The Week Ahead For Crude Oil, Gas and NGLs Markets – Jan 21, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – Jan 21, 2019

CRUDE OIL

  • US crude oil inventories declined 2.7 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories showed sizable gains of 7.5 MMBbl and 3.0 MMBbl, respectively. Total petroleum inventories posted a gain of 5.0 MMBbl. US crude oil production was estimated to be up 200 MBbl/d. Crude oil imports were down 319 MBbl/d, to an average of 7.5 MMBbl/d, versus the week prior.
  • While some bullish expectations remained in the market, last week started with price declines. For imports and exports during December, China reported its lowest level over the past two years, causing the declines. This news enhanced concerns about slowing economic growth and demand for petroleum products. These concerns were quickly reversed with news that China is planning to introduce policies to stabilize the slowing economy. On Friday, news of a Chinese proposal to reduce the trade imbalance between China and the US over the next six years resulted in WTI prices rising $1.78/Bbl and closing the week at the highest level since early December.
  • Other supportive elements continue in the market as Saudi Arabia’s energy minister Khalid Al-Falih announced that OPEC is on track to comply with the production cuts. He added that OPEC will have no need for an extraordinary meeting before the April meeting, where it will decide on output policy for the remainder of 2019.
  • The China announcements and perceived strength in the US economy had the US dollar gaining last week. The inverse relationship between the US dollar and WTI prices disappeared as both gained over the week.
  • Last week’s inventory release continued the trend of late, with crude oil declines but gains in total petroleum inventories. This reflects historic demand declines in the first quarter and may have a reduced impact on prices.
  • Prices in WTI settled the week up $2.21/Bbl, but the market internals were not as supportive to additional gains. WTI had a decrease in volume and continued declines in open interest as prices increased, testing resistance. A long-term bullish market needs to keep feeding the rallies with additional volume and open interest gains if the price run is to maintain its structural bias. The CFTC report is still not available, due to the government shutdown, so the market is blind to position structure among the sectors.
  • WTI prices are now challenging the high end of the range and an area of consolidation from last November and December between $49.00/Bbl and $54.55/Bbl. As the market digests production cuts, sanctions, and tariffs, the price range will be between $42/Bbl and $55/Bbl near-term. Once the market has a full understanding of these elements, the price will likely stabilize around $55/Bbl.

NATURAL GAS

  • Natural gas dry production gained 0.25 Bcf/d, while Canadian imports decreased 0.17 Bcf/d.
  • Res/Com demand increased 6.73 Bcf/d due to cooler temperatures. Power and Industrial demand also increased 1.86 Bcf/d and 0.49 Bcf/d, respectively. LNG exports declined 0.31 Bcf/d on the week, while Mexican exports were flat. Totals for the week show the market gaining 0.08 Bcf/d in supply while demand increased 9.14 Bcf/d.
  • The storage report last week came in with a withdrawal of 81 Bcf, well below historical withdrawals for the same week. The upcoming weeks should show more historical seasonal withdrawals.
  • The week started with a large price gap created from changes in the weather forecasts. Forecasted temperatures support stronger demand through the end of the month. As discussed previously, the market adjusts to changes in the forecasts, which occur throughout the day. An example of this intra-day volatility was seen on Friday, when the market opened lower and moved down, trying to close the gap from earlier in the week, only to reverse when the late-morning forecasts reaffirmed the cold weather.
  • With the CFTC not reporting the positions of trade sectors (due to the government shutdown), it is impossible to identify shifts within traders’ expectations and positions. Market internals had volume and open interest gaining (compared with the previous week) as prices rallied.
  • An early week run took prices up to the week’s high at $3.722/MMBtu. Prices then declined throughout the week, likely creating the low side of the trade range between $3.167/MMBtu and $3.201/MMBtu, barring any significant forecast changes. The high side of the range may be tested during the coming week, with a potential for a $0.55+/MMBtu trade range, as prices continue a period of potentially high volatility.
  • Trade has not reached a consensus about the outcome of the winter, with many traders concerned about ending storage inventories in March. This concern is buoyed by the flattening of production gains over the past two months. Other traders are not worried about the ending inventories. This struggle to assess the market is the reason that price action is so sensitive to the forecasts.

NGLs

  • Prices improved week over week across the board. Ethane was up $0.01 to $0.30, propane up $0.02 to $0.67, normal butane up $0.02 to $0.80, isobutane up less than $0.01 to $0.80, and natural gasoline up $0.01 to $1.06.
  • The Conway to Mont Belvieu ethane/propane mix spread shortened to about $0.09, with the differential as large as $0.15 in prior weeks.
  • US propane stocks decreased about 1.2 MMBbl in this past week’s inventories. Stocks now sit at 67.5 MMBbl, about 9.5 MMBbl higher than in the first week of 2018, but 4.7 MMBbl lower than in the first week of 2017.

Storage Levels Nearly Back to 2018 Levels, Price Volatility Continues

Storage Levels Nearly Back to 2018 Levels, Price Volatility Continues

Natural gas storage inventories decreased 81 Bcf for the week ending January 11, according to the EIA’s weekly report. This draw is slightly below market expectation, which was 84 Bcf. The largest draws of the week came from the Midwest and the East, which accounted for 34 Bcf and 31 Bcf, respectively.

Working gas storage inventories now sit at 2.533 Tcf, which is 77 Bcf below last year and 327 Bcf below the five-year average.

At the time of this writing, the February 2019 contract was trading ~$0.038 higher than yesterday’s close of $3.384/MMBtu. Prices were up nearly $0.15/MMBtu this morning before the release but could not hold and fell after the EIA release.

Temperature forecasts over the next two to three weeks have turned colder, causing a bullish sentiment in the market. For the first ten days of the new year, the prompt month contract was trading below $3/MMBtu. However, with the forecast showing a prolonged cold shot, prices have moved back into the $3.40/MMBtu to $3.50/MMBtu range.

Mild weather and production growth (up year-over-year ~8 Bcf/d) has made it possible for storage levels to close the gap on last year’s level and the five-year average. Despite these bearish factors, the market remains uncomfortable with where the storage level sits given the current forecast. Going forward, expect volatility to remain, and price movement to be reflective of changes in the weather forecasts.

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 January 17, 2019.

Supply:

  • Dry gas production increased 0.63 Bcf/d on the week. The increase comes from the South Central/Gulf region (+0.36 Bcf/d) and the Mountain region (+0.36 Bcf/d), both rebounding off lower production the past couple of weeks.
  • Canadian imports were relatively flat week-over-week.

Demand:

  • Domestic natural gas demand increased 12.00 Bcf/d week-over-week. Cold temperatures had Res/Com demand up 9.23 Bcf/d on the week. Power and Industrial demand also increased, adding 2.02 Bcf/d and 0.76 Bcf/d, respectively.
  • LNG exports decreased 0.28 Bcf/d, while Mexican exports were down 0.01 Bcf/d week-over-week.

Total supply is up 0.63 Bcf/d and total demand increased 12.04 Bcf/d week-over-week. With the increase in demand over supply, expect the EIA to report a stronger draw next week. The ICE Financial Weekly Index report is currently expecting a draw of 155 Bcf for next week. Last year, the same week was a draw of 288 Bcf, while the five-year average is a draw of 163 Bcf.

Prices Drop With The Inventory Build And Concerns On Global Economic Growth

Prices Drop With The Inventory Build And Concerns On Global Economic Growth

U.S. crude oil stocks posted a decrease of 2.7 MMBbl from last week. Gasoline and distillate inventories increased of 7.5 MMBbl and 3.0 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 0.65 MMBbl alongside gasoline and distillate builds of 6.0 MMBbl and 3.2 MMBbl, respectively. Analysts were expecting a crude oil withdrawal of 2.5 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 5.0 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

U.S. crude oil production was estimated to be up 200 MBbl/d from last week, per the EIA. Crude oil imports were down 319 MBbl/d last week, to an average of 7.5 MMBbl/d. Refinery inputs averaged 17.2 MMBbl/d (343 MBbl/d less than last week), leading to a utilization rate of 94.6%. The total petroleum stocks build, increasing US production, and global economic growth concerns are pressuring prices, while optimism around OPEC-led supply cuts are giving some support to prices. Prompt-month WTI was trading down $0.45/Bbl, at $51.66/Bbl at the time of writing.

Prices have been trading in the $50/Bbl to $52/Bbl range last week. Optimism from OPEC-led supply cuts and talks between US and China to resolve the trade disputes have helped prices recover from their recent collapse and continue to support prices. On Monday, prices fell nearly 2 percent, with China reporting import and export declines (most in two years) in December, which increased the fears of slowing economic growth and demand for crude-related products. However, bullish news came in quickly and helped WTI rise about 3 percent on Tuesday following news that China is planning to introduce policies to stabilize the slowing economy by fiscal stimulus.

Although fundamentals still point to a supply overhang, the recent OPEC production numbers and the group’s willingness to lower supply levels have increased the bullish sentiment. OPEC production fell nearly 0.6 MMBbl/d in December ahead of the official start date of supply cuts, which was January 2019. OPEC, with the aid of non-OPEC countries, led by Russia, is fully committed to execute the 1.2 MMBbl/d output cut to prevent the supply glut from continuing and to bring balance to the market. Saudi Arabia’s Energy Minister Khalid al-Falih’s comments also gave some support to prices, as he said that OPEC is on track with its compliance and he believes that the market will balance soon; he also added that he sees no need for an extraordinary OPEC meeting before April, which is when the group will decide its output policy for the remainder of 2019. On the bearish side, US-China trade disputes, although having the possibility of being resolved, are still pressuring prices. The US and China will have to decide by the March 2 deadline what the fate of trade disputes will be. The trade talks may support bearish sentiment near term, due to concerning reports by China showing large declines in exports and a lower economic growth projection for 2019, while the market awaits news about the trade dispute. On the U.S. side, the positive jobs number has somewhat calmed worries about an impending recession for the time being; however, increasing US production, is still pressuring prices.

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. 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 last week, up $3.63/Bbl after testing the highs from early December at $53.27/Bbl. Market internals had volume increasing during the rally. However, open interest declined during the week. If crude is to return to its aggressive price structure, there will need to be gains in open interest during the rallies. Unfortunately, the CFTC report is still not available, due to the government shutdown, leaving the market blind as to position structure among the sectors. Prices are now challenging an area of consolidation from last November and December between $49/Bbl and $54.55/Bbl. The rally off the lows has established a wider range of between $42/Bbl and $53/Bbl, which will likely hold the trade in the near term. The impacts of the production cuts and the changing demand dynamics (both seasonally and geopolitically) will dictate the direction of prices out of the range. Extensions downward could be driven by further stock builds and bearish news around economic growth. Extensions upward will be met with selling due to the rising stock numbers and would require a surprise reversal of the overhang in the first several months of the year. After the market fully assesses the fundamentals, longer-term prices will stabilize near the $55/Bbl levels.

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The Week Ahead For Crude Oil, Gas and NGLs Markets – Jan 14, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – Jan 14, 2019

CRUDE OIL

  • US crude oil inventories declined 1.7 MMBbl last week, according to the weekly EIA report. Both the gasoline and distillate inventories showed significant increases for the week, gaining 8.1 MMBbl and 10.6 MMBbl, respectively. With these significant gains, total petroleum inventories showed an increase of 13.3 MMBbl. US crude oil production was flat on the week. Crude oil imports were down 454 MBbl/d to an average of 7.8 MMBbl/d versus the week prior.
  • Optimism returned to the WTI trade last week with expectations of a possible resolution to the US-China trade dispute and output declines among the major producers. Saudi Arabia’s energy minister, Khalid Al-Falih, announced on Wednesday that producers reduced output by 600 MBbl/d in December. While some skepticism remains regarding Russia’s commitment to the production cuts, traders looked to the robust numbers on the US economy from the jobs report and the extension of negotiations between the US and China as driving forces behind the bullish bias.
  • Should the perception of strength in equities and the general economy continue, it is likely that the WTI market will find support. As discussed a few weeks ago, the inverse relationship between crude and the US dollar had disappeared during the collapse of crude last fall. However, since the recent lows in crude were established, the inverse relationship to the dollar has re-emerged. As seen in the chart below, WTI has maintained a slow but solid gain, while the dollar index has declined with crude strength. Should the dollar continue to decline, expect additional support for WTI.

  • The inventory release last week highlighted trends that may continue for the coming weeks, with declines in crude supplies being offset by gains in gasoline and distillate inventories. Historically, demand for products is weakest during the first quarter. Therefore, the impact of production cuts may not be recognized in the inventory numbers immediately. An element of the bearish trade that is not likely to vacate the market immediately is the continued US growth, which will continue to hang over the market.
  • Prices in WTI settled the week up $3.63/Bbl after testing the highs from early December at $53.27/Bbl. Market internals had volume increasing during the rally. However, open interest declined during the week. If crude is to return to its aggressive price structure, there will need to be gains in open interest during the rallies. Unfortunately, the CFTC report is still not available, due to the government shutdown, leaving the market blind as to position structure among the sectors.
  • Prices are now challenging an area of consolidation from last November and December between $49.00/Bbl and $54.55/Bbl. The rally off the lows has established a wider range of between $42/Bbl and $53/Bbl, which will likely hold the trade in the near term. After the market fully assesses the fundamentals, longer-term prices will stabilize near the top end of the range.

NATURAL GAS

  • Natural gas dry production gained 0.29 Bcf/d, while Canadian imports increased 0.60 Bcf/d.
  • Mild temperatures caused Res/Com demand to drop 1.29 Bcf/d, while Power demand jumped 0.86 Bcf/d and Industrial demand decreased 0.12 Bcf/d. LNG exports declined 0.13 Bcf/d on the week, while Mexican exports gained 0.60 Bcf/d. Total supply gained 0.88 Bcf/d, while total demand fell 0.09 Bcf/d.
  • Last week’s storage report came in with a withdrawal of 91 Bcf, with a reclassification of 4 Bcf from working gas to base gas in the mountain region. This implies a flow of 87 Bcf, which is well below historical averages for the same week.
  • Prices started the week within the recent range as traders waited for the next change to the weather forecast. Prices tested support at $2.91 and showed gains through the week. On Friday, prices closed the open session at the highs and continued higher in the late market. Last week showed supportive internals as volume and open interest gained as prices rose. Expect continued strength as the market opens this week. With the CFTC not reporting the positions of trade sectors (due to the government shutdown), it is impossible to identify shifts within traders’ expectations and positions.
  • The market continues to struggle with the current storage scenario. One side remains concerned about ending storage inventories in March; the other side is convinced inventories are not an issue with current production. With this struggle in place, there is potential for significant volatility associated with forecast changes. That volatility became evident this morning, with a large price jump in response to a forecast of colder weather in the coming three weeks. Should the forecast change or the cold temperatures last longer or be lower than expected, prices may be more volatile and retrace a significant portion of the losses from December.
  • Prices opened at the same general level at which they closed on December 28, before falling lower on New Year’s Eve. This has developed an “island” where there is no trade between $3.166 and $3.278. This area should be considered support this week, and prices may try to close this gap depending on the duration and severity of the forecast modifications. Rallies will have numerous targets from $3.57 up to $3.86.

NGLs

  • Last week, ethane prices were down $0.01 from the week prior to $0.29. Propane, normal butane, and natural gasoline were up $0.02, $0.02, and $0.11, respectively, to $0.65, $0.78, and $1.05. Isobutane was flat at $0.80.
  • The Conway to Mont Belvieu ethane/propane mix spread has widened to $0.16, a level not seen since early November 2018. The largest differential in 2018 was $0.35. The region’s large discount to Mont Belvieu is due to maxed-out pipeline capacity to the coast.
  • US propane stocks decreased about 2 MMBbl in this past week’s inventories. Stocks now sit at 68.7 MMBbl, about 7 MMBbl higher than in the first week of 2018, but 11 MMBbl lower than in the first week of 2017.

Storage Draw Beats Market Expectations

Storage Draw Beats Market Expectations

Natural gas storage inventories decreased 91 Bcf for the week ending January 4, according to the EIA’s weekly report. However, this draw includes a reclassification of 4 Bcf in working gas stocks in the Mountain region, implying a flow change of 87 Bcf. Regardless of looking at the net or implied flow, this week’s draw was above market expectations, which were 78 Bcf. The largest draw of the week came from the Midwest, which accounted for 35 Bcf.

Working gas storage inventories now sit at 2.614 Tcf, which is 204 Bcf below last year and 464 Bcf below the five-year average.

At the time of this writing, the February 2019 contract was trading ~$0.05 higher than yesterday’s close of $2.984/MMBtu.

With moderate weather the past few weeks, storage inventories have been able to climb their way back to 204 Bcf below last year’s levels. The key driver to price volatility has been, and will remain to be, weather forecast changes. Should weather forecasts remain moderate to above-average, expect prices to remain at or below $3/MMBtu. However, should forecasts change to show below-average temperatures, expect prices to show some volatility and be above $3/MMBtu.

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 January 10, 2019.

Supply

  • Dry gas production decreased 0.16 Bcf/d on the week. Most of the decrease can be attributed to the Mountain region (-0.32 Bcf/d), where Wyoming dropped 0.28 Bcf/d. A slight offset to the drop in the Mountain region came in the South Central/GoM region, which increased 0.12 Bcf/d.
  • Canadian imports increased 0.70 Bcf/d week-over-week. This change is mainly due to additional receipts in the Northeast.

Demand

  • Domestic natural gas demand decreased 13.52 Bcf/d week-over-week. Above average temperatures had Res/Com demand down 9.38 Bcf/d on the week. Power and Industrial demand also decreased, falling 0.27 Bcf/d and 3.87 Bcf/d, respectively.
  • LNG exports decreased 0.05 Bcf/d, while Mexican exports increased 0.74 Bcf/d. The increase in Mexican exports is mainly due to deliveries out of South Texas onto the Sistrangas system in Tamaulipas, Mexico.

Total supply is up 0.54 Bcf/d and total demand decreased 12.94 Bcf/d week-over-week. With the increase in supply and the decrease in demand, expect the EIA to report a weaker draw next week. The ICE Financial Weekly Index report is currently expecting a draw of 75 Bcf for next week. Last year, the same week was a draw of 183 Bcf, while the five-year average is a draw of 222 Bcf.

Prices Increase With The US-China Meeting Ending Positively In Resolving Trade Disputes Despite Bearish Inventory Report

Prices Increase With The US-China Meeting Ending Positively In Resolving Trade Disputes Despite Bearish Inventory Report

US crude oil stocks posted a decrease of 1.7 MMBbl last week. Gasoline and distillate inventories both showed sizeable increases of 8.1 MMBbl and 10.6 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 6.1 MMBbl alongside a gasoline build of 5.5 MMBbl and a distillate build of 10.2 MMBbl. Analysts were expecting a crude oil withdrawal of 3.3 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 13.3 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production remained the same last week, per the EIA. Crude oil imports were up 454 MBbl/d last week, to an average of 7.8 MMBbl/d. Refinery inputs averaged 17.6 MMBbl/d (194 MBbl/d less than last week), leading to a utilization rate of 96.1%. Trade talks between the US and China concluding with positive sentiment and recent OPEC supply cuts are lifting prices as WTI broke through the $50/Bbl mark for the first time in 2019; however, large increases in total inventories are pressuring prices. Prompt-month WTI was trading up $2.45/Bbl, at $52.23/Bbl at the time of writing.

Prices had been rising for the last couple of weeks, recovering from crashing to their lows for more than 18 months. The supply overhang and concerns about slowing economic growth and demand for oil products caused a collapse in prices of more than 40 percent between October and late December. In the last couple of weeks, prices have gotten support from initial evidence of Saudi Arabia and OPEC keeping their promise to slash supply, as well as US-China talks in Beijing extending to an unscheduled third day and ending with hopes that the world’s two largest economies would bring a halt to and potentially solve the trade disputes.

Bullish sentiment increased further this week with WTI reaching above $50/Bbl for the first time in 2019. The increase in prices was due to Saudi Arabia already starting to reduce supply levels drastically and reducing shipments, mainly to the US. Saudi Arabia’s efforts in reducing supply erased some of the skepticism as to whether OPEC would stay loyal to their quotas. Russia’s efforts in reducing supply as one of the main non-OPEC producers in the supply cut deal increased the bullish sentiment further. The other catalyst that is giving strong support to prices is the highly anticipated trade talks between the US and China that started on Monday. The meeting between the world’s two largest economies ended today with positive news and hopes that a trade war between the two countries could be avoided thus not impacting the global economy and oil demand moving forward. Officials from the countries said details around the meeting will be released soon. On the US side, the positive jobs number has somewhat calmed worries about an impending recession for the time being; however, increasing US production is still supporting the bearish sentiment.

The rally in WTI due to positive news around the US-China trade talks took prices over $50/Bbl this week. The low end of this new range seems to be established at the June 2017 low of $42/Bbl. Drillinginfo expects prices to remain volatile within a $40-$50/Bbl window over the next month as the market tries to make sense of the fundamentals. The impacts of the production cuts and the changing demand dynamics (both seasonally and geopolitically) will dictate the direction of prices out of the range. Extensions downward could be driven by further stock builds like the one this week. Extensions upward will be met with selling due to the stock number this week and would require a surprise reversal of the overhang in the first several months of the year.

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