The Week Ahead For Crude Oil, Gas and NGL Markets – Apr 15, 2019

The Week Ahead For Crude Oil, Gas and NGL Markets – Apr 15, 2019

CRUDE OIL

  • US crude oil inventories posted an increase of 7.0 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories decreased 7.7 MMBbl and 0.1 MMBbl, respectively. The total petroleum inventories showed an increase of 4.1 MMBbl. US crude oil production remained the same as the previous week, per EIA. Crude oil imports were down 0.16 MMBbl/d to an average of 6.6 MMBbl/d versus the week prior.
  • WTI opened last week by extending prices higher based on news from Libya that the Libyan National Army launched a campaign to take control of Tripoli, suggesting lower production due to the unrest. This news supported the price rally, along with continued supply reductions from OPEC and non-OPEC participants.
  • Despite the positive bias early in the week, prices started to digest some of the negative elements of the current market as the week progressed. First and foremost was the news that Russian Energy Minister Alexander Novak announced that supply cuts would be unnecessary if the market was expected to be balanced in the second half of the year. This news was met with more negative news, including that the US government may impose tariffs on European goods and the IMF is lowering its global economic growth forecast. The economic announcement regarding growth brought the market back to the reality of how precarious the recent gains remain long term.
  • The CFTC report (positions as of April 9) continued the recent trend with the speculative commitment aiding the recent gains. The Managed Money long component increased length by 26,149 contracts, while the Managed Money short component covered 8,207 contracts. Evidence continues to build that the speculative bulls are adding positions on any type of retracement in spite of another bearish inventory report. The report also identified the Merchant Short position (producers hedging) increased by 38,977 contracts and the refiners (hedging input costs) increased by 30,908 contracts. The refiners increasing their hedges reflects a respect for the recent gains and the bullish condition of a market that continues to rise even when the data affecting the market is bearish.
  • Last week’s close ($63.76) was the sixth consecutive higher close and confirms the bullish sentiment that the WTI maintains. Market internals reflect the bullish bias, with the momentum indicators being bullish but nearing overbought levels. The volume was significantly stronger last week than the previous week, with a significant amount of the increase on Monday. Open interest showed some gains, which is important as these two elements — volume and open interest gains while prices rise — are required for any sustained run in prices.
  • Last week WTI prices gave their first indication that the price run may follow a more traditional bullish extension. While trading higher early in the week, prices respected the bearish inventory numbers from the EIA and the headline news and promptly started to retrace some of the week’s gains. The $0.50 decline in WTI during the last 45 minutes of trade on Friday is indication that some of the bullish elements are taking profits on short-term gains. This profit activity is part of a bull market behavior pattern. Participants need to collect profits before adding to additional commitments, and this usually leads the market to periods of consolidation that have been discussed before.
  • The key this week is how far the declines will go to support before bullish participants add to existing positions. Further extensions taking prices between $65 and $68 (an area of consolidation from last fall during the price collapse) will likely run into selling. Some of that selling was from US producers, and this behavior is likely to continue on price runs allowing the US producer access to higher-priced hedges. Should prices continue a consolidation phase for WTI trade, a potential retracement to the breakout area around $60.00 should be expected.

NATURAL GAS

  • Natural gas dry production decreased 0.85 Bcf/d, with the majority of the losses coming from Louisiana (-0.42 Bcf/d). Canadian imports decreased 0.21 Bcf/d.
  • Res/Com demand fell 8.27 Bcf/d, while Power and Industrial demand dropped 0.41 Bcf/d and 1.23 Bcf/d, respectively. LNG exports fell 0.26 Bcf/d on the week, while Mexican exports increased 0.10 Bcf/d. For the week, total supply fell 1.34 Bcf/d, while total demand dropped 10.43 Bcf/d.
  • The storage report last week came in with reclassifications and showed an implied flow of 29 Bcf and a net flow of 25 Bcf. Total inventories are now 183 Bcf below last year and 485 Bcf below the five-year average. Based on supply and demand fundamentals, a larger injection is expected this week.
  • The CFTC report (as of April 9) showed the Managed Money long sector reducing positions by 16,130 contracts while the short position increased by 6,204 contracts. This continues the trend of the last few weeks, which has the long traders reducing positions on rallies while the short trade adds to short positions. Should the shorts continue to pressure prices lower, long-term support is just below current prices, and the historical calendar (prices rise during Q2) does not favor declines into May and June.
  • Market internals are developing a bearish bias from neutral the previous week. Prices traded in a smaller range ($0.078) and closed $0.004 below the previous week’s close. Volume increased week over week, and open interest showed a strong gain over the previous week. While total open interest is below historical levels, it does not deny the potential for a directional bias to price movement. Last week’s gains could be construed as the beginning of a short-term directional bias.
  • Last week’s failure to break above the previous week’s high signals that the market has little or no interest in higher prices. Accordingly, a test of major support (over three years) that exists in a well-defined range between $2.522 and $2.560 should be expected in the coming weeks. That said, historical price action allows that the lows in late winter (usually February through April) are established prior to prices firming, as the market enters the primary injection season and the summer power-demand period. If this market is headed for a test of the well-defined support, it is likely to occur before the end of the month. Consider the recent weekly highs between $2.729 and $2.733 to find sellers during the coming week.

NATURAL GAS LIQUIDS

  • ONEOK’s Elk Creek pipeline is expected to be completed by year-end 2019. This pipeline will run from ONEOK’s Riverview terminal in eastern Montana to its facilities in Bushton, Kansas, and is expected to bring an additional 240 MBbl/d to the Conway area. However, when Elk Creek hits the market, downstream fractionation and purity product takeaway at Conway will likely become an issue, as few frac and pipeline projects are expected to come online.
  • Prices were up across the board last week. The largest percentage increase was ethane, which jumped 8.3%, or $0.018, to $0.231. This jump was followed by propane, which was up $0.029 to $0.646, normal butane up $0.023 to $0.767, natural gasoline up $0.030 to $1.309, and isobutane up $0.008 to $0.771.
  • US propane stocks increased ~1.2 MMBbl the week ending April 5. Stocks now sit at 54.4 MMBbl, roughly 18.5 MMBbl and 14.0 MMBbl higher than the same week for April 2018 and April 2017, respectively.

SHIPPING

  • Based on customs manifests, weekly waterborne crude imports are quite low this week, especially to PADD 3, which is only slightly higher than 1 MMBbl/d. Imports to Houston increased to the highest level since mid-February, but that was overshadowed by declines at Corpus Christi, Lake Charles, Mobile, Pascagoula, and Texas City. No bills of lading were filed for arrivals to Morgan City, which is the delivery port for LOOP cargoes. PADD 1 imports were close to 320k bbl/d, while PADD 5 was at 596k bbl/d. PADD 3 crude imports from Iraq were at zero for the second time since mid-March, but only the fifth time since the beginning of 2017.

Chevron breaks A&D Logjam with $50 billion Anadarko buy

Chevron breaks A&D Logjam with $50 billion Anadarko buy

“Coming on the heels of a record low quarter for U.S. M&A activity of a paltry $1.6 billion, Chevron stepped up to the plate with a $50 billion deal to acquire Anadarko,” noted Drillinginfo M&A Analyst Andrew Dittmar.

The offer of $65/share (75% equity, 25% cash) represents a 37% premium to Anadarko’s prior-day close and the deal value of $50 billion consists of $33 billion is cash/stock plus $15 billion in net debt assumed plus $2 billion of book value on non-controlling interest.

“The deal appears to be well received by Wall Street, reversing a trend seen in Q4 2018 that showed buyer’s stock trade down significantly with deal announcements.  Chevron is currently trading down a minor 5% on the news” added Dittmar.

The deal is the sixth largest deal in oil and gas history and the largest deal since Shell bought BG for $82 billion in 2015 to become a global LNG powerhouse.

“Clearly, a large driver of the deal is Anadarko’s prized position in the Delaware Basin where Chevron increases its position by 240,000 net acres to over 1,400,000 net acres.  The Delaware Basin currently provides the best well economics of any shale play in the country” said Dittmar.  Drillinginfo analysis indicates about $12 billion of the $50 billion purchase price is attributed to the Delaware Basin acreage or approximately $50,000 per acre. Chevron also acquires world class midstream assets that includes 12,509 miles of pipeline that tie to key US supply basins.

 

Delaware Basin Strategic Acreage Positions

 

 

Beyond the Permian, Chevron gets overlapping operations in Colorado’s DJ Basin and the deepwater Gulf of Mexico.  In Africa, Chevron establishes new valuable positions in Mozambique, Algeria and Ghana that complement Chevron’s existing positions across Africa.  The acquired Mozambique asset is a world class gas asset that is underway for full scale global LNG development.

“This blockbuster deal portends to jumpstart further consolidation within the Permian Basin and the US shales in general.  As these shales become further de-risked and companies move to full development mode, scale matters. Drillinginfo expects this deal to be the start of further consolidation with the US shales and specifically within the Permian Basin” Dittmar concludes.

Injection Lower Than Expected, Prices Show Little Reaction

Injection Lower Than Expected, Prices Show Little Reaction

Natural gas storage inventories increased 25 Bcf, with an implied flow of 29 Bcf, for the week ending April 5, according to the EIA’s weekly report. This injection is well below the market expectation, which was an inventory increase of 38 Bcf. This week also came with reclassifications in the Pacific and South Central regions. In the Pacific, gas stocks showed a reclassification of a 1 Bcf decrease, and South Central stocks showed a 2 Bcf drop.

Working gas storage inventories now sit at 1.155 Tcf, which is 183 Bcf below inventories at the same time last year and 485 Bcf below the five-year average.

At the time of this writing, the May 2019 contract was trading at $2.689/MMBtu, $0.011 below yesterday’s close of $2.670/MMBtu. The little reaction to the bullish report shows that the market is content with injections at this point in the season. Prices are likely to show more volatility later in the season if inventory levels are low and injections are below expectations.

This injection season started much earlier than last year. Looking at the past two weeks for the same time last year, we had draws totaling 48 Bcf. This year, we have injections totaling 48 Bcf, nearly a 100 Bcf difference in inventories. The difference in inventories can mainly be attributed to the longer winter last year, which ran through most of April. With more injections expected throughout April 2019, prices will likely stay below $3/MMBtu as inventory levels close the gap on the five-year average.

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 April 11, 2019.

Supply:

  • Dry gas production decreased 1.07 Bcf/d on the week. The decrease stems mainly from declines in the South Central/Gulf region, which fell 1.06 Bcf/d. The big drop in the region was Louisiana, which fell 0.51 Bcf/d.
  • Canadian net imports decreased 0.34 Bcf/d on the week.

Demand:

  • Domestic natural gas demand decreased 8.72 Bcf/d week over week. Res/Com demand continued its decline into the summer season, falling 7.66 Bcf/d week over week, while Industrial demand fell 1.23 Bcf/d and Power demand gained 0.17 Bcf/d.
  • LNG exports fell 0.67 Bcf/d week over week due to maintenance at the port of Sabine on trains 1 and 2. Mexican exports increased 0.05 Bcf/d.

Total supply is down 1.41 Bcf/d, while total demand decreased 9.64 Bcf/d week over week. With the decrease in demand greater than the decrease in supply, expect the EIA to report a stronger injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 94 Bcf. Last year, the same week saw a draw of 36 Bcf; the five-year average is an injection of 27 Bcf.

 

Prices Increase Despite Bearish Inventory Report

Prices Increase Despite Bearish Inventory Report

US crude oil stocks posted a large increase of 7.0 MMBbl from last week. Gasoline and distillate inventories decreased 7.7 MMBbl and 0.1 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 4.1 MMBbl alongside gasoline and distillate draws of 7.1 MMBbl and 2.4 MMBbl, respectively. Analysts were expecting a crude oil build of 2.3 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 4.1 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 down 0.16 MMBbl/d last week, to an average of 6.6 MMBbl/d. Refinery inputs averaged 16.1 MMBbl/d (251 MBbl/d more than last week), leading to a utilization rate of 87.5%. Price rally that paused due to a lower economic growth forecast from the International Monetary Fund (IMF) and Russia stating it does not support extending supply cuts continued today, despite the bearish inventory report as crude oil and total petroleum stocks both posted sizeable gains. Prices are getting support from the unrest in Libya potentially threatening its oil supply and continuing OPEC supply cuts. Prompt-month WTI was trading up $0.21/Bbl, at $64.19/Bbl, at the time of writing.

Prices continued their climb early into this week as WTI hit its five-month high on Monday and edged near the $65/Bbl mark, while Brent reached the closely watched $70/Bbl mark. However, bearish news on Tuesday brought an end to the rally, as prices gave up some of their gains after bearish news from the IMF and Russia.

Continuing OPEC+ production cuts and further declines from Venezuela and Iran due to unrest and sanctions continued to support prices. Prices rallied to their fresh five-month highs on Monday, largely on the concerns about lower production from Libya, as the Libyan National Army launched a campaign to take over Tripoli. Although it is too early to assess what this means for the country’s oil supply, the possibility of lower production due to unrest pushed prices higher as global supply levels are already tightening. Also supporting prices were the US-China trade talks coming to an end for the time being and officials stating progress is being made.

Although sentiment has completely shifted to bullish with tightening supply levels and news from Libya, prices retracted from their five-month highs quickly due to worries about global economic growth and Russia’s comments on easing the supply-cut deal. A threat by the US government to impose tariffs on European goods as well as IMF lowering its global economic growth forecast, once again brought back the fears of a slowdown in global economic and demand growth. Russian Energy Minister Alexander Novak said an extension of supply cuts would be unnecessary if the market were expected to be balanced in the second half of the year, which signals Russia may not be willing to participate in further reductions and could potentially increase production even if OPEC decides to proceed with supply cuts after June.

Last week’s trade closed over $63.00/Bbl, the highest weekly close since the last week of October 2018, just before the market declines accelerated. Market internals have developed a bullish bias, however, and are now entering overbought levels. The trade may extend the gains and test the $65/Bbl range but will need more bullish headlines to support this level before it finds some selling. The market will closely watch any news surrounding Iranian sanctions, Libyan supply levels, and US-China trade talks. Any slight shift in sentiment due to fundamentals or bearish news could cause a consolidation phase, with a potential retracement back to the $60/Bbl range.

Petroleum Stocks Chart

The Week Ahead For Crude Oil, Gas and NGLs Markets – Apr 8, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – Apr 8, 2019

CRUDE OIL

  • US crude oil inventories posted an increase of 7.2 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories decreased 1.8 MMBbl and 2.0 MMBbl, respectively. Total petroleum inventories showed a large increase of 7.2 MMBbl. US crude oil production was higher by 100 MBbl/d compared with the previous week (per EIA). Crude oil imports were up 0.22 MMBbl/d to an average of 6.8 MMBbl/d versus the week prior.
  • WTI prices maintained their bullish gains with news of Venezuelan production declines and the stern commitment by Saudi Arabia to bring Brent up to $70, which was achieved last Friday. The positive bias of tightening supplies was confirmed with a Reuters report showing OPEC production in March fell to its lowest level in four years and Saudi Arabia bringing its production below its committed quota. Chinese factory activity showed its sharpest rise in eight months, easing some of the concerns about a global economic slowdown and bringing longer-term bullish bias to the market.
  • Another element residing in the trade is the upcoming expiration of the sanction waivers allowing eight countries (China, Japan, India, Turkey, Italy, Greece, South Korea and Taiwan) to continue to buy Iranian crude. The US administration will have to extend, modify, or end the waivers. Last November, when the Trump administration announced the waivers, prices dropped precipitously as the trade had built significant positions around the Iranian sanctions. The US has until May 2 to decide what to do around the sanctions and waivers. However, the chart below shows that the Managed Money long sector has increased positions during the recent price run, seemingly placing a bet on waivers ending. It should also be noted that the total position of this sector is well below levels achieved last fall as the market headed into the sanctions.

  • The CFTC report (positions as of April 2) confirmed the speculative commitment to the current bullish trend. The Managed Money long component increased by 12,486 contracts, while the short component was forced to cover 6,165 contracts. It is becoming clear that the speculative bulls are adding positions on any type of retracement, in spite of the bearish inventory report. This is likely associated with the pending decision on waivers. The report also identified the Merchant short position increasing by 13,993 contracts. These gains were the first in a while and confirm that producers will hedge as prices eclipse $60.00/Bbl and remain there for an extended period.
  • Last week’s trade closed over $63.00/Bbl, the highest weekly close since the last week of October 2018, just before the market declines accelerated. Market internals have developed a bullish bias, however, and are now entering overbought levels. Volume was stronger week over week but declined later in the week as prices rallied to the highs. Finally, open interest showed some gains, which is important as these two elements (volume and open interest gains while prices rise) are required for any sustained run in prices.
  • With prices having closed over $63/Bbl and Brent near the Saudi target, further extensions taking prices between $65 and $68 (an area of consolidation from last fall during the price collapse) will likely run into selling from the US producers (witnessed last week). Should prices follow a consolidation phase for WTI trade, a potential retracement to the breakout area around $57.96-$60.00 should be expected.

NATURAL GAS

  • Natural gas dry production showed a decrease of 0.34 Bcf/d week over week. This decrease mainly came from declines in the South Central and Mountain regions, with a slight offset from gains in the Northeast. Canadian imports increased slightly, gaining 0.02 Bcf/d on the week.
  • Driving the demand gains this week, power demand gained 0.83 Bcf/d. Res/Com demand fell 0.11 Bcf/d and Industrial demand gained 0.28 Bcf/d. LNG exports declined 0.21 Bcf/d on the week, while Mexican exports were relatively flat. Totals for the week show the market lost 0.33 Bcf/d in supply while demand gained 0.80 Bcf/d.
  • The storage report last week came in with an injection of 23 Bcf. Total inventories are now 228 Bcf below last year’s and 505 Bcf below the five-year average.
  • The CFTC report (as of April 2) showed the Managed Money long sector reducing positions by 16,044 contracts while the short sector increased by 2,703 contracts. The speculative elements in this market are beginning to reflect a potential trend coming into place as the long sector has reduced positions while the short sector increases. This is not yet a trend but is worth watching closely in the coming weeks as prices usually ascend entering the summer months. Should the shorts continue to expand positions during the seasonally strong period of the year, price action could become more volatile.
  • Market internals remain neutral with a bearish bias, as the trade last week stayed in a $0.101 range and closed just $0.002 above the previous week’s close. Volume increased week over week, while open interest increased slightly but remains well below historical norms. The lack of open interest with little directional bias suggests that the natural gas commodity as a trading instrument by the larger funds is very limited.
  • The failure of prices to seriously test the previous week’s high signals that the market has a potential test of major support between $2.52 and $2.56. Historical price action shows the lows are established in late winter (usually February through April) before prices firm up going into the summer power demand period. If this market is headed for a test of the well-defined support, such a test is likely to occur before the end of the month.
  • Prices last week could not garner the support to test the previous week’s high at $2.77 and found selling at $2.73. Expect prices to find additional selling this week. The market will have to develop the interest by traders to take prices to major resistance around $2.857-$2.908, which is unlikely at this point. All signals indicate an extension downward this week.

NGLs

  • Prices were up and down among NGL products last week. Ethane dropped $0.021 to $0.214, propane was down $0.055 to $0.617, and isobutane was down $0.050 to $0.763. Normal butane increased $0.002 to $0.744, and natural gasoline was up $0.007 to $1.279.
  • US propane stocks increased ~1.6 MMBbl the week ending March 29. Stocks now sit at 53.2 MMBbl, roughly 16.9 MMBbl and 11.6 MMBbl higher than the same weeks for March 2018 and March 2017, respectively.

SHIPPING

  • Weekly waterborne imports rose slightly week over week, according to customs manifests. The growth was due to an increase in PADD 1 imports, which rose to 819 MBbl/d. PADD 3 fell slightly to nearly 1.95 MMBbl/d, and PADD 5 was nearly 550 MBbl/d. Imports from Venezuela have almost disappeared from US shores, but we did see three imports last week. The Tarbet Spirit delivered 471 MBbl of Hamaca Blend to Chevron Pascagoula. London Star delivered 304 MBbl of Diluted Crude Oil (DCO) to Citgo Lake Charles from Aruba. Finally, Yasa Golden Bosphorus delivered 485 MBbl of DCO to PBF’s Chalmette refinery from Cul de Sac on St. Lucia.
  • With March in the rearview mirror, we can see that imports from Saudi Arabia did increase slightly from February but remain quite low. Saudi Aramco’s refinery Motiva Port Arthur did resume imports in March after importing virtually no Saudi crude in the first two months of the year.