The Week Ahead For Crude Oil, Gas and NGLs Markets – June 10, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – June 10, 2019

CRUDE OIL

  • US crude oil inventories posted an increase of 6.8 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories increased 3.2 MMBbl and 4.6 MMBbl, respectively. Total petroleum inventories showed a substantial increase of 22.4 MMBbl. US crude oil production increased 100 MBbl/d last week per EIA. Crude oil imports were up 1.07 MMBbl/d to an average of 7.3 MMBbl/d versus the week prior.
  • As expected, price declines were extended in early trade last week. Trade tensions between the US and China have subdued global economic growth and brought a distinctly bearish bias to trade. Manufacturing activity from China was disappointing, shrinking more than expected and confirming the market’s concerns about global economic activity. The market then had to assess potential tariffs on Mexican goods entering the US, but this measure was rejected upon President Trump’s return to the US on Friday.
  • News of the possibility of OPEC extending the supply cuts to the second half of the year and the ongoing tensions in the Middle East seemingly brought some modesty to the declines. Saudi Arabian energy minister Khalid al-Falih stated that a consensus was emerging among producers to continue working to “sustain market stability.” It is unclear whether Russia has interest in participating in the supply cut extension. Final announcement will occur at the upcoming OPEC meeting later in the month or early in July.
  • Weakness in prices was manageable until the inventory release that showed an alarming build in total petroleum stocks. The release brought another wave of selling and pressured prices down to early January levels, just above $50/Bbl. These declines left the momentum indicators at extremely oversold levels, setting the market up for a countertrend bounce toward the end of the week.
  • The CFTC report (positions as of June 4) brought forth additional selling from the bulls as the Managed Money long component sold 18,133 contracts while the short position added 12,798 contracts. Much of the liquidation occurred when prices broke through support around $57/Bbl and continued early last week.
  • Prices maintain a distinctly bearish bias. Evidence is starting to mount that the US equity market and WTI move in the same direction, with both of these directly correlated to economic growth in the US and globally. Last week’s late gains were also met with a significantly lower dollar index, with further gains in US Treasury (10-year). Traders are still spooked by the current global markets, and the announcement from the US Federal Reserve Chairman Jerome Powell, hinting at a possible rate cut, does little to bestow a bullish spin on growth in the markets. This outlook may be a catalyst to the equity/risk markets in the near term.
  • The news of Mexican tariffs being withdrawn will likely support prices early in the coming week. With the strength of prices last Friday, follow-through gains going into this week should be expected. A break above last week’s high ($54.63) should carry the run to the key area from two weeks ago, between $56 and $57.33, where the selling should intensify. Declines back to $51.23 and to last week’s lows of $50.60 will find significant buying. The market may be developing a new range between $50 and $57 for the near term as we head into the OPEC meeting and the G20 summit, which may bring news regarding the US and China tariff standoff.

NATURAL GAS

  • Natural gas dry production showed a decrease of 0.77 Bcf/d, with most of the declines coming from Pennsylvania (-0.29 Bcf/d) and Texas (-0.21 Bcf/d). Canadian imports increased by 0.38 Bcf/d.
  • Res/com demand showed a drop of 0.59 Bcf/d, while power demand increased 2.30 Bcf/d as the market heads into the early summer season. Industrial demand gained 0.12 Bcf/d. LNG exports fell 0.32 Bcf/d, and Mexican exports increased by 0.07 Bcf/d. These events left the total supply dropping 0.39 Bcf/d while total demand increased by 1.59 Bcf/d.
  • The storage report last week showed the injections for the previous week at 119 Bcf. Total inventories are now 182 Bcf higher than last year and 240 Bcf below the five-year average. With demand outgaining supply last week, expect the EIA to report a weaker injection next week.
  • The CFTC report (as of June 4) showed the Managed Money long sector decreasing positions by 1,340 contracts while the short position took an aggressive position of additional weakness by adding 41,037 contracts. Additional gains were likely as prices fell after the expiration of the June contract and into the first few days of the prompt July contract., as suggested last week.
  • Market internals continue to show a bearish bias; total volume has increased substantially week over week, while total open interest also gained (according to preliminary data from the CMS) on the week. Momentum indicators remained bearish but are starting to reach extremely oversold levels.
  • The current market direction is based on strong production with a lack of early summer demand. As long as these fundamental combinations remain, the market is likely to probe lower. Should summer demand remain anemic, prices may head down to the $2.00 level (or below) in the early fall. The market will not get to that level directly, but will need periods of consolidation before that type of collapse. Due to the oversold levels currently present in prices, look for the potential countertrend bounce in the coming weeks. Any rally in prices will run into selling at last week’s highs of $2.475 and up to $2.573. Further probes lower will likely challenge a zone from May 2016, between $2.288 and $2.151.
  • The winter strip continued to weaken, just not at the same rate as the prompt July contract. The CFTC report identified that some of the selling was due to the producer hedging the upcoming winter sales. The winter strip seems to be correlated more closely to the prompt month than it was earlier in the spring, promoting storage operators to utilize the weak daily cash prices by offsetting with hedges against the winter spreads.

NATURAL GAS LIQUIDS

  • Meritage Midstream and subsidiary Thunder Creek NGL Pipeline have launched a binding open season for the expansion of the pipeline. The expansion will take gas from processing plants in Campbell and Converse counties in Wyoming, and will interconnect with the ONEOK Bakken Pipeline in Converse, allowing additional y-grade volumes to reach fractionation facilities and storage at Conway via ONEOK’s Overland Pass Pipeline.
  • Purity product prices dropped significantly across the board. Ethane fell $0.027 to $0.202, propane down $0.082 to $0.445, normal butane down $0.116 to $0.473, isobutane down $0.106 to $0.500, and natural gasoline down $0.138 to $0.998.
  • US propane stocks increased ~2.5 MMBbl during the week ending May 31. Stocks now sit at 68.3 MMBbl, roughly 21.2 MMBbl and 17.9 MMBbl higher than the same week in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil rose for the week ending June 7, according to DrillingInfo’s analysis of manifests from US Customs and Border Patrol. This increase was driven mostly by an increase in imports to PADD 1. As of June 10, PADD 1 imports stood at nearly 1.25 MMBbl/d for the week, while PADD 5 imports rose slightly to more than 1.22 MMBbl/d. PADD 3 imports dropped from the prior week and are at 1.6 MMBbl/d.

  • The imports to PADD 1 are the highest reported since July 2018. The biggest origin for crude into PADD 1 was Norway, which contributed more than 540 MBbl/d of Ekofisk. These barrels were imported by PBF Delaware City and PES Philadelphia. So far this month, those two refineries have imported nearly 4 MMBbl of Ekofisk, far exceeding any month since at least 2017. Ekofisk is a light sweet crude oil and one of the grades of crude that make up the Brent benchmark.

Webinar: Where do the Major Permian Players Stand after the Anadarko Acquisition?

Webinar: Where do the Major Permian Players Stand after the Anadarko Acquisition?

The brief but intense Chevron-Occidental bidding war for Anadarko resulted in one of the largest upstream O&G deals ever. But that’s already old news. Now the questions on the collective mind of O&G investors and executives are: “What does this mean for my company, and are more deals on the way?”

 

Join us on Tuesday, June 11th for a live webinar when our expert analysts will examine the competitive landscape among the major Permian players. Follow this link to register to attend.

 

Andrew Dittmar, a Senior M&A Analyst on the Drillinginfo Market Research Team, will look at how the market is valuing companies on a dollar per acre basis, how that stacks up with previous Permian deals, and the key trends shaping the M&A landscape.

Andrew will also look at specific companies like Diamondback Energy, Pioneer Natural Resources and Concho that are candidates for the next transaction of $20 billion or more, and those who could be in smaller deals like Parsley Energy and Centennial Resource Development.

 

Tyler Krolczyk, a Petroleum Engineer and Technical Advisor on the Drillinginfo Consulting Services Team, will do a deep dive into these assets from the engineering and geology perspectives to explain why the market finds them so attractive.

 

You don’t want to make guesses or assumptions while evaluating your next opportunity. This webinar will provide you with the data and analysis you need to make well-informed decisions.

 

Use this link to register to attend. If you have a question you would like Andrew and Tyler to address, please send it to us on Twitter or Facebook.

 

Another Triple-Digit Injection Exceeds Expectations, Prices Fall

Another Triple-Digit Injection Exceeds Expectations, Prices Fall

Natural gas storage inventories increased 119 Bcf for the week ending May 31, according to the EIA’s weekly report. This injection is significantly above the market expectation, which was an inventory increase of 110 Bcf.

Working gas storage inventories now sit at 1.986 Tcf, which is 182 Bcf above inventories at the same time last year and 240 Bcf below the five-year average.

At the time of writing, the July 2019 contract was trading at $2.332/MMBtu, dropping $0.046 from yesterday’s close on the bearish inventory report.

For the first time since 2014, EIA has reported triple-digit injections for natural gas for four consecutive weeks. The record for most consecutive triple-digit injections is held by the year 2014, which saw seven consecutive weeks with a 100+ Bcf injection. The ICE Financial Weekly Index report is currently expecting injections in the coming two weeks to be right around the 100 Bcf mark, which would put 2019 at six consecutive weeks of triple-digit injections should that expectation come to fruition.

The injections of 2019 are mainly being driven by the increased production, coupled with average to below-average demand to start the summer season. During summer 2019, Drillinginfo expects dry gas production to average ~17.5 Bcf/d more than summer 2014, which significantly helps injection capabilities. However, some of this excess production has been offset by increased demand, particularly in LNG exports.

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 6, 2019.

Supply:

  • Dry gas production decreased 0.63 Bcf/d. This drop mainly came from the East region, which fell 0.39 Bcf/d on the week, with nearly all of the decline in the region coming from Pennsylvania (-0.36 Bcf/d).
  • Canadian net imports increased on the week, gaining 0.23 Bcf/d.

Demand:

  • Domestic natural gas demand increased 1.58 Bcf/d week over week. We continue to see the season change as power demand increased 2.30 Bcf/d and res/com demand decreased 0.78 Bcf/d. Industrial demand increased slightly on the week, gaining 0.06 Bcf/d.
  • LNG exports decreased 0.49 Bcf/d week over week, while Mexican exports increased 0.13 Bcf/d.

Total supply is down 0.39 Bcf/d, while total demand increased 1.21 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 100 Bcf. Last year, the same week saw an injection of 96 Bcf; the five-year average is an injection of 88 Bcf.

Extremely Bearish Inventory Report Pulls the Prices Below $52

Extremely Bearish Inventory Report Pulls the Prices Below $52

US crude oil stocks posted an increase of 6.8 MMBbl from last week. Gasoline and distillate inventories increased 3.2 MMBbl and 4.6 MMBbl respectively. Yesterday afternoon, API reported a crude oil build of 3.6 MMBbl, alongside gasoline and distillate builds of 2.7 MMBbl and 6.3 MMBbl, respectively. Analysts, to the contrary were expecting a crude oil draw of 0.2 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 22.4 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 the EIA. Crude oil imports were up 1.07 MMBbl/d last week to an average of 7.3 MMBbl/d. Refinery inputs averaged 16.9 MMBbl/d (171 MBbl/d more than last week’s average), leading to a utilization rate of 91.8%. Report is bearish due to huge crude and total stocks builds and pressuring prices. Prompt-month WTI was trading down $2.13/Bbl, at $51.35/Bbl, at the time of writing.

Prices had a tough week, tumbling to their three-month lows on Friday and ending the month of May with the largest monthly drop since November of 2018, as trade tensions and fears of a slowdown in global economic and demand growth reached new heights.

The trade tensions between the US and China already had increased to new heights after China signaled the restriction of rare earth mineral exports to the US, which increased concerns about the global economy. The gloomy situation got even worse on Friday as the market reacted to President Donald Trump’s comments on Twitter, where he announced imposing 5% tariff on all goods imported from Mexico starting June 10. The tariff would gradually rise to 25% until Mexico resolves the illegal immigration issue. The comments by the president added more fuel to the already burning fire regarding global economic and demand growth, as the US and Mexican economies are very much tied, and the tariffs would be felt by American consumers. Also pressuring prices was disappointing manufacturing activity from China, as it shrank more than expected. The news from China increased the bearish sentiment, as the market starts to wonder how much more impact the continuing US–China trade war will have on economic growth in China and in other economies across the world.

Though increasing worries on global economic health have increased the bearish sentiment, the possibility of OPEC extending the supply cuts to the second half of the year and tensions in the Middle East are supporting prices. Tuesday brought some support to prices as Saudi Energy Minister Khalid al-Falih stated that a consensus was emerging among producers to continue working “to sustain market stability” in the second half of the year. The final decision will be made during OPEC’s next meeting which will be at the end of June or beginning of July. The main risk to the supply-cut extension is Russia’s interest in participation, which at this point seems unlikely. US Federal Reserve Chairman Jerome Powell’s comments on a possible cut in interest rates also gave some support to prices.

Prices have now established a distinctly bearish bias. The next area for the declines to test is the lows from February, at $51.23/Bbl. After closing last week just off the lows of the week, prices are poised to extend the declines early this week. The market is entering a very volatile period, as the geopolitical unrest in Middle East may cause violent snapbacks in prices. Currently, the global economic growth issue is well defined by the market, driving prices downward. The unknown in the WTI market is the unrest in the Middle East and what the OPEC meeting later in June or at the beginning of July will provide. Markets tend to overshoot directionally, and with WTI starting to approach extremely oversold levels, a bounce back should be expected over time. Perhaps traders will continue to liquidate length and force prices down to the February. The alternative, which may happen after early weakness, would have prices finding a bid and testing the range between $56/Bbl and $57.33/Bbl. An extension of a rally beyond that range, up to $63.81/Bbl, will require substantive news to offset global economic concerns.

Petroleum Stocks Chart

Drillinginfo: Infrastructure and Exports Will Drive or Hinder the Future of Energy in America

Austin, TX (May 8, 2019) – Drillinginfo, the leading energy SaaS and data analytics company, has released an update on exports as a part of their FundamentalEdge series. The report points to continued production growth of crude oil, natural gas, and NGLs, that outpaces domestic demand, with the supply surplus heading overseas.

“The story on the future of oil and gas in America is becoming clearer. Every incremental barrel of production since the middle of 2016 has been exported. As U.S. crude oil production grows, all incremental barrels are (and will continue to be) exported,” said Bernadette Johnson, Vice President of Market Intelligence at Drillinginfo. “To facilitate this rapid increase in exports, additional infrastructure will be critical. Without it, operators will be stuck with a valuable product, but limited options of how to send it to market,” said Johnson

The report highlights that most of this infrastructure will be built in Houston and Corpus Christi, Texas. Corpus Christi is expected to be the leading point of export moving forward, due to its proximity to the Permian and Eagle Ford basins and being a less congested port. As natural gas production continues to grow faster than domestic demand, more gas is finding a home outside of the U.S. In early 2017, the U.S. became a net exporter of natural gas for the first time. During 2018, net exports reached an average of 2.5 Bcf/d. Over the next five years, Canadian imports and Mexican exports will each represent 5 Bcf/d, netting zero imports/exports. Therefore, the amount of LNG exports will equal the total net exports in the U.S. By 2024, the U.S is expected to net export ~10 Bcf/d of natural gas.

“This will be a busy year, and very telling for the future of the LNG export market,” continued Johnson. Three new facilities are expected to come online — Elba Island, Cameron LNG, and Freeport LNG. Additionally, currently operating terminals will be increasing their capacity with added trains in Sabine Pass and Corpus Christi. Beyond that, there are four projects already approved but not under construction, and many others have been announced. “If recent history has shown us anything, it’s that infrastructure doesn’t always come online as expected, and everyone, both the industry and investors alike, should expect some price volatility while the market balances itself,” she said.

Key Takeaways from the Report:

  • Crude oil exports have been growing since 2017 as U.S. production reached historic levels thanks to growth from prolific shale basins, which in large part produces lighter crude that is better suited for refinery fleets in Asia and Europe. Exports to Asia are finding new destinations as China’s imports have declined to virtually zero. Iranian sanctions by the U.S., the situation in Venezuela, and U.S.-China trade wars will play a big role in U.S. exports moving forward. The U.S. supply growth is likely to be exported rather than displacing currently imported volumes.
  • The LNG liquefaction market is the key player for natural gas exports. By the end of 2019, the U.S. will have six operating terminals and nearly 10 Bcf/d of capacity. Additionally, more than 40 Bcf/d and 20 terminals have been proposed in the U.S. However, Drillinginfo analysts expect U.S. LNG exports to reach 10 Bcf/d in 2023, as growth from non-U.S. LNG export facilities drives global LNG prices down.
  • For NGLs, strong production growth is expected to continue. Export markets will continue to grow, as supply will outpace domestic demand. As additional infrastructure hits the market, ethane, propane, and butanes will grow export volumes. Pentanes plus domestic demand is expected to grow in the short term, due to bottleneck issues and production cuts in Canada.

 

 

 

Members of the media can download a 20-page preview of Growing Exports or contact Jon Haubert to schedule an interview with one of Drillinginfo’s market analysts.