Gas Draw Below Expectations, Prices Continue Declines

Gas Draw Below Expectations, Prices Continue Declines

Natural gas storage inventories decreased 237 Bcf for the week ending February 1, according to the EIA’s weekly report. This draw is below the market expectation, which was a decrease of 247 Bcf.

Working gas storage inventories now sit at 1.960 Tcf, which is 135 Bcf below last year and 415 Bcf below the five-year average.

At the time of this writing, the March 2019 contract was trading at $2.570/MMBtu, $0.092 below yesterday’s close of $2.662/MMBtu.

As peak winter season is nearing an end, prices continue to decline. The polar vortex did not succeed in making prices rise, and forecasts of colder weather have also failed to gain any traction. There still could be a rise in prices if a prolonged and sustained cold shot comes about. However, even if that cold shot forms, expect prices to stay below $3/MMBtu.

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

This Week in Fundamentals
The summary below is based on Bloomberg’s flow data and DI analysis for the week ending February 7, 2019.

Supply:

  • Dry gas production fell 0.70 Bcf/d on the week, with the decrease mainly coming from the South Central region (-0.62 Bcf/d). The decrease in the South Central region was spread out among Louisiana (-0.32 Bcf/d), the GoM (-0.25 Bcf/d), and Texas (-0.16 Bcf/d).
  • Canadian net imports were down 2.40 Bcf/d on the week. The decrease was spread across the US and due to severely cold weather in Canada combined with above average temperatures in the US.

Demand:

  • Domestic natural gas demand decreased 26.20 Bcf/d week over week. Res/Com demand was the main driver of this decrease, falling 19.28 Bcf/d. Power and Industrial demand also fell 4.65 Bcf/d and 2.28 Bcf/d, respectively.
  • LNG exports decreased 1.18 Bcf/d. Sabine Pass exports caused the decrease week over week due to an outage on train 1. Mexican exports decreased 0.19 Bcf/d on the week.

Total supply is down 3.10 Bcf/d, while total demand dropped 28.33 Bcf/d week over week. With the demand decrease outpacing the supply decrease, expect the EIA to report a weaker draw next week. The ICE Financial Weekly Index report is currently expecting a draw of 80 Bcf for next week. Last year, the same week saw a draw of 194 Bcf, while the five-year average is 162 Bcf.

Prices Pare Losses With Smaller Than Expected Crude Build, But Prices Are Still Pressured By Concerns Of A Slowdown In Economic Growth

Prices Pare Losses With Smaller Than Expected Crude Build, But Prices Are Still Pressured By Concerns Of A Slowdown In Economic Growth

US crude oil stocks posted an increase of 1.3 MMBbl from last week. Gasoline inventories increased 0.5 MMBbl and distillate inventories decreased 2.3 MMBbl. Yesterday afternoon, API reported a crude oil build of 2.5 MMBbl alongside gasoline and distillate builds of 1.7 MMBbl and 1.1 MMBbl, respectively. Analysts were expecting a crude oil build of 2.18 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 3.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production remained unchanged last week, per the EIA. Crude oil imports were up 63 MBbl/d last week, to an average of 7.1 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (170 MBbl/d more than last week), leading to a utilization rate of 90.7%. The less than anticipated crude oil build and decline in total petroleum stocks are supporting prices. Prices are also supported by the OPEC-led supply cuts and US sanctions on Venezuelan crude, while the global economic growth concerns and lower demand expectations are pressuring prices. Prompt-month WTI was trading up $0.40/Bbl, at $54.06/Bbl, at the time of writing.

Prices traded in the $53/Bbl to $55/Bbl range last week. It has been a volatile week for prices, as WTI prices reached their two-month highs late last week due to OPEC-led supply cuts and Venezuelan crude sanctions by the US government, only to give up their gains the beginning of this week due to rising supply levels in the US and the continuing concerns about global economic and demand growth.

The OPEC-led supply cuts and Saudi Arabia’s willingness to reduce the supply levels have given some hope to the market in terms of a possible tighter crude market. The bullish sentiment, supported by the cuts, increased due to OPEC production data showing significant reduction in supply levels and Saudi Energy Minister Khalid al-Falih’s comments that the Kingdom will reduce production further in February than it originally had planned. In addition to positive news from OPEC and Saudi Arabia, prices are also getting support from the officially announced US sanctions on Venezuelan crude, which could take out as much as 0.5 MMBbl/d from the market.

Although the recent bullish news from OPEC and Venezuela point to a significant reduction in supply levels, the concerns about a global economic slowdown and demand for crude-related products are still holding a ceiling for prices. The global economic growth was already gloomy due to the ongoing US-China trade dispute, disappointing earnings from industrial firms in US and China, and the Chinese economy posting its weakest growth rate in nearly 30 years. The latest data from the US government showing new orders for US made goods sharply falling in November, increased the concerns about the economic growth and demand slowdown. Also pressuring prices further is the dollar gaining strength as well as the EIA, in its latest monthly report, showing US production increasing significantly. US production has not showed any signs of slowing down and could increase further as the year progresses when the pipeline takeaway capacity issue in the Permian basin is alleviated.

Prices in the near term will be volatile as the market assesses the OPEC supply cuts and waits for a resolution of the trade disputes between the US and China, which is to be decided by the March 2 deadline. If a deal can be reached between the countries to eliminate the currently proposed tariffs on Chinese goods or to prevent any additional tariffs, global economic and demand growth could tick upward, which could support higher prices. However, if a deal cannot be reached and the Chinese economy continues to suffer, along with other emerging economies, sentiment could shift to bearish again regardless of the OPEC and non-OPEC supply cuts pressuring prices further.

Prices in WTI settled the week up $3.46/Bbl as the market tested the highs from early December and closed the week above those levels. Watch for gains on higher volume and open interest to signify long-term expectation of gains beyond current levels. The next area for the rally to take prices up is the mid-November high of $57.96/Bbl. Should bearish news damage traders’ expectations, then the area around $50/Bbl should find support. Due to the dynamic environment surrounding WTI, prices are still subject to high volatility. Currently, the market is sending a breakout bias, but it can still fall subject to negative news (especially around global growth or failure of a significant deal between China and the US on tariffs) that can cause a quick and brutal blow to the recent gains.

Petroleum Stocks Chart

The Week Ahead For Crude Oil, Gas and NGLs Markets – Feb 4, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – Feb 4, 2019

CRUDE OIL

  • US crude oil inventories showed an increase of 0.9 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories decreased 2.2 MMBbl and 1.1 MMBbl, respectively. Total petroleum inventories declined 4.8 MMBbl. US crude oil production was unchanged last week (per EIA). Crude oil imports were down 1.1 MMBbl/d to an average of 7.1 MMBbl/d versus the week prior.
  • The bullish inventory release supported the market, which started the week with bearish news on China’s announcement that 2018 showed the slowest economic growth in 30 years. This news, coupled with the weak earnings reports from US industrial firms, brought concerns that global economic growth may be in jeopardy and the supply overhang may be extended.
  • Last week’s bearish beginning was replaced with news that brought a solid bid to WTI prices. On Tuesday, the Trump administration announced the decision to impose sanctions on Venezuelan state-owned oil from PDVSA. This may put as much as 0.5 MMBbl/d of crude at risk. This news was followed by the announcement from Saudi Energy Minister Khalid al-Falih that Saudi Arabia will reduce output to 10.1 MMBbl/d during February from the original quota level of 10.3 MMBbl/d. Additionally, news that the European Parliament recognized Guaido as interim president, and put Venezuelan heavy crude cargoes on hold, also had a positive impact on prices.
  • Long-term support still hangs in the balance on the continuing tariff negotiations between China and the US. The upbeat tone of those meetings, and President Trump announcing that he would meet with Chinese president Xi Jinping soon to potentially seal a comprehensive trade deal, brought additional strength to WTI prices.
  • With the government reopening last week, the CFTC started publishing trade data. The CFTC will be publishing data on Tuesdays and Fridays until the reports are brought current. The December 24 report had the speculative long position at 196,962 contracts, while the speculative short position was 120,752 contracts. While not balanced, the data does show that a short position had been established during the declines from the October highs.
  • Prices in WTI settled the week up $3.46/Bbl as the market tested the highs from early December and closed the week above those levels. Watch for gains on higher volume and open interest to signify long-term expectation of gains beyond current levels. The next area for the rally to take prices up is the mid-November high of $57.96/Bbl. Should bearish news damage traders’ expectations, then the area around $50/Bbl should find support.
  • Due to the dynamic environment surrounding WTI, prices are still subject to high volatility. Currently, the market is sending a breakout bias, but it can still fall subject to negative news (especially around global growth or failure of a significant deal between China and the US on tariffs) that can cause a quick and brutal blow to the recent gains.

NATURAL GAS

  • Dry gas production increased 0.35 Bcf/d for the week. Canadian net imports increased 0.80 Bcf/d primarily due to decreased exports from the US to Canada. This was caused by increased demand because of the polar vortex.
  • Res/Com demand increased 3.59 Bcf/d, while Power and Industrial demand increased 0.80 Bcf/d and 0.28 Bcf/d, respectively. LNG exports were flat on the week, while Mexican exports gained 0.14 Bcf/d. For the week, supply gained 1.15 Bcf/d while demand increased 4.94 Bcf/d.
  • The storage report last week came in with a withdrawal of 173 Bcf, below expectations, and extended the declines that had already started prior to the release.
  • For the third time in the past four weeks, prices opened with a gap from where prices closed the week before. Governed primarily from warming forecasts, prices broke below several areas of support, with trade reconciling views that winter is over and storage issues are no longer a factor. This bias resolution has the market chasing the Q1 lows that occur annually.
  • Market internals with the price action occurred on lower volume, but with slight gains in open interest, which is not normal with expiration. The CFTC report identified positions on December 24 that had the market predominantly long from the speculative sector. The CFTC will be updating each week on Tuesdays and Fridays until it is current with release dates. Drillinginfo will follow these updates and report on them weekly.
  • The declines last week took prices below the lowest price so far in 2019. The weak close on Friday and the warmer upcoming weather this week set up the potential for additional declines early, barring any changes in the weather forecasts further into February.
  • Further declines will face support at the 2018 lows between $2.621/MMBtu and $2.752/MMBtu. Rallies from $2.85/MMBtu to $2.983/MMBtu are expected to be met with selling. Short of a major shift in weather forecasts, the high for the March contract has already occurred. The market has defined its bias negative for the coming weeks; therefore expect the March contract to expand the losses during February.

NGLs

  • Average prices last week generally improved from the week prior. Ethane up $0.02 to $0.34; normal and isobutane were up $0.05 to $0.87; and natural gasoline was up $0.06 to $1.10. Propane ended the week at $0.70, but average prices for the week were flat to the week prior at $0.67.
  • Ethane hit a high of $0.35 last week as strong US cracker and export demand continue. However, despite high demand, ethane prices remain slightly discounted due to higher global storage and competitive propane/naphtha prices.
  • Propane will likely post a strong draw next week due to the polar vortex, but the product’s heating demand is expected to fluctuate throughout the month. Currently, forecasted temperatures are warm the first part of February and turn colder later in the month. However, similar to ethane, propane will see prices capped because of lower chemical feedstock prices, in addition to lower crude prices.
  • US propane stocks decreased about 3.6 MMBbl the week ending January 25. Stocks now sit at 60.2 MMBbl, about 7.1 MMBbl higher than the first week of 2018 but 2.5 MMBbl lower than the first week of 2017.

Ukraine PSA Tender 2019

Ukraine PSA Tender 2019

The State Geological Service (SGS) will shortly open a public tender for 12 blocks under a petroleum sharing agreement (PSA) covering a total area of 15,600 sq km onshore Ukraine; Balakliyska, Berestianska, Buzivska, Hrunivska, Ichnyanska, Ivanivska, Okhtyrska, Rusanivska, Sophiivska, Uhnivska, Varvynska, and Zinkivska. The tender terms are expected to be published by mid-February 2019 and interested parties will then have 90 days to submit applications. Winning bidders will be notified by November 2019, with final awards anticipated in Q3 2020. Full details at http://www.goukrainenow.com/ or http://www.geo.gov.ua/

Fig 1 - Dnieper-Donets blocks

Fig 1 – Dnieper-Donets blocks

This is the first PSA bid round to be held in the country since 2012. The PSA tender will be performed under the procedure in accordance with the Resolutions and the amended Law of Ukraine No. 1039-XIV On Production Sharing Agreements dated 14 September 1999 (PSA Law). A PSA model contract has not been released, however the bid information document reveals the following details:

  • A non-refundable bid participation fee of UAH 300,000 (~US$ 10,830).
  • An initial exploration period of five years. A minimum financial commitment in the five-year period is a bid requirement (minimum commitments have been stipulated dependent on each block in the range UAH 450 million (~US$ 16 million) to UAH 1 billion (~US$ 36 million)
  • During the first exploration period, a minimum work programme must be completed which is to include seismic acquisition and no less than two exploration wells, with an increased commitment of minimum 500 sq km 3D seismic and three exploration wells in the case of the Varvinska, Ichnyanska and Sofiyivska blocks.
  • The total PSA duration is 50 years, with an option for a negotiated extension.
  • Cost recovery ceiling not exceed 70% of gross production until the contractor has recovered all costs and expenses (this implies the ceiling may be lowered after payout).
  • The state’s share of profit petroleum to be at least 11%.
  • Effective from 1 January 2018, a the royalty rate for the production of oil or condensate under a PSA is 2% and for natural gas is 1.25%.
  • According to the PSA Law, the contractor is required to pay all taxes and charges stipulated by the Tax Code of Ukraine. The general corporate income tax rate is currently 18%.

Fig 2 - North Carpathian blocks

Fig 2 – North Carpathian blocksInternational oil companies can bid directly for PSAs. In parallel, Ukraine is offering 30 onshore blocks under royalty/tax terms to Ukrainian companies, although foreign investors can participate via a local subsidiary company. The first 10 of these blocks were tendered on 6 December 2018 as Round 1, with bidding scheduled for 6 March 2019, whilst a further seven were released on 29 January for an auction to be held on 29 April 2019; the remaining 13 blocks are expected to follow in the coming months.

 

Drastic Cold Causes Increased Demand, Prices Show Little Reaction

Drastic Cold Causes Increased Demand, Prices Show Little Reaction

Natural gas storage inventories decreased 173 Bcf for the week ending January 25, according to the EIA’s weekly report. This draw is well below the market expectation, which was a decrease of 184 Bcf.

Working gas storage inventories now sit at 2.197 Tcf, which is 14 Bcf below last year and 328 Bcf below the five-year average.

At the time of this writing, the March 2019 contract was trading at $2.830/MMBtu, $0.024 below yesterday’s close of $2.854/MMBtu. The February 2019 contract expired at $2.950/MMBtu on Tuesday.

The first real cold spell of the season hit the lower 48, producing subzero temperatures. The upper Midwest had temperatures drop below -20 degrees Fahrenheit, but futures prices didn’t seem to react to the drastic cold; the March 2019 contract stayed well below $3/MMBtu. Even with the demand surge, the market seems comfortable with where we sit with storage inventories and production levels. Should February have below-average temperatures for a prolonged period of time, a concern for inventory levels may come back to the market. However, without a cold shot, prices will be bearish and stay below $3/MMBtu.

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

This Week in Fundamentals

The summary below is based on Bloomberg’s flow data and DI analysis for the week ending January 31, 2019.

Supply:

  • Dry gas production increased 0.67 Bcf/d on the week. The main contributors to the increase were the South Central/Gulf (+ 0.54 Bcf/d) and the Mountain (+0.11 Bcf/d) regions. In the South Central/Gulf region, Texas was the main driver of the production increase, gaining 0.36 Bcf/d on the week.
  • Canadian net imports were up 0.71 Bcf/d on the week. The increase in net imports is mainly attributed to reduced exports from the US to Canada due to the extreme cold in the upper Midwest.

Demand:

  • Domestic natural gas demand increased 10.12 Bcf/d week-over-week. Res/Com demand increased 7.48 Bcf/d, with most of the demand coming from the Midwest and the East. Power and Industrial demand both increased on the week, gaining 1.76 Bcf/d and 0.88 Bcf/d, respectively.
  • LNG exports increased 0.01 Bcf/d, while Mexican exports increased 0.18 Bcf/d on the week.

Total supply is up 1.38 Bcf/d, while total demand gained 10.64 Bcf/d week-over-week. With the increase in demand outpacing the increase in supply, expect the EIA to report a stronger draw next week. The ICE Financial Weekly Index report is currently expecting a draw of 250 Bcf for next week. Last year, the same week saw a draw of 119 Bcf, while the five-year average is 152 Bcf.