Natural gas storage inventories increased 39 Bcf for the week ending November 9, according to the EIA’s weekly report. This week’s injection is slightly above market expectations, which were 36 Bcf. Sticking with the trend over the past couple of weeks, this week’s build comes from the Midwest and the South Central, which accounted for 36 Bcf of the 39 Bcf injection.
At the time of writing, the December 2018 contract was trading at $4.140/MMBtu, ~$0.697/MMBtu below the December 2018 close of $4.837 yesterday.
Working gas storage inventories now sit at 3.247 Tcf, which is 528 Bcf below last year and 601 Bcf below the five-year average.
The December 2018 contract has traded in a wide range in November, from $3.237/MMBtu to $4.837/MMBtu. Prices soared again this week, with the December 2018 contract closing at the November high of $4.837/MMBtu yesterday; the December ‘18 contract has a closing average $4.24/MMBtu so far this week. The price volatility for December can be explained somewhat by the fundamentals—weather, storage levels, production, and demand—but there is also some thought that the financial markets are playing a role that caused the December contract to reach the highs yesterday. The thought is that hedge funds were long crude and short natural gas for the winter, which have historically been profitable. However, with gas trending up and crude trending down, these hedge funds were forced to unwind their positions to avoid any further loss.
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 November 15, 2018.
- Dry gas production decreased 0.40 Bcf/d on the week. Production decreases in the Mountain Region (-0.30 Bcf/d) and the South Central Region (-0.18 Bcf/d) are the main contributors to the drop in production. Within the Mountain Region, a majority of the movement came from New Mexico (-0.24 Bcf/d). Texas (-0.37 Bcf/d), Louisiana (+0.12 Bcf/d), and the GoM (+0.11 Bcf/d) are the main drivers of the South Central Region change.
- Canadian imports increased 0.72 Bcf/d for the week. Roughly 0.41 Bcf/d of the Canadian import increase comes from additional receipts on Iroquois flowing into New York.
- Domestic natural gas demand increased 21.63 Bcf/d week over week. The cold weather caused heating demand to increase, causing Res/Com to increase 16.44 Bcf/d. Power and industrial demand also increased 3.74 Bcf/d and 1.46 Bcf/d, respectively.
- LNG exports increased 0.45 Bcf/d week over week, while Mexican exports decreased by 0.17 Bcf/d.
Total supply is up 0.32 Bcf/d, and total demand is up 22.53 Bcf/d week over week. With the increase in demand outpacing the increase in supply, the EIA is expected to report the first draw of the season. The ICE Financial Weekly Index report is currently expecting a draw of 118 Bcf for next week. Last year for the same week was a draw of 46 Bcf, while the five-year average is a draw of 49 Bcf.
US crude oil stocks posted a large increase of 10.3 MMBbl last week. Gasoline and distillate inventories decreased 1.4 MMBbl and 3.6 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil build of 8.8 MMBbl, while reporting a gasoline build of 0.18 MMBbl and a distillate draw of 3.2 MMBbl. Analysts were expecting a smaller crude oil build of 3.0 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decrease of 1.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production increased 100 MBbl/d last week, per EIA. Crude oil imports were down 87 MBbl/d last week, to an average of 7.5 MMBbl/d. Refinery inputs averaged 16.4 MMBbl/d (24 MBbl/d more than last week), leading to a utilization rate of 90.1%. The reaction to the report has been mixed as significant crude oil build is pressuring prices, while the decline in total petroleum stocks and news regarding OPEC and Russia potentially introducing supply cuts in 2019 are giving support to prices. Prompt-month WTI was trading up $0.66/Bbl, at $56.91/Bbl at the time of writing.
Prices extended their losses and sank on Tuesday dipping below the $56/Bbl mark to their lowest year-to-date. WTI prices have now fallen for 12 consecutive sessions. This is the longest losing streak for WTI since it started being traded on the New York Stock Exchange. Both benchmarks have fallen more than 20 percent since hitting their four-year highs in early October. The WTI market has now shifted its sentiment to bearish, flipping from being a speculator-driven bull market due to anticipation of a supply shortage from Iranian sanctions to being a fundamentally oversupplied market due to rapidly rising supply levels and a weaker demand growth.
The announcement of Iranian sanctions gave no support to prices; to the contrary, it drove them down due to the temporary waivers granted to eight countries (China, India, Japan, Italy, Greece, Turkey, South Korea, and Taiwan). This decision by the US government caused a shift in sentiment, as OPEC and Russia had agreed in June to produce more crude in order to offset the anticipated declines by Iranian sanctions. OPEC (led by Saudi Arabia) and Russia have increased production to historical levels since then. US production has also increased to historical highs, which is also contributing to the supply surplus. The rising supply levels from OPEC, Russia, and the US, as well as a weaker demand outlook, now have the market convinced that a supply glut will materialize moving into 2019.
Although OPEC and Russia had agreed to increase output, the recent price crash caused them to backtrack and possibly reverse their decision in 2019. On Sunday, OPEC and Russia signaled a potential joint production cut in order to prevent a global supply glut. However, a decision was not made, as Russia’s energy minister, Alexander Novak, said it was too early to make a decision to reverse course. OPEC will be re-grouping in Vienna on December 6 to discuss and determine its next move in terms of potential supply cuts.
Although news about OPEC potentially reducing supply levels was a bullish headline, it had no effect on prices, instead prices saw further declines following a tweet from President Donald Trump urging Saudi Arabia and OPEC to stay the course and continue producing to keep the oil prices down Another factor that pressured prices despite the bullish OPEC headline was OPEC projecting significantly less demand growth in 2019, just like IEA has projected, which led prices down to their lowest level of the year.
New selling from the speculative shorts and an increase in producer selling have pressured prices into extremely over-sold levels. Prices already dipped below the lows of 2018, falling below $56/Bbl. This type of selling usually abates with prices likely to bounce off the lows and retrace some of last week’s declines. The highs of last week at $64.14/Bbl are the first target, while the respected 200-day average of $67.36/Bbl will be challenged next. Prices will continue to be under pressure with the current global supply levels and a weaker demand growth. The bullish headlines, such as OPEC supply cuts or anything relating to Iranian production declines, will give support to prices. Regardless of any bounce, the market has lost a significant amount of its bullish bias. Drillinginfo continues to believe the long-term range will occur between $60/Bbl and $65/Bbl for an extended period of time, with the short-term range being between $55/Bbl and $60/Bbl as market waits to hear news from the next OPEC meeting.
Petroleum Stocks Chart
Natural gas storage inventories increased 65 Bcf for the week ending Nov. 2, according to the EIA’s weekly report. This week’s injection is above market expectations, which were 59 Bcf. The majority of this week’s build again comes from the Midwest and the South Central, which accounted for 54 Bcf of the 65 Bcf injection.
At the time of writing, the December 2018 contract was trading at $3.532/MMBtu, slightly below the December ‘18 close yesterday of $3.555.
Working gas storage inventories now sit at 3.208 Tcf, which is 580 Bcf below last year and 621 Bcf below the 5-year average.
So far during November, the December ’18 contract has traded in a range of $3.237/MMBtu and $3.567/MMBtu. Prices soared this week, with the December ’18 contract closing at the November high of $3.567/MMBtu on Monday, a jump of ~$0.28/MMBtu from the close on Nov. 2. The drastic increase in prices resulted from the past weekend’s change in the weather forecast, where the temperature outlook changed from mild to cold across the Midwest and Northeast. The weather forecast change has produced what is expected to be the first draw of the season for the week ending Nov. 16, currently expected to be 72 Bcf, according to the ICE Financial Weekly Index report.
See the chart below for projections of the end-of-season storage inventories as of Nov. 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 Nov. 8, 2018
- Dry gas production decreased 0.62 Bcf/d on the week. A majority of the decrease can be attributed to production decreases in the South Central Region (-0.33 Bcf/d), mainly Louisiana (-0.29 Bcf/d). Other contributors to the decrease were the Mountain Region (-0.16 Bcf/d) and the Northeast (-0.14 Bcf/d).
- Canadian Imports decreased 0.15 Bcf/d for the week.
- Domestic natural gas demand increased 1.51 Bcf/d week-over-week. ResCom increased 2.84 Bcf/d, while Power demand decreased 1.58 Bcf/d. Industrial demand increased 0.25 Bcf/d.
- LNG exports decreased 0.04 Bcf/d week-over-week. Mexican Exports also decreased 0.02 Bcf/d.
Total supply is down 0.77 Bcf/d, and total demand is up 1.26 Bcf/d week-over-week. With the increase in demand and the decrease in supply, expect EIA to report a weaker injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 38 Bcf for next week. Last year for the same week was a draw of 18 Bcf, while the 5-year average is an injection of 6 Bcf.