The Week Ahead for Crude Oil, Gas and NGLs Markets – Sep. 17, 2018

The Week Ahead for Crude Oil, Gas and NGLs Markets – Sep. 17, 2018

CRUDE OIL

  • US crude oil inventories decreased by 5.3 MMBbl, according to the weekly EIA report. Both the gasoline and distillates increased, with gasoline rising 1.3MMBbl and distillates increasing 8.6 MMBbl. Total petroleum inventories showed a significant increase of 10.1 MMBbl. US crude oil production was estimated to be down 100 MBbl/d. Crude oil imports were down 123 MBbl/d to an average of 7.6 MMBbl/d versus the week prior.
  • Last week had a similar price profile to the previous week, with early strength generated by news that the US and China tariff discussions were showing progression, continued political unrest in southern Iraq, Libyan violence, continued declines in Venezuelan production, the uncertainty of Iran sanctions, and the impact of Hurricane Florence. The confluence of this news and the declining dollar early in the week took WTI prices up to the highs for the week at $71.26/Bbl before news on Thursday that the Trump administration was going to follow through and impose $200 billion in tariffs on Chinese imports. This news, along with the large inventory build the previous day, brought an immediate reversal in the gains.
  • The WTI trade still carries a bullish bias. The IEA raised demand projections for 2018 and 2019, but the potential impact from tariff discussions clearly casts a shadow over price advances. US production continues to remain high and drilling continues ahead of takeaway capacity from the Permian.
  • Expectations around the tariff issues have had an impact on the speculative trade. The declines from the week prior on bearish news regarding the China and US trade issues brought about a 23,606 contract decline in the Managed Money long positions in the latest CFTC report. The report also showed a gain of Managed Money short positions increasing 5,567 contracts.
  • The failure of prices to stay above $71/Bbl suggests that this level will provide definable resistance to any further runs. Price declines will meet buying associated with the 200-day moving average, which is currently $65.65/Bbl. The market will continue to feed off additional news for an extension beyond $71/Bbl up to the June highs at $75/Bbl. If news around tariffs continues to pressure prices, a breakdown below the key average will likely take prices down to the April lows around $62/Bbl. When all the current headline news plays out and some of the uncertainty fades, prices are likely to consolidate into a lower range. With the quota easement, continued US production growth, and the fears of weaker demand growth, Drillinginfo believes the long-term range will occur between $58/Bbl-$65/Bbl.

NATURAL GAS

  • Natural gas dry production increased last week, rising 0.38 Bcf/d to a new weekly average of 83.35 Bcf/d. Expect production to continue to grow later into the month as the Rover Pipeline project finishes its last phase and brings additional gas to the market. Canadian Imports fell 0.35 Bcf/d.
  • US power demand fell 3.37 Bcf/d on the week, while Res/Com gained 1.97 Bcf/d and industrial demand increased 0.10 Bcf/d. LNG exports increased 0.13 Bcf/d on average for the week and Mexican Exports were down slightly, falling 0.10 Bcf/d. These events left the totals for the week showing the market gaining 0.02 Bcf/d in total supply while total demand lost 1.42 Bcf/d.
  • The storage report last week came in with an injection of 69 Bcf. The data release brought some additional weakness, taking prices down into the weekly close. This week’s injection should be stronger based upon the supply demand balance from last week.
  • According to the CFTC report (dated Sept. 11), the Managed Money long position (speculators) reduced the position by 8,463 contracts while the Managed Money short positions increased positions by 34,579 contracts. With the declines toward the end of the week, expect to see further increases in the Managed Money short sector. This directional play by the speculative crowd strongly indicates that the expectation of speculative traders is a test of the July lows at $2.704.
  • Prices continue to trade based upon two theories in the industry. The first is that production will continue to grow (now flowing at record average levels) and that there will be more than enough supply into the winter season. The other theory is that production won’t be enough to carry the market through the winter and storage levels are a concern. When there is an equal amount of action with both theories, the market will trade in a range ($2.70-$2.99) that it has for the last four months. As suggested previously, a break down through the July lows at $2.704 will likely set up a slow melt down to $2.568 with volatility increasing. Should the declines find support at the July lows, expect the bounce to test the resistance around the 200-day moving average ($2.834).

NGLs

Announcements

  • ONEOK announced plans to invest $295 million to expand its West Texas LPG pipeline system, which provides liquids takeaway capacity for Permian producers to Mont Belvieu. The project will expand the pipe’s capacity by 80 MBbl/d and includes additional infrastructure to connect the system to ONEOK’s previously announced Arbuckle II project, which will carry 400 MBbl/d of liquids from the Mid-Continent region to the Gulf Coast. Both projects are expected to be completed in Q1 2020.
  • Marathon announced this past week that its subsidiary, MarkWest, launched a binding open season to solicit commitments from potential shippers for a new pipeline that it plans to construct to serve growing NGL needs for Appalachian producers. The pipe will ship a mixed stream of NGLs, including higher molecular weighted hydrocarbons, from Processing plants in WV and PA to fractionators in OH and PA.
  • Ethane prices hit 55 cents per gallon last Thursday, its highest in more than six years. Prices are supported by record exports and cracker consumption.

Propane Inventories

  • The EIA reported a build of 1.2 MMBbl in this past week’s inventories. Propane stocks now sit at 74.6 MMBbl, approximately 5.3 lower than this time last year and 8.5 MMBbl lower than the 5-year average.

Storage Injection Above Expectations, Gas Prices Steady

Storage Injection Above Expectations, Gas Prices Steady

Natural gas storage inventories increased by 69 Bcf for the week ending Sep. 7, according to the EIA’s weekly report. This injection is above market expectations, which were 65 Bcf. Before the EIA release, the October 2018 contract was trading at $2.848 per MMBtu, slightly higher than the October 2018 close yesterday of $2.829. After the EIA release and at the time of writing, the October 2018 contract was trading at $2.846, similar to before the EIA release.

Working gas storage inventories now sit at 2.636 Tcf, which is 662 Bcf below last year and 596 Bcf below the 5-year average.

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 PointLogic’s flow data and DI analysis for the week ending September 13, 2018.

Supply:

  • Dry gas production is up 0.295 Bcf/d week-over-week, with total dry production at 83.26 Bcf/d. The Northeast (+0.265 Bcf/d) and Texas (+0.229 Bcf/d) were the main contributors in the production increase. Notable production decreases came from the Rockies (-0.176 Bcf/d). Tropical Storm Gordon still has production down in the GoM – expect those volumes to return in the coming weeks.
  • Canadian Imports are down 0.45 Bcf/d week-over-week, bringing Canadian Imports to 4.43 Bcf/d.

Demand:

  • Domestic natural gas demand decreased 1.72 Bcf/d week-over-week, with the decrease attributable to power burn (-4.01 Bcf/d) and the offset in ResCom (+2.14 Bcf/d). Total domestic demand decreased to 59.38 Bcf/d for the week.
  • LNG exports were up 0.20 Bcf/d week-over-week, while Mexican Exports were down 0.31 Bcf/d.

Total supply is down 0.16 Bcf/d and total demand is down 2.02 Bcf/d week-over-week. With the decrease in demand outpacing the decrease in supply, expect EIA to report a higher injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 81 Bcf for next week. Last year’s injection for the same week was 97 Bcf, while the 5-year average is 78 Bcf.

Crude Oil Withdrawal and Hurricane Florence Push Prices Higher

Crude Oil Withdrawal and Hurricane Florence Push Prices Higher

US crude oil stocks decreased 5.3 MMBbl last week. Gasoline and distillate inventories increased 1.3 MMBbl and 6.2 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil draw of 8.6 MMBbl, alongside gasoline and distillate builds of 2.1 MMBbl and 5.8 MMBbl, respectively. Analysts were expecting a crude oil draw of 2.7 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a significant increase of 10.1 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production was estimated to be down 100 MBbl/d from last week, per EIA. Crude oil imports were down 123 MBbl/d last week, to an average of 7.6 MMBbl/d. Refinery inputs averaged 17.9 MMBbl/d (210 MBbl/d more than last week), leading to a utilization rate of 97.6%. Although total petroleum stocks posted a significant build, large crude oil withdrawal, Hurricane Florence increasing strength and approaching the coast and EIA lowering it’s crude output expectations for 2018 and 2019 are supporting prices. Prompt-month WTI was trading up $1.67/Bbl, at $70.92/Bbl at the time of writing.

Prices traded in the tight range of $67/Bbl to $68/Bbl. Supply shortage worries and a weaker global demand growth were the continuing headlines that pulled prices in both directions. Prices surged over 2% on Tuesday as bullish sentiment increased. The surge in prices was due to Hurricane Florence gaining strength, Iranian sanctions, and increasing geopolitical tensions in Middle East.

Although geopolitical tensions, supply outages and Iranian sanctions were the main catalysts behind the price surge on Tuesday, Hurricane Florence and its possible impact on supply helped the price action as well. It is unclear how much Hurricane Florence will affect the supply as it makes landfall later this week in North and South Carolina. It is also possible that the hurricane will impact demand in the region as it makes landfall.

The boost in prices was also caused by rising geopolitical tensions in Iraq and Libya. Rioters burned down several buildings in Basra, a major city in Southern Iraq where the country produces significant amount of crude. The rising tensions in Iraq increased the supply shortage worries as Iraq is a major OPEC producer. The risk with Libya’s oil production volatility also increased as gunmen attacked the country’s national oil company killing two people and injuring nearly a dozen others. Libya’s oil production has been unstable as the country constantly faces riots and attacks. Libya’s oil production has been recovering, however the latest attack on Monday once again raised the skepticism around the stability of production from the country and increased bullish sentiment.

The increasing geopolitical tensions added more risk to a supply shortage scenario as the market expects further declines from Venezuela and Iran as November 4 approaches. The US sanctions on Iranian crude already squeezed some of Iran’s exports as the country’s exports to the Asian market have declined. The US government had told its allies to reduce Iranian exports, and some Asian buyers seem to be falling in line. Although Iranian sanctions are showing some early signs affecting countries exports levels, the true impact of how much supply will be lost will not be determined until US announces the 2nd round of sanctions, which is due on November 4.

The bullish sentiment in the market is certainly increasing with rising geopolitical tensions, declining Venezuelan production and approaching Iranian sanctions. However, the on-going US-China trade wars and worries around a weaker global economy and demand growth will be working against any significant price gains. Continuously increasing US production will be another bearish factor that will keep a lid on prices, in addition to the gloomier demand outlook.

The market remains with a bullish bias, but the failure of prices to break above and maintain the $71/Bbl level suggests that the risks associated with possible tariffs may pressure prices back to the key support areas associated with the 200-day moving average at $65.31/Bbl. This commonly watched indicator is rising and is starting to narrow the trade range for WTI. Any breakdown and daily close below this key support will remove the bullish bias from the market and will likely force some liquidation by the speculative longs. However, this notable average has held the bull market for a year now and is expected to continue to hold. Should prices test this level again and it holds, prices will likely head back to the high end of the range at $71/Bbl. At that point, the market will need additional news for an extension beyond that level and onward to the June highs at $75/Bbl. A breakdown below the key average will likely take prices down to the April lows around $62/Bbl. Some elements to the trade that will continue are the volatility and daily headline risks along with short-term supply outages due to rising geopolitical tensions. As the market understands the fundamental impacts of sanctions and tariffs later this year, prices will start to consolidate into a lower range. The quota easement, continued US growth, and fears of a weaker demand growth lead Drillinginfo to believe this range to be $58/Bbl-$65/Bbl for an extended period of time.

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The Week Ahead for Crude Oil, Gas and NGLs Markets – Sep. 10, 2018

The Week Ahead for Crude Oil, Gas and NGLs Markets – Sep. 10, 2018

CRUDE OIL

  • US crude oil inventories decreased by 4.3 MMBbl, according to the weekly EIA report. Gasoline and distillate stocks increased 1.8 MMBbl and 3.1 MMBbl, respectively. Total petroleum inventories showed an increase of 3.6 MMBbl. US crude oil production was estimated to be up 84 MBbl/d. Crude oil imports were up 230 MBbl/d to an average of 7.7 MMBbl/d versus the week prior.
  • Prices remained around $70/Bbl early in the week with bullish news about possible offshore outages from Tropical Storm Gordon and upcoming sanctions on Iranian crude supplies. Exports from Iran are starting to decline, but the market is still uncertain about the impact of the sanctions on long-term fundamentals. Prices are buoyed by this uncertainty along with continued declines from Venezuela. Later in the week, the markets got a bearish twist following the inventory report release showing a substantive gain in petroleum inventories and comments from the Trump administration that it was leaning towards an additional $200 billion in tariffs on Chinese goods. The dollar trade stabilized last week, meaning the WTI declines late in the week were more of a reaction to trade issues. The decline in prices also confirms that the speculative trade is very weary of further tariffs and the possible turmoil that these actions will cause for the global economy and global demand.
  • Growing US production continues to keep a lid on price gains. Producers are taking advantage of the higher price environment, completing more efficient wells, and developing an inventory of DUCs for additional gains in production when some of the takeaway capacity issues are resolved.
  • The rally early last week was generated by the speculative bulls, who, according to the latest CFTC report, increased long positions 18,754 contracts. Meanwhile, the Managed Money short positions decreased a meager 750 contracts. It should also be noted that the Merchant short positions (producers hedging) increased 20,652 contracts as producers locked in future prices.
  • The market remains with a bullish bias, but the failure of prices to break above and maintain the $71/Bbl level suggests that the risks associated with possible tariffs may pressure prices back to the key support areas associated with the 200-day moving average at $65.31/Bbl. This commonly watched indicator is rising and is starting to narrow the trade range for WTI. Any breakdown and daily close below this key support will remove the bullish bias from the market and will likely force some liquidation by the speculative longs. However, this notable average has held the bull market for a year now and is expected to continue to hold. Should prices test this level again and it holds, prices will likely head back to the high end of the range at $71/Bbl. At that point, the market will need additional news for an extension beyond that level and onward to the June highs at $75/Bbl. A breakdown below the key average will likely take prices down to the April lows around $62/Bbl. As the market understands the fundamental impacts of sanctions and tariffs later this year, prices will start to consolidate and develop a range between $58-$65/Bbl for an extended period.

NATURAL GAS

  • Natural gas production gained 0.16 Bcf/d last week. Expect production to grow later into September as Rover finishes its last phase, adding more supply capabilities to the market. Canadian Imports fell 0.55 Bcf/d as the early September heat moderated in the Northeast, negatively impacting demand requirements.
  • US power demand declined 1.35 Bcf/d on the week, while Res/Com fell 0.19 Bcf/d and industrial demand decreased 0.14 Bcf/d. LNG exports declined by 0.05 Bcf/d on average and Mexican Exports were up slightly, rising 0.03 Bcf/d on the week. These events left the totals for the week showing the market losing 0.38 Bcf/d in total supply while total demand lost 1.65 Bcf/d.
  • The storage report last week came in slightly below expectations with an injection of 63 Bcf. The market expectation was an injection of 64 Bcf. This week’s injection should be stronger based upon the supply/demand balance from last week.
  • According to the CFTC report (dated Sept. 4), the Managed Money long position (speculators) reduced the position by 13,831 contracts, while the Managed Money short position increased by 12,133 contracts. This shift by the speculative crowd confirms that the break below the well established support levels has brought a more nuetral-to-bearish bias to prices. It should also be noted that the Commercial Merchant long and short postitions increased by 24,931 contracts and 25,139 contracts, respectively. This type of hedging from the commercial sector signifies that producers like the winter prices over $3.00, and now the industrial and utility consumers are initiating hedges to protect from any type of run.
  • Prices last week finally indicated the preference for near-term trade direction. Since early August when prices broke out above the 200-day moving average, the concept of prices driving over $3.00 was suggested based on power demand and potentially low storage inventories in October. However, the bulls could not garner enough support to attack $3.00, and prices broke below the commonly traded zone last week. As suggested, a breakdown through the commonly traded zone would increase volatility and send prices toward the July low at $2.704. Last week’s price range (volatility) jumped to nearly $0.15 after hovering at $0.09 for the previous three weeks. Now prices have moved into a near-term defining area for trade. The fundamentals in the market continue to lend support for a bearish bias as the market has moderating temperatures, tropical storms that will strip demand, and the potential for additional production entering the market from the conclusion of Rover in the middle of the month. If the weakness that started last week extends prices through the July lows, prices will likely head to strong and multiyear support (dating back to late 2016) between $2.522-$2.568. Rallies in prices will test the broken support at the 200-day moving average ($2.84).

NGLs

Announcements

  • The peak of hurricane season started with Tropical Storm Gordon. NGL prices increased on the news of production drops resulting from the storm. However, cracker and refinery utilization were not substantially affected from the storm and prices rescinded back to previous levels. Ethane, however, is climbing alongside increased exports, hitting 46 cents per gallon on Sept. 6.
  • Enterprise Products Partners initiated construction on their 10th fractionator in Mont Belvieu this past week. The 150 MBbl/d facility is expected to increase EPD’s total Mont Belvieu capacity to 905 MBbl/d once it is in service in Q1 2020. The industry expects increased production to result in continued tightness in Mont Belvieu fractionation over the coming years. Drillinginfo estimates total US NGL production to increase 10% by the end of Q1 2020, or about 430 MBbl/d.

Propane Inventories

  • The EIA reported a build of 2.0 MMBbl in this past week’s inventories. Propane stocks now sit at 73.4 MMBbl, approximately 0.1 MMBbl lower than this time last year and 7.0 MMBbl lower than the 5-year average.

Crude Withdrawal Can’t Help Prices As Trade Wars and Demand Fears Take Precedence

Crude Withdrawal Can’t Help Prices As Trade Wars and Demand Fears Take Precedence

US crude oil stocks decreased 4.3 MMBbl last week. Gasoline and distillate inventories increased 1.8 MMBbl and 3.1 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 1.17 MMBbl, alongside gasoline and distillate builds of 1.0 MBbl and 1.8 MMBbl, respectively. Analysts were expecting a crude oil draw of 1.29 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 3.6 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production was estimated to be up 84 MBbl/d from last week, per EIA. Crude oil imports were up 230 MBbl/d last week, to an average of 7.7 MMBbl/d. Refinery inputs averaged 17.6 MMBbl/d (81 MBbl/d more than last week), leading to a utilization rate of 96.6%. Although crude oil withdrawal was higher-than-expected, the build in total petroleum stocks and expectation of US-China trade dispute further escalating with another round of tariffs on $200 billion worth of Chinese goods have pushed prices down. Prompt-month WTI was trading down $1.47/Bbl, at $67.25/Bbl at the time of writing.

Prices traded in the $68/Bbl to $70/Bbl range last week. Prices had a volatile week as they mainly traded on speculative bullish and bearish headlines. Although prices had a strong start to the week, they gave up their losses to fall lowest levels in about a week.

Prices were buoyed on Tuesday with increasing supply worries as some offshore production was shut off due to anticipated damage from Tropical Storm Gordon. However, the price action due to the storm was short-lived, and prices gave up their gains as the storm weakened and moved away from the production areas.

Although Tropical Storm Gordon and possible loss of production from the Gulf of Mexico was the main headline for bullish sentiment earlier in the week, Iranian export levels and the upcoming sanctions in November are still the main catalyst supporting prices and keeping the bias bullish. Iranian exports are already showing signs of rapid declines. However, it is still unclear what the true impact will be when the sanctions are announced in November.

The market seems to still have a bullish bias, mainly due to declining production from Venezuela and Iranian sanctions causing a supply disruption. However, sentiment could shift quickly, as there are numerous factors that could threaten prices – especially if the impact from Iranian sanctions is not as drastic as the market is expecting. One of the biggest threats to prices is the ongoing US-China trade wars, which could get worse, as the public comment period on the next round of sanctions is closing and President Donald Trump seems to be leaning toward the implementation of $200 billion of tariffs on Chinese goods. The crisis in Turkey is still causing fears on the global market, as turmoil may spread and emerge in other economies. Both of these factors tremendously affect the overall health of the global economy and growth as well as demand growth. Prices will continue to be pressured, with the possibility of a weakening economic growth and weaker demand.

Continuously increasing US production is another bearish factor that will keep a lid on prices. Producers are taking advantage of higher pricing as they strengthen their balance sheets and, complete more efficient wells while building DUCs to prepare for further ramp-up when additional takeaway capacity is available. Saudi Aramco calling off the IPO could also be another threat to prices, as Saudi Arabia may now not be as interested in keeping prices higher – especially in a time when they have already starting increasing production along with Russia.

The market still has a bullish bias, as the test of the 200-day moving average failed and, as expected, the rebound has now taken prices to the high end of the recent range ($64.43/Bbl-$71.10/Bbl). This notable moving average (now trading at $65.06/Bbl) has held the bull market for a year now. This average will hold near-term declines. However, should this average break down, a significant amount of selling will damage the long-term bias, and declines can take prices down to the April lows around $62/Bbl. Last week’s continued rebound off of the test of the average took prices over $70/Bbl briefly, only to retrace at the end of the week. Expect the high end of the recent range to be tested early this week. However, until the supply and demand fundamentals are well understood, there will be hesitation to take prices too high. One element to the trade that will continue is the volatility and daily headline risk. As the market resolves this uncertainty later in the year, volatility will recede and prices will start to consolidate in a lower range. The quota easement, continued US growth, and fears of a weaker demand growth lead Drillinginfo to believe this range to be $58/Bbl-$65/Bbl for an extended period of time.

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