a triple-digit injection. This is the first time this has happened since 2014, when there were seven consecutive weeks of triple-digit injections. With the summer’s peak demand season just around the corner, don’t expect the triple-digit injections to hang around much longer. As power burn ramps up in July and August, some of the gas that is currently being injected into storage will need to be used to meet power burn demand. ICE’s Financial Weekly Index report is currently expecting an injection below 100 Bcf for next week.

See the chart below for projections of the end-of-season storage inventories as of November 1, the end of the injection season.

This Week in Fundamentals

The summary below is based on Bloomberg’s flow data and DI analysis for the week ending June 20, 2019.

Supply:

  • Dry gas production saw an increase of 0.23 Bcf/d. The largest move was in the East region, which showed a 0.22 Bcf/d gain in production. Within the East region, nearly all of the change came from Ohio (+0.20 Bcf/d).
  • Canadian net imports decreased 0.67 Bcf/d. This decrease is mainly due to the complete shutdown of the Alliance pipeline system. This shutdown is for repairs to the pipeline in Iowa and Illinois, and the pipeline is expected to come back online over the weekend.

Demand:

  • Domestic natural gas demand increased 0.51 Bcf/d week over week. Power demand was the driver of the change, gaining 0.74 Bcf/d on the week. This was slightly offset by both Res/Com and Industrial demand, which fell 0.21 Bcf/d and 0.01 Bcf/d, respectively.
  • LNG exports showed an increase of 0.31 Bcf/d on the week, while Mexican exports increased 0.09 Bcf/d.

Total supply is down 0.44 Bcf/d, while total demand increased 0.93 Bcf/d week over week. With the increase in demand and the decrease in supply, expect the EIA to report a weaker injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 95 Bcf. Last year, the same week saw an injection of 66 Bcf; the five-year average is an injection of 66 Bcf.

Crude Withdrawal Supports Prices

Crude Withdrawal Supports Prices

US crude oil stocks posted a decrease of 3.1 MMBbl from last week. Gasoline and distillate inventories decreased 1.7 MMBbl and 0.6 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 0.8 MMBbl, alongside a gasoline build of 1.46 MMBbl and a distillate draw of 50 MBbl. Analysts were expecting a larger crude draw of 2.0 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 0.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production decreased 100 MBbl/d last week, per the EIA. Crude oil imports were down 0.1 MMBbl/d last week to an average of 7.5 MMBbl/d. Refinery inputs averaged 17.3 MMBbl/d (200 MBbl/d more than last week’s average), leading to a utilization rate of 93.9%. The bullish report due to higher than expected crude withdrawal is supporting prices. Prompt-month WTI was trading up $0.34/Bbl, at $54.24/Bbl, at the time of writing.

Lingering trade tensions between the US and China, weaker demand growth, and worries over global economic health have been pressuring prices. Expectations that trade officials from the US and China would settle on an agreement on the trade disputes during the June 28-29 G20 meeting in Osaka had been fading away, which was the main catalyst driving the bearish sentiment. Prices took a sharp positive turn yesterday, increasing nearly 4% after US President Donald Trump said he would hold an extensive meeting with Chinese President Xi Jinping at the G20 meeting. Also supporting prices were Saudi Arabia’s reportedly increasing pressure on OPEC members and allies to reach an agreement on extending supply cuts and increasing tensions in the Middle East following last week’s tanker attacks, with the US planning to send more troops to the region.

The attacks last week on two tankers in the coast of Strait of Hormuz, the world’s busiest sea lane for oil shipments, triggered concerns about supply disruptions from the region; however the US –   China trade tensions and gloomy economic and demand outlook had offset the supply risk price movement until President Trump’s statement that a meeting will take place with the Chinese president during the G20 meeting. It is too early to tell what the outcome from the meeting between Trump and his counterparty will be at the end of the month, as the countries have been unable to reach an agreement for months now. IEA’s new monthly report showing a down revision of demand growth by 0.1 MMBbl/d in 2019, as well as a slowing Chinese economy as a result of trade wars, will continue to keep the pressure on prices.

Market will be awaiting the outcome of the G20 meeting on the trade tensions for clarity on the demand side as well as the outcome of the OPEC meeting that will take place around the same time frame as the G20 meeting on the supply side, which will indicate whether OPEC+ will decide to extend the production cut agreement into the second half of the year. Until the results of these meeting materialize, any news on further increasing tensions in the Middle East or demand deteriorating further will be the main driver of any price movement.

The market internals maintain a consolidating trade within the new range. Last week’s trade softened the oversold conditions, as the market closed in the middle of the range on rising volume, while open interest declined. The last two weeks traded to highs of $54.63/Bbl and $54.84/Bbl, respectively, and those levels should find sellers this week. A break above those levels this week will likely challenge the area where prices broke down: between $56.00/Bbl and $57.33/Bbl. Should prices reach this range, selling should accelerate. Declines back to the lows of the past two weeks, at $50.60/Bbl to $50.72/Bbl, will find buyers just like last week. The recent range should hold without significant expansion of the conflict with Iran.

Petroleum Stocks Chart

The Week Ahead For Crude Oil, Gas and NGLs Markets – June 17, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – June 17, 2019

CRUDE OIL

  • US crude oil inventories posted an increase of 2.2 MMBbl last week, according to the weekly EIA report. Gasoline inventories increased 0.8 MMBbl, and distillate inventories decreased 1.0 MMBbl. The total petroleum inventories showed another substantial increase of 9.3 MMBbl. US crude oil production decreased 100 MBbl/d last week per EIA. Crude oil imports were down 0.3 MMBbl/d to an average of 7.6 MMBbl/d versus the week prior.
  • Prices confirmed the recent trend of weak global demand outpacing the production cuts and geopolitical unrest to drive trader interests. Rarely in WTI trade does the price of crude fail to maintain most of its gains after bullish events, like the two tankers attacked in the Gulf of Oman on Thursday. This type of geopolitical unrest, targeting the shipping lanes, should send prices up at a strong clip. While the action was met with gains immediately, by the end of the week prices had settled back into the middle of a recent range ($50-$55), closing the week at $52.51/Bbl.
  • Early in the trade last week, prices were supported based on Saudi Arabian energy minister Khalid al-Falih’s comments about extending the oil production cuts, with an agreement on the horizon. He went on to say that the only oil exporter undecided on the need to extend the cuts was Russia. Russian energy minister Alexander Novak provided little insight as to where the country stands on the deal, only citing the risk that if oil producers pump out too much oil, prices could drop to $30.00/Bbl.
  • After positive bias early in the week, which set the week’s highs, prices were punished when the inventory report was released. This bearish report, similar to other recent reports, showed US petroleum inventories growing significantly. IEA’s latest oil market report, lowering demand 0.1 MMBbl/d, brought additional negativity to the market.
  • Data points from world markets and equities confirm that both global economic growth and demand for crude are under attack, and market sentiment in WTI is not immune to these factors. Trade tensions between the US and China, which are subduing global economic growth, may be addressed at the upcoming G20 meetings later in June, but neither side has publicly shown a strong interest in resolving the issues. This lack of interest has placed a cloud of uncertainty over the markets, as traders continue to trade out of risk assets that are linked to economic growth (crude, commodities in general, and some equities) and into safety trades like the US Treasury (10-year).
  • The CFTC report (positions as of June 11) brought forth additional selling from the bulls as the Managed Money long component liquidated 24,136 contracts, while the short position added 27,839 contracts. The short speculative sector seems to add to positions on price runs to the high side of the recent range ($50-$55). With the continued gains in the short position of late, uncertainty regarding any solution to the trade issues is directing the positions of traders.
  • The market internals maintain a consolidating trade within the new range. Last week’s trade softened the oversold conditions, as the market closed in the middle of the range on rising volume, while open interest declined. With the strength of prices on Friday, follow-through gains going into this week should be expected. The last two weeks traded to highs of $54.63/Bbl and $54.84/Bbl, respectively, and those levels should find sellers this week. A break above those levels this week will likely challenge the area where prices broke down: between $56.00/Bbl and $57.33/Bbl. Should prices reach this range, selling should accelerate. Declines back to the lows of the past two weeks, at $50.60/Bbl to $50.72/Bbl, will find buyers just like last week. The recent range should hold without significant expansion of the conflict with Iran.

NATURAL GAS

  • Natural gas dry production showed an increase of 0.32 Bcf/d, while Canadian imports decreased by 0.42 Bcf/d.
  • Res/com demand gained 0.09 Bcf/d, while power demand declined 0.98 Bcf/d. Industrial demand dropped 0.03 Bcf/d. LNG exports rose 0.02 Bcf/d, while Mexican exports increased 0.04 Bcf/d. These events left the total supply for the week dropping 0.10 Bcf/d while total demand decreased by 0.87 Bcf/d.
  • The storage report last week showed the injections for the previous week at 102 Bcf. Total inventories are now 189 Bcf higher than last year and 230 Bcf below the five-year average. With the drop in demand being greater than the drop in supply, expect the EIA to report a stronger injection this week.
  • Weather models are showing that summer-like temperatures will be arriving in the southeast and south central regions in the coming two weeks. This will provide the market a good period to evaluate the power demand requirements over the summer months.
  • The CFTC report (as of June 11) showed the Managed Money long sector decreasing positions by 1,751 contracts, while the short position took another aggressive position by adding 40,771 contracts. The chart below shows the position of the speculative short trade position.

  • The level of shorts is now challenging the bearish period of January 2018, but remains 120,000 contracts below the multiyear lows of early 2016. It should also be noted that the Managed Money long position has dipped down to the low levels from early 2016. The market positions of the speculative community show a lack of panic from the longs, while the shorts are adding aggressively to their positions. This situation has the potential for a short covering rally that could catch trade off guard.
  • Market internals continue to show a bearish bias; total volume has increased week over week, while total open interest remained flat (according to preliminary data from the CMS). The quieter trade last week took the momentum indicators out of the extremely oversold levels.
  • The fundamental indicators continue to show strong production, but the market will likely taste summer demand in the coming weeks. Prices look to seek additional declines but have found buyers when they have headed toward $2.30 over the past seven trade days. This area around $2.30 might be the low side of a potential trading range for prices during the July prompt contract until the market fully understands the potential impact of summer power demand. Any rally in prices will run into selling at $2.475 up to $2.573. Should the support area fail to hold declines, probes lower will likely challenge a zone from May 2016, between $2.151 and $2.288.

NATURAL GAS LIQUIDS

  • NGL prices mostly dropped week over week. Ethane fell $0.035 to $0.167, propane was down $0.033 to $0.412, normal butane dropped $0.004 to $0.468, and isobutane was down $0.002 to $0.499. Natural gasoline was the only product to increase, gaining $0.021 to reach $1.019.
  • US propane stocks increased ~2.9 MMBbl during the week ending June 7. Stocks now sit at 71.1 MMBbl, roughly 20.3 MMBbl and 18.4 MMBbl higher than the same weeks in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil fell for the week ending June 14, according to DrillingInfo’s analysis of manifests from US Customs & Border Patrol. The decrease was driven mostly by a drop in imports to PADD 1 and PADD 5. As of June 17, the data showed that PADD 1 imports stood at nearly 590 MBbl/d for the week, while PADD 5 imports were at nearly 1.05 MMBbl/d. PADD 1 imports fell by more than 650 MBbl/d from the prior week. PADD 3 imports rose from the prior week and are at nearly 1.75 MMBbl/d.

  • Total US crude imports from Russia were at their highest level since at least 2017 at nearly 330 MBbl/d. PADD 1 received nearly 90 MBbl/d, PADD 3 received more than 45 MBbl/d, and PADD 5 received nearly 195 MBbl/d. The biggest recipient of Russian barrels was Par’s refinery on Oahu, which imported nearly 150 MBbl/d of Sakhalin Blend and Sokol crude oil originating from facilities in South Korea and Japan.

Triple-Digit Injection for Fifth Consecutive Week Meets Expectations

Triple-Digit Injection for Fifth Consecutive Week Meets Expectations

Natural gas storage inventories increased 102 Bcf for the week ending June 7, according to the EIA’s weekly report. This injection is nearly spot on with the market expectation, which was an inventory increase of 101 Bcf.

Working gas storage inventories now sit at 2.088 Tcf, which is 189 Bcf above inventories at the same time last year and 230 Bcf below the five-year average.

At the time of writing, the July 2019 contract was trading at $2.350/MMBtu, dropping $0.035 from yesterday’s close. However, most of this decline came before the release of the storage report.

This week, the prompt month contract has traded in a narrow $0.049 range. The main driver of prices as we near peak summer will be weather. Should weather forecasts show significant heat, expect price gains. However, should the peak summer season be mild and inventories continue to gain on the five-year average, expect prices to fall.

See the chart below for projections of the end-of-season storage inventories as of November 1, the end of the injection season.

This Week in Fundamentals

The summary below is based on Bloomberg’s flow data and DI analysis for the week ending June 13, 2019.

Supply:

  • Dry gas production increased 0.04 Bcf/d. The largest move was in the East region, which showed a 0.21 Bcf/d gain in production, while all other regions decreased less than 0.10 Bcf/d.
  • Canadian net imports decreased 0.29 Bcf/d.

Demand:

  • Domestic natural gas demand was flat week over week. Power demand fell 0.14 Bcf/d, while the offset came from Res/Com, which increased 0.17 Bcf/d. Industrial demand decreased slightly on the week, falling 0.04 Bcf/d.
  • LNG exports showed an increase of 0.03 Bcf/d on the week, while Mexican exports were relatively flat.

Total supply is down 0.25 Bcf/d, while total demand increased 0.04 Bcf/d week over week. With the increase in demand and the decrease in supply, expect the EIA to report a weaker injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 99 Bcf. Last year, the same week saw an injection of 95 Bcf; the five-year average is an injection of 81 Bcf.

With Coal in Rear View Mirror, Renewables Look to Battle Natural Gas Next for Market Share

Austin, TX (June 11, 2019) – Drillinginfo, the leading energy SaaS and data analytics company, has released Gas Power Burn, an update on fuels used to power America’s domestic electric market. This is an interim report covering the dynamics of the natural gas power demand market in the U.S.

“While no one can predict the future – or the weather – our modeling is projecting a glimpse of how renewables will affect power burn in the U.S.,” said Rob McBride, Senior Director of Market Intelligence at Drillinginfo. “From forecasting out a year in advance, to next-day load forecasts, we’re finding utility operators, power marketers, and other power buyers are tapping machine learning technology to obtain accurate, actionable information. When it comes to load forecasting, accuracy matters,” said McBride.

The report draws from historical data related to time of year, weather, and traditional power use. For example, during the summer months, natural gas demand from the electric power sector makes up a larger share of total domestic gas demand compared to winter. Last summer, power burn represented 49 percent of the total gas demand consumed in the U.S. While winter heating demand from the residential and commercial sectors is very price inelastic due to a lack of substitutes, summer cooling demand from the power sector is price sensitive. Grid operators have the flexibility to respond to changes in the pricing of input fuels by substituting coal and gas for each other. The share of total power generation attributed to gas has been growing over the past several years due to changes in infrastructure, most specifically additions to power plant fleets fueled with gas and added gas transport capacity.

As the report indicates, that could change as a number of wind and solar projects are slated to come online over the next five years. From 2019 to 2020, if all wind and solar projects come online as expected, and run at 100 percent capacity, wind and solar power generation will displace 1.42 Bcf/d of gas demand for power burn.

Regional Power Outlooks:
Retail sales of power differ by region, with some sales being above or below total generation. If retail sales are above total generation, the region needs to import power to meet demand. If retail sales are below total generation, the region has excess power generation and needs to export the excess. Gas Power Burn highlights two prominent regions in the U.S.

Northeast — The grid in the Northeast region is dominated by gas and nuclear. Although some switching capacity remains, coal is mostly gone from the region. Nuclear plants continue to face pressure from low power prices caused by cheap gas and a lack of demand growth. The Pilgrim (MA) nuclear plant is set to retire by June 1, 2019. Following Pilgrim is Indian Point (NY), which may retire unit 2 by May 2020 and unit 3 by May 2021. These three units represent 30 percent of the nuclear capacity in the region. As these units retire and nuclear generation decreases, wind is expected to pick up the generation capacity.

PJM-East — The PJM-East region remains very coal-heavy despite decreasing coal generation and retirements over the past several years. Local coal production makes the fuel more competitive compared to other regions. Over the next 5 years, 43% (14.5 GW) of new gas-fired capacity in the US is expected to be in the PJM-East region. If all announcements come online, this region will add 3.6 GW (or 4%) over the next year, compared to 8.8 GW over the past year. In the next 5 years, it would add 14.5 GW (or a 17% increase from today), compared to 25.3 GW over the past 5 years. With nuclear generation holding steady over the past few years and very little generation from other sources, gas is set to take market share from coal as new plants come online.

Key Takeaways from the Report:

  • The share of total power generation attributed to natural gas has been growing over the past several years due to changes in infrastructure, most specifically additions to power plant fleets fueled with gas and added gas transport capacity.
  • Power burn represents almost 50% of the total gas demand consumed in the U.S. during the summer months.
  • In 2019, demand for power during May-August is expected to average 35.2 Bcf/d. Warmer weather, similar to the summer of 2011, will cause gas demand for power burn to exceed 2018 and reach 36.5 Bcf/d. However, having a cooler summer similar to 2014 will cause weak power burn demand, taking power burn down to 34.0 Bcf/d.
  • End of injection season storage inventories will be greatly impacted by summer weather. Warmer temperatures will cause higher power demand and less gas going into storage, while cooler temperatures will do the opposite. Drillinginfo analysts expect storage inventories to end the injection season between 3.6 Tcf and 3.7 Tcf.
  • Renewables and natural gas continue to increase their shares on the supply stack for electricity generation as coal and nuclear decline. However, some coal-to-gas switching capacity remains, but it is more limited.
  • For natural gas, the battle is now with renewables. With a number of wind and solar projects slated to come online over the next couple of years, natural gas demand could decline by 1.2-1.4 Bcf/d, should all projects come online as expected.

Members of the media can download an 11-page preview of Gas Power Burn or contact Jon Haubert to schedule an interview with one of Drillinginfo’s market analysts.