The Week Ahead For Crude Oil, Gas and NGLs Markets – Dec. 3, 2018

The Week Ahead For Crude Oil, Gas and NGLs Markets – Dec. 3, 2018

CRUDE OIL

  • US crude oil inventories increased 3.6 MMBbl, according to the weekly EIA report. Gasoline inventories decreased 0.8 MMBbl, and distillate inventories increased 3.45 MMBbl. Total petroleum inventories showed an increase of 2.4 MMBbl. US crude oil production remained unchanged from the prior week. Crude oil imports were up 608 MBbl/d to an average of 8.2 MMBbl/d versus the week prior.
  • Prices may have established a short-term bottom to the trade, as prices closed the week with a slight gain for the first time in the past eight weeks (closing the week up $0.53/Bbl). The market received some bullish news over the weekend. Alberta announced producers would be forced to cut output by 325 MBbl/d to deal with bottlenecks, and the US and China came to a temporary truce over tariffs, while OPEC is still expected to determine supply cuts during a December 6 meeting. Qatar announced that it is leaving OPEC in January due to Saudi Arabia’s dominance of the group.
  • The waivers granted to eight countries, allowing them to continue to work with Iran for crude, were established for six months. The market is now one month closer to expiration of those waivers, potentially bringing the oversupplied market more into balance.
  • Last week provided two CFTC reports due to the Thanksgiving holiday. Combining the two reports shows the managed-money sector reducing long positions by 22,578 contracts and short positions decreasing 16,341 contracts. These position changes infer additional length liquidation and that the speculative short sector took some profits as the market extended into extreme oversold internals.
  • Even with the small weekly rise in prices, the market remains oversold. The close on Friday has prices beyond two standard deviations below the 20-week moving average. The weekly momentum indicator is oversold to levels not seen since the declines of August 2015. Open interest in the WTI market continues to decline, while the volume showed a slight gain on the week.
  • The market is due for a countertrend rally to alleviate the pressure from the seven-week liquidation. Should last week’s gains and the bullish news over the weekend provide a base for a countertrend rally, price action should become volatile and could take prices above last week’s high at $52.56/Bbl and potentially up to $57.44/Bbl.
  • Drillinginfo continues to believe the long-term range for prices will occur between $60/Bbl and $65/Bbl for an extended period. However, the market may trade within the range of $51-$61 in the near term as the market assesses the potential supply changes coming up.

NATURAL GAS

  • Dry gas production increased last week 0.60 Bcf/d, with most of the gains from the Mountain, Gulf/Southern, and Northeast regions. Canadian imports decreased 0.15 Bcf/d.
  • Moderating weather last week brought a decline in Res/Com demand, which fell 1.71 Bcf/d. Power demand increased 1.84 Bcf/d, while Industrial demand decreased 0.39 Bcf/d. LNG exports increased slightly, up 0.05 Bcf/d, and Mexican exports increased 0.06 Bcf/d. Totals for the week show supply up 0.45 Bcf/d and demand down 0.12 Bcf/d.
  • The storage report last week showed a withdrawal of 59 Bcf. The release sent prices immediately down to $4.452 before buying returned to the market and erased the losses provided by the report.
  • The CFTC report dated November 20 was released last Monday and contained the position change that was expected, but in an odd way. Between November 13 and 20, over 100,000 contracts held by “spread” traders were liquidated. An additional 39,355 short positions from the “other reportable” market segment were forced to cover. The combination of short covering and spread liquidation by the speculative sector explains the historic decline of open interest and the drastic rise in prices on November 14. Another interesting element of the CFTC release (dated November 20) was the reduction of the managed-money (speculator) long sector, which took profits and reduced positions by 41,243 contracts as prices blew out to $4.92 during the short-covering crises.
  • Last week, the CFTC report (dated November 27) showed every speculative and merchant market sector reducing positions during the week. Both the managed-money long and short positions were reduced by 5,851 contracts and 6,451 contracts, respectively.
  • The net result of the position liquidation and short covering has left the market over $4.00. Last week, prices challenged support at $4.00 briefly on Monday before resuming the rally during the expiration of the December contract, sending prices to $4.80. The largest contributor to the price volatility is the midterm weather forecast. Warming forecasts will send prices to support around $4.00, while extensions of below-normal forecasts will lend support to test the high end of the range around $4.80.

NGLs

  • Energy Transfer announced that its subsidiary Sunoco Pipeline launched an open season for the transportation of propane+ from the Marcellus/Utica to Marcus Hook on the Mariner East system. This likely has to do with the dynamics of Mariner East 2 commissioning, as space might have been freed up on the existing system, or shippers may have rescinded commitments because of the delays. Nonetheless, this could be a good sign that the ME2 in-service is nearing completion, which will allow increased exports and higher relative pricing in the Northeast and the US.
  • Week over week, ethane, propane, and natural gasoline are up 6%, 3%, and 3%, respectively, to 32, 71, and 69 cpg. Normal and isobutane are down 3% and 5%, respectively, to 74 and 82 cpg. The Conway-Mont Belvieu EP mix spread has shrunk to 7 cents, its smallest difference between indices since February this year.
  • The EIA reported a draw of 0.6 MMBbl in this past week’s inventories. Propane stocks now sit at 81.1 MMBbl, approximately 7.4 MMBbl higher than this time last year and 2.6 MMBbl lower than the five-year average.

Gas Storage Draw Below Expectations, Prices Remain Volatile

Gas Storage Draw Below Expectations, Prices Remain Volatile

Natural gas storage inventories decreased 59 Bcf for the week ending November 23, according to the EIA’s weekly report. This week’s draw is below market expectations, which were 68 Bcf. The East and Midwest regions accounted for a majority of the draw, accounting for 46 Bcf of the 59 Bcf.

At the time of writing, the January 2019 contract was trading at $4.516/MMBtu, ~$0.183/MMBtu below the January 2019 close of $4.699/MMBtu yesterday. A majority of this decrease occurred before the storage report release, but declines continued after the release. The December 2018 contract expired yesterday at $4.715/MMBtu.

Working gas storage inventories now sit at 3.054 Tcf, which is 644 Bcf below last year and 720 Bcf below the five-year average.

The December 2018 contract expired yesterday, and traded in a wide range in November, ranging from $3.237/MMBtu to $4.837/MMBtu. The December 2018 contract was very volatile during November, with day-over-day closing changes ranging as high as $0.799/MMBtu and averaging over $0.21/MMBtu for November. This volatility mainly comes from the fundamentals: inventory levels, weather forecasts, supply, and demand. As we continue through the winter season, these fundamentals will play a key role in price levels, and volatility is expected to continue.

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 November 29, 2018.

Supply:

  • Dry gas production increased 0.58 Bcf/d on the week. This increase can mainly be attributed to the Northeast (+0.18 Bcf/d). Smaller increases also came from the Bakken (+0.09 Bcf/d) and the Southwest Mountain region (+0.08 Bcf/d), mainly New Mexico.
  • Canadian imports were relatively flat week-over-week.

Demand:

  • Domestic natural gas demand decreased 1.1 Bcf/d week-over-week. Power demand increased 0.20 Bcf/d, but decreases in Res/Com and Industrial demand outpaced the gains in Power, falling 0.85 Bcf/d and 0.45 Bcf/d, respectively.
  • LNG exports decreased 0.03 Bcf/d week-over-week, while Mexican exports increased by 0.06 Bcf/d.

Total supply is up 0.58 Bcf/d, and total demand is down 1.00 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 60 Bcf for next week. Last year for the same week was an injection of 2 Bcf, while the five-year average is a draw of 66 Bcf.

Prices Are Further Pressured With Crude Oil And Product Inventory Builds

Prices Are Further Pressured With Crude Oil And Product Inventory Builds

US crude oil stocks posted an increase of 3.6 MMBbl last week. Gasoline inventories decreased 0.8 MMBbl while distillate inventories increased 2.6 MMBbl. Yesterday afternoon, API reported a crude oil build of 3.45 MMBbl, alongside a gasoline draw of 2.6 MMBbl and a distillate build of 1.2 MMBbl. Analysts were expecting a smaller crude oil build of 0.77 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 2.4 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 EIA. Crude oil imports were up 608 MBbl/d last week, to an average of 8.2 MMBbl/d. Refinery inputs averaged 17.6 MMBbl/d (698 MBbl/d more than last week), leading to a utilization rate of 95.6%. The report is bearish due crude oil and total petroleum stocks build. Prices are being pressured by the inventory builds, uncertainty about demand, and supply overhang, while the anticipation on positive results from the upcoming G20 and OPEC meetings is giving some support to prices. Prompt-month WTI was trading down $0.72/Bbl, at $50.84/Bbl at the time of writing.

Prices hit their lowest since October 2017 on Friday as WTI fell nearly 8% percent and touched $50.15/Bbl. Prices rose slightly on Monday following the stock market rally and due to the upcoming G20 meeting in Argentina as well as the next OPEC meeting in Vienna; however, they are still trading near their lowest levels for almost a year.

Ever since reaching their four-year highs in early October, prices have been on a downward spiral and have fallen nearly 33% in just eight weeks, as market sentiment shifted from bullish to bearish due to rising supply levels and weakening economic and demand growth projections, which pointed to a supply glut at the end of 2018 and moving into 2019. Rising supply levels were largely due to OPEC (led by Saudi Arabia) and Russia increasing production in anticipation of the Iranian sanctions and the US reaching historically high production levels. The granting of waivers to eight countries for Iranian sanctions by the US government caught everyone by surprise and was the final blow to prices.

The market sentiment remains bearish due to fears of another large supply overhang, as the world’s top three producers (Russia, US, and Saudi Arabia) are all producing at record levels and demand growth projections remain weak. Prices could see further pressure as supply levels are still rising; Saudi Arabia production in November is projected to be above 11 MMBbl/d, which would be an all-time high for the Kingdom. As things stand, prices will be pressured by fundamental supply/demand levels, which all point to a supply overhang. The upcoming G20 meeting in Argentina later this week; and the OPEC meeting in Vienna on December 6 will give some support to prices, as the market anticipates some resolutions in US-China trade disputes and the OPEC supply cut talks in 2019 to mitigate the supply overhang.

Although OPEC and Saudi Arabia hinted that they are willing to cut production levels to bring balance to the market, the skepticism about whether the Kingdom can accomplish the supply cuts is increasing with Russia’s stance on joining the supply cuts and US President Donald Trump’s pressure on Saudi Arabia to keep production levels high in order to maintain lower prices. President Trump has been very vocal on Twitter about his willingness to keep oil prices low, and he wants Saudi Arabia and OPEC to steer away from any production curtailments. Under normal circumstances the headlines around OPEC and Saudi Arabia discussing production cuts would have increased prices. However, President Trump’s decision to refrain from acting against Saudi Arabia over the assassination of the journalist Jamal Khashoggi gives him the leverage to force the Kingdom into keeping prices low and not reducing supply. Saudi Arabia seems to be cornered ahead of the OPEC meeting, with President Trump’s leverage on the assassination and potentially using it against them if they decide to reduce supply.

The extensions downward have taken prices well below support. On Friday, prices were three standard deviations below the 20-week moving average. This negative pressure also took momentum indicators into extreme oversold levels not seen since the price collapse in August 2015. History confirms that when WTI extends into extreme levels, a countertrade is likely to occur in the near term. If additional declines materialize, expect the lows from October 2017 ($49.18/Bbl) and August 2017 ($45.58/Bbl) to find buyers. Should a countertrade materialize, last week’s high ($57.44/Bbl), up to the previous week’s high ($61.28/Bbl), will limit gains. Drillinginfo continues to believe the long-term range for prices will occur between $60/Bbl and $65/Bbl for an extended period, with the near-term market trading within the $51-$61/Bbl range as the market waits to hear news from the next OPEC meeting.

Petroleum Stocks Chart

The Weather Outside Was Frightful, Accurate Load Forecasts Deliver

The Weather Outside Was Frightful, Accurate Load Forecasts Deliver

Thanks to Drillinginfo’s PRT next-day load forecasts, utilities, power marketers, and other PRT users were prepared for the frigid temperatures that swept through Texas a few weeks ago. The cold snap provided an opportunity to demonstrate how machine learning technology can deliver accurate, actionable information. When it comes to load forecasting, accuracy matters.

PRT’s next-day load forecasts vastly outperformed the Electric Reliability Council of Texas (ERCOT) Independent System Operators’ (ISO) own forecasts.

Rob Allerman, Director of Analytics at Drillinginfo, first uncovered a bullish load trend published by ERCOT on Nov. 7 and called out ERCOT’s over-projection for the cold snap on Monday, Nov. 12, in the daily reports. Not only did this trend continue, but the bullish sentiment intensified into the week. PRT’s adaptive machine learning stayed on track while Allerman’s watchful eye kept PRT users informed as Texas entered its first cold snap of the season.

From Nov. 12 to Nov. 15, PRT’s peak mean absolute percentage error (MAPE) was less than 2 percent, while ERCOT came in more than two percentage points higher at 4.26 percent.

The Week Ahead For Crude Oil, Gas and NGLs Markets – Nov. 26, 2018

The Week Ahead For Crude Oil, Gas and NGLs Markets – Nov. 26, 2018

CRUDE OIL

  • US crude oil inventories increased 4.9 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories decreased 1.3 MMBbl and 0.1 MMBbl, respectively. Total petroleum inventories declined 0.2 MMBbl. US crude oil production was flat from the previous week. Crude oil imports were up 102 MBbl/d versus the week prior, to an average of 7.6 MMBbl/d.
  • Prices continued declines, with a lower close for the seventh consecutive week. The WTI market has capitulated to bearish territory due to increasing supply from OPEC, Russia, and the US coupled with global demand concerns. The reluctance from the Trump administration to address the death of journalist Jamal Khashoggi removed concerns that Saudi Arabia would consider politically driven supply cuts.
  • Russia’s oil minister, Alexander Novak, suggested it was too early to decide on supply cuts, and OPEC will discuss potential supply cuts at the upcoming Vienna meeting on December 6. The fact that prices seemed to ignore this potential and continue declines signals a general bearish market sentiment.
  • The latest CFTC report is delayed due to the holiday. Expect additional liquidation by the speculative longs and additions to the speculative shorts.
  • The extensions downward have taken prices well below support. On Friday, prices were three standard deviations below the 20-week moving average. This negative pressure also took momentum indicators into extreme oversold levels not seen since the price collapse in August 2015. History confirms that when WTI extends into extreme levels, a countertrade is likely to occur in the near term. If additional declines materialize, expect the lows from October 2017 ($49.18/Bbl) and August 2017 ($45.58/Bbl) to find buyers. Should a countertrade materialize, last week’s high ($57.44/Bbl), up to the previous week’s high ($61.28/Bbl), will limit gains. Drillinginfo continues to believe the long-term range for prices will occur between $60 and $65 for an extended period, with the near-term market trading within the $51-$61/Bbl range.

NATURAL GAS

  • Dry production increased 0.43 Bcf/d last week, with most of the gains from the Gulf and Southern regions. Canadian imports increased 0.07 Bcf/d.
  • Moderating weather last week brought declines in the primary market sectors. Res/Com, Power, and Industrial demand fell 2.18 Bcf/d, 4.77 Bcf/d, and 0.19 Bcf/d, respectively. LNG exports were flat on the week, while Mexican exports decreased 0.09 Bcf/d. Total supply was up 0.50 Bcf/d, while total demand decreased 7.84 Bcf/d.
  • The storage report last week came in with a withdrawal of 134 Bcf. The release sent prices up to $4.75 but fell short of setting the high for the week ($4.86). By the end of the day, prices retreated below the price level when the report was released.
  • With the CFTC report delayed due to the holiday, the accuracy of the reports of hedge funds being caught short in natural gas and long crude, which were published in the prior week, cannot be verified. Last week’s action promptly tested the higher side of recent trade ($4.779) only to fall and retrace a majority of the gains. Trade settled into a range between $4.864 and $4.117 for the week. The consolidative action relieved some of the extremely overbought readings in the momentum indicators, but these indicators remain overbought by historical standards.
  • Trade, this time of the year, revolves around the weather forecasts, as traders are keenly aware of the supply/demand balance. Should the longer-range forecasts moderate from the recent cold weather, then additional pressure on prices will continue. Should they continue delivering additional below-normal temperatures in the Northeast and Midcon regions, price strength will continue.
  • With this fundamental relationship as a background, this week’s price action should continue the volatile trade of the last few weeks, especially with the expiration of the December contract on Wednesday. Expect declines to $3.90 to be met with buying, initially, and the highs from $4.30 to $4.56 to be sold.

NGLs

  • Earlier this month, Energy Transfer and their subsidiary Lone Star announced plans to construct a fractionation facility at Mont Belvieu, as well as to expand the Lone Star Express Pipeline NGL takeaway capacity out of the Permian. The 150 MBbl/d fractionator is scheduled to be operational Q1’20 and will be Lone Star’s seventh frac. The company’s fifth frac was placed in service in July, and their sixth is expected to be placed in service in Q1’19.
  • The EIA reported a draw of 2.0 MMBbl in this past week’s inventories. Propane stocks now sit at 81.8 MMBbl, approximately 7.1 MMBbl higher than this time last year and 2.2 MMBbl lower than the five-year average.
First Draw of the Season Exceeds Expectations

First Draw of the Season Exceeds Expectations

Natural gas storage inventories decreased 134 Bcf for the week ending November 16, according to the EIA’s weekly report. This week’s draw is above market expectations, which were 119 Bcf. The East, Midwest, and South Central regions were the bulk of the draw, accounting for 119 Bcf of the 134 Bcf.

At the time of writing, the December 2018 contract was trading at $4.669/MMBtu, ~$0.146/MMBtu above the December 2018 close of $4.523 yesterday.

Working gas storage inventories now sit at 3.113 Tcf, which is 620 Bcf below last year and 710 Bcf below the five-year average.

The December 2018 contract has traded in a wide range in November, from $3.237/MMBtu to $4.837/MMBtu.
From November 1 through November 12, prices were trading under the $4/MMBtu mark. However, the trend since then has sent prices above $4/MMBtu, with prices trading in a range of $4.038/MMBtu to $4.837/MMBtu since November 13. With storage inventories at a record low and early winter cold temperatures, prices are likely to continue to bounce around for the remainder of the winter season.

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 November 21, 2018.

Supply:

  • Dry gas production decreased 0.05 Bcf/d on the week. The relatively flat total was brought about by offsetting positions in the Mountain region (+0.13 Bcf/d) and the South Central region (-0.16 Bcf/d).
  • Canadian imports increased 0.15 Bcf/d for the week.

Demand:

  • Domestic natural gas demand decreased 3.20 Bcf/d week-over-week. The big mover was Power demand, which decreased 2.24 Bcf/d. Res/Com and Industrial demand decreased 0.61 Bcf/d and 0.36 Bcf/d, respectively.
  • LNG exports increased 0.11 Bcf/d week-over-week, while Mexican exports decreased by 0.09 Bcf/d.

Total supply is up 0.11 Bcf/d, and total demand is down 3.30 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 65 Bcf for next week. Last year for the same week was a draw of 33 Bcf, while the five-year average is a draw of 34 Bcf.