Prices Fall on Weather Forecast Changes, Despite Production Declines

Prices Fall on Weather Forecast Changes, Despite Production Declines

Natural gas storage inventories increased 62 Bcf for the week ending July 12, according to the EIA’s weekly report. This is in line with the expected injection, which was 61 Bcf.

Working gas storage inventories now sit at 2.533 Tcf, which is 291 Bcf above inventories at the same time last year and 143 Bcf below the five-year average.

At the time of writing, the August 2019 contract was trading at $2.334/MMBtu, roughly $0.030 higher than yesterday’s close and ~$0.08 lower than last week.

Hurricane Barry caused the market to drop over 1.5 Bcf/d in supply week over week. This happened while Power demand was at its highest levels of the summer. These bullish factors drove prices up last week, but they could not hold, and prices started their decline early this week, falling to the $2.30 to $2.34 range. These declines have come as a result of weather forecast changes, as the last third of July temperature expectations have fallen and are now expected to be cooler. Expect prices to continue to trade on movements in the weather forecasts moving forward.

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 July 18, 2019.

Supply:

  • Dry gas production saw a decrease of 1.8 Bcf/d week over week. The South Central/Gulf region saw the largest move, decreasing 1.56 Bcf/d due to Hurricane Barry. The region is starting to recover and will do so in the coming weeks as crews resume work in the Gulf.
  • Canadian net imports declined slightly this week, down 0.1 Bcf/d.

Demand:

  • Domestic natural gas demand increased 2.68 Bcf/d week over week. Summer heat once again took demand upward, causing Power demand to increase 2.12 Bcf/d. Res/Com and Industrial demand also increased on the week by 0.37 Bcf/d and 0.19 Bcf/d, respectively.
  • LNG exports saw a slight drop during the week, falling 0.13 Bcf/d, while Mexican exports increased 0.05 Bcf/d.

Total supply is down 2.01 Bcf/d, while total demand increased 2.58 Bcf/d week over week. With Barry causing the drop in supply and summer heat creating stronger demand, expect the EIA to report a weaker injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 35 Bcf. Last year, the same week saw an injection of 24 Bcf; the five-year average is an injection of 40 Bcf.

Prices Pressured Further with Inventory Build, Despite of Crude Draw

Prices Pressured Further with Inventory Build, Despite of Crude Draw

US crude oil stocks posted a decrease of 3.1 MMBbl from last week. Gasoline and distillate inventories increased 3.6 MMBbl and 5.7 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 1.4 MMBbl alongside a gasoline draw of 0.48 MMBbl and a distillate build of 6.2 MMBbl. Analysts were expecting a larger crude draw of 2.7 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a very large increase of 11.7 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production decreased 400 MBbl/d last week (due to Gulf of Mexico shut-ins), per the EIA. Crude oil imports were down 0.47 MMBbl/d last week, to an average of 6.8 MMBbl/d. Refinery inputs averaged 17.3 MMBbl/d (0.17 MMBbl/d less than last week’s average), leading to a utilization rate of 94.4%. Although crude oil withdrawal is higher than expected, large total petroleum stocks build is pressuring prices. Prompt-month WTI was trading down $0.28/Bbl, at $57.34/Bbl, at the time of writing.

Escalating tensions in the Middle East between the US and Iran and the impact of Tropical Storm Barry on Gulf of Mexico production had pushed prices above the $60/Bbl level last week, and prices traded in the narrow range of $59-$60/Bbl until the beginning of this week. Prices started declining on Monday, falling nearly 1%, and sharply declined on Tuesday, dropping nearly 4% due to bearish factors, creating a perfect storm. IEA’s newest report, released on Friday, stated that in the first half of 2019, demand grew at the slowest pace since 2011, due primarily to the contraction in manufacturing. Meanwhile, global oil stockpiles grew in the first half of 2019, with world supply exceeding demand by 0.9 MMBbl/d in spite of the OPEC+ reductions. The report and the warning by IEA about a possible supply glut in 2020 certainly increased the bearish sentiment. Prices also got support on signs that the impact of Barry on Gulf of Mexico production would be short-lived, as producers are already starting to resume operations. Two other catalysts that pushed prices down nearly 4% were; Chinese industrial output and retail data showing the country’s slowest quarterly economic growth in decades and the potential easing of tensions between the US and Iran following remarks by US President Donald Trump and US Secretary of State Mike Pompeo. The disappointing Chinese data dimmed an already gloomy outlook for global economic growth and appetite for crude demand, pushing prices down further. Pompeo’s statement on Iran being prepared to negotiate on its missile program eased the fears of a military conflict arising and tensions further increasing between the countries, which potentially could have impacted supply from the Strait of Hormuz.

OPEC+ production cuts and the increasing tensions in the Middle East, potentially threatening supply from the Strait of Hormuz, have been driving the bullish sentiment. Prices could see further pressure due to the bearish IEA report and thawing tensions between the US and Iran, offsetting these bullish elements for the time being. Continuously increasing US production, along with the increasing bearish elements in the market, could initially take prices down to $56.00/Bbl, where prices will likely find support. However, further thawing of US – Iran tensions, as well as additional data showing weakening global economic growth, could push prices to levels below $55.00/Bbl.

Petroleum Stocks Chart

The Week Ahead For Crude Oil, Gas and NGLs Markets – July 15, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – July 15, 2019

CRUDE OIL

  • US crude oil inventories posted a large decrease of 9.5 MMBbl last week, according to the weekly EIA report. Gasoline inventories decreased 1.5 MMBbl, while distillate inventories increased 3.7 MMBbl. The total petroleum inventories showed a decrease of 3.8 MMBbl. US crude oil production increased 100 MBbl/d last week per EIA. Crude oil imports were down 0.3 MMBbl/d to an average of 7.3 MMBbl/d versus the week prior.
  • Prices regained their bullish momentum primarily on the effects from Hurricane Barry in the Gulf of Mexico, which forced US Gulf operators to shut in nearly 1.0 MMBbl/d. The bullish reduction of crude oil inventories in the EIA’s data release on Wednesday also contributed to the gain.
  • These bullish elements brought further support to prices beyond the existing factors provided by the geopolitical unrest in the Mideast, which escalated after Iran’s threats to restart its deactivated centrifuges and increase uranium enrichment. The deployment of a British frigate to escort a BP tanker through the Strait of Hormuz, which was challenged by Iran boats, brought further concerns about this critical shipping lane for crude oil supplies.
  • Despite these elements and the continuation of the OPEC+ supply cuts through Q1 2020, the IEA noted some bearish implications for the market in the longer term. In its report released on Friday, the IEA cited that in the first half of 2019, demand grew at the slowest pace since 2011, due primarily to the contraction in manufacturing. Meanwhile, global oil stockpiles grew in the first half of 2019, with world supply exceeding demand by 0.9 MMBbl/d in spite of the OPEC+ reductions. Though the agency forecast for 2019 is steady, it will require a massive rebound in consumption, three times the level of the first half of the year. With demand continuing to deteriorate, OPEC may be forced to reduce output further in order to attain market balance.
  • This report exemplifies the primary reason the market has not had a more prominent rally given the tensions in the Mideast. Global economic concerns regarding the lack of growth and the ongoing unresolved tariff negotiations between the US and China (the world’s two largest economies) place a dark cloud over any longer-term gains in price.
  • The CFTC report was issued on Monday and Friday last week for the reporting periods of July 2 and July 9. The combined reports showed a reduction in the Managed Money short positions by 6,943 contracts, while the long sector increased by 8,883 contracts. The speculative long position is gaining, but the hesitancy in adding to positions at a significant level shows the market is not convinced that prices will remain strong over an extended period of time.
  • The market internals represent a more neutral to slightly bullish bias with the gains from Hurricane Barry. Volume was higher, while open interest was flat on the week. Prices this week will focus on results of any damage to the Gulf region oil assets and the geopolitical issues lingering in the Mideast.
  • Prices may expand the bid up to the highs of last week at $60.94/Bbl up to $63.81/Bbl, but these areas will find sellers. The highest weekly close since the middle of May should bring a brief expansion early this week. The concerns over the IEA report may bring some selling into the price action, but prices will likely find support in the $56.00/Bbl area. As discussed last week, this market may need time to consolidate the gains as it waits for any additional Iran drama to further support price movements. That said, as the Iran issues become more muted, expect declines based on weak global economic demand to have a greater impact on prices longer term.

NATURAL GAS

  • Natural gas dry production showed a decrease of 1.13 Bcf/d. These declines come from the impact of Hurricane Barry, which took Gulf production down 0.78 Bcf/d, split between the Gulf and Louisiana. The remaining declines were seen in the Northeast. Canadian imports increased by 0.03 Bcf/d.
  • Res/Com demand increased 0.08 Bcf/d, while power demand increased 1.182 Bcf/d (a result of excessive heat in the South and Central regions of the CONUS). Industrial demand decreased 0.03 Bcf/d. LNG exports declined 0.12 Bcf/d, likely due to Hurricane Barry, while Mexican exports gained 0.18 Bcf/d. These events left the totals for the week showing the market dropping 1.10 Bcf/d in total supply and total demand increasing by 1.90 Bcf/d.
  • The storage report last week showed the injections for the previous week at 81 Bcf. Total inventories are now 275 Bcf higher than at the same time last year and 142 Bcf below the five-year average. With demand increasing and supply decreasing, expect the EIA to report a weaker injection this week.
  • Weather forecasts continue to show above-average temperatures in the coming 10 days throughout the Central and Eastern regions of the US. The longer-term forecast maintains heat in the South and Central regions, with some moderating temperatures in the Northern Plains, Great Lakes and Northeast.
  • Hurricane Barry will impact the market this week, and while the initial response was a reduction in production from the Gulf operators evacuating rigs, the longer-term impact will be on the reduced temperatures associated from the storm’s rains. The market will start to get insight as to the effect on power demand early this week as the flow data becomes transparent.
  • The CFTC report was released twice last week; the report on Monday reflected position changes as of July 2, and the report last Friday reflected position changes effective July 9. Combining those reports had the Managed Money short position reducing positions by 18,753 contracts, while the long position reduced positions by 3,431 contracts. It would seem that the speculative trade may be loosening some of their conviction of $2.00 gas.
  • Prices held firm last week, staying above $2.40 for most of the week. Prices closed the week above the 50-day moving average (a closely monitored indicator of intermediate-term trend) for only the third time in 2019 (the other two occurring on either side of the Memorial Day holiday). Market internals changed to a more neutral bias as volume was significantly higher week over week. Total open interest remained nearly flat according to preliminary data from the CME.
  • The fundamentals-based trade will have to assess the impact from Hurricane Barry. Weather forecasts are always subject to change but currently show a declining demand picture two weeks out. Any further extension of the rally will have to overcome the selling at $2.49 as witnessed last week with the failure to push through. This area ($2.49) up to $2.522, and then $2.56, will continue to find significant selling in the coming weeks. On the other side, declines during the coming heat will find buyers down between $2.30 and $2.263.

NATURAL GAS LIQUIDS

  • Prices strengthened across the board week over week. Ethane gained $0.013 to $0.151, propane gained $0.013 to $0.458, normal butane gained $0.036 to $0.532, isobutane gained $0.090 to $0.682, and natural gasoline gained $0.042 to $1.155.
  • US propane stocks decreased ~241 MBbl the week ending July 5. Stocks now sit at 76.9 MMBbl, roughly 13.3 MMBbl and 14.7 MMBbl higher than the same weeks in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil fell for the week ending July 12, according to Drillinginfo’s analysis of manifests from US Customs and Border Protection. As of July 15, the data showed that PADD 3 imports increased to nearly 1.8 MMBbl/d, while PADD 5 imports fell to slightly more than 910 MBbl/d. PADD 1 imports rose to 492 MBbl/d.

  • Imports from Mexico were the driver of the PADD 3 increase, reaching more than 900 MBbl/d with an additional 50 MBbl/d imported to PADD 5, the highest level since August 2018.

Gas Storage Injection In-Line with Expectations, Hurricane Barry Ahead

Gas Storage Injection In-Line with Expectations, Hurricane Barry Ahead

Natural gas storage inventories increased 81 Bcf for the week ending July 5, according to the EIA’s weekly report. This is in line with the expected injection, which was 80 Bcf.

Working gas storage inventories now sit at 2.471 Tcf, which is 275 Bcf above inventories at the same time last year and 142 Bcf below the five-year average.

At the time of writing, the August 2019 contract was trading at $2.466 MMBtu, roughly $0.022 higher than yesterday’s close and $0.20 higher than last week.

Natural gas prices have been gaining traction over the past couple of weeks as weather forecasts have started to show warming temperatures across the lower-48. Prices rallied during expiration of the July contract, as expiration typically does, but then took a downturn to start the month, dropping as low as $2.24/MMBtu. However, the above-average weather forecasts have garnered support for prices, and prices are now trading in the $2.45 to $2.50 range as power demand is expected to increase. Tropical Storm Barry is now expected to become Hurricane Barry by tomorrow and could have a bearish impact on prices during the next couple of days should LNG terminals are shut in, leaving an over-supplied market. The storm will also likely decrease power burn for southern states (Texas and Louisiana) adding additional bearish sentiment to the market in the very short term.
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 July 10, 2019.

Supply:
Dry gas production saw a decrease of 0.7 Bcf/d. The South Central region saw the largest move, decreasing by 0.47 Bcf/d as production is being shut down ahead of the tropical storm in the Gulf.
Canadian net imports also decline this week, down 0.1 Bcf/d.

Demand:
Domestic natural gas demand increased 1.1 Bcf/d week over week. Power demand accounted for nearly all the domestic demand increase again this week, gaining 1.4 Bcf/d as temperatures started heating up. Res/Com demand decreased slightly, losing 0.15 Bcf/d, and Industrial demand fell 0.1 Bcf/d.
LNG exports were flat week on week, while Mexican exports gained 0.18 Bcf/d.
Total supply is down 0.7 Bcf/d, while total demand increased 1.3 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 65 Bcf. Last year, the same week saw an injection of 51 Bcf; the five-year average is an injection of 73 Bcf.

Oil Prices Jump on Very Large Crude Draw

Oil Prices Jump on Very Large Crude Draw

US crude oil stocks posted a very large decrease of 9.5 MMBbl from last week. Gasoline inventories decreased 1.5 MMBbl, and distillate inventories increased 3.7 MMBbl. Yesterday afternoon, API reported a large crude oil draw of 8.1 MMBbl alongside a gasoline draw of 0.26 MMBbl and a distillate build of 3.7 MMBbl. Analysts were expecting a smaller crude draw of 3.1 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 3.8 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 the EIA. Crude oil imports were down 0.3 MMBbl/d last week, to an average of 7.3 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (0.1 MMBbl/d more than last week’s average), leading to a utilization rate of 94.7%. The report is bullish and supporting prices due to large and higher than expected crude oil and total petroleum stocks withdrawals. Prompt-month WTI was trading up $1.53/Bbl, at $59.36/Bbl, at the time of writing.

Prices recovered some of their losses from Friday and have been trading in the narrow $57-$58/Bbl range as intensifying geopolitical tensions and OPEC+ production cuts are offsetting the concerns over global economic and demand growth. The tensions between the US and Iran have been supporting prices because the situation also threatens the major oil transportation channel, the Strait of Hormuz. The tensions increased further this past week as Iran threatened to restart its deactivated centrifuges and increase its uranium enrichment, plus the British Royal Marines seized an Iranian crude tanker. In addition to heightened tensions in the Middle East and concerns about disruptions in the Strait of Hormuz, prices are also supported by reports that Russia’s oil production in early July was down to its lowest in nearly three years. Geopolitical tensions, OPEC+ supply cuts and declining production from Venezuela and Iran will continue to support prices; however, the lingering trade disputes between the world’s two largest economies, the US and China, and faltering global economic growth will continue to pressure prices. Although the trade truce between the US and China gave some hope to the market that a deal can be reached between the countries, the existing tariffs and disappointing factory and manufacturing growth from Europe and Asia could potentially further deteriorate demand growth and increase the pressure on prices. Continuously increasing US production is also another catalyst that will keep prices in check, in addition to the gloomy economic and demand growth.

Prices will likely continue to consolidate in the recent range – between $56.00/Bbl and $60.00/Bbl – as the market digests the struggle between the Middle East tensions, the lack of global demand growth and the Fed’s decision on possible interest rate cuts. It is unlikely that the geopolitical tensions and demand concerns will be resolved quickly, and this recent range and the broader range – $50/Bbl to $64/Bbl – may hold prices until the market resolves the competing issues later in the year.

Petroleum Stocks Chart