US crude oil inventories increased by 1.5 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 0.5 MMBbl and 0.9 MMBbl respectively. The most important number to keep an eye on, total petroleum inventories, increased by 0.3 MMBbl. US production increased 31 MBbl/d and imports were up 303 MBbl/d to an average of 7.6 MMBbl/d versus the previous week. The EIA data release was bearish for WTI prices, as crude oil inventories grew along with US production.
Earlier in the week, a Reuters survey showed compliance by OPEC members carrying quotas had reached 94% in February. Per the survey, Saudi Arabia continues to drive the high compliance rate, as they have reached a 744 MBbl/d cut in February, much higher than the promised 486 MBbl/d. On the other hand, Nigeria, one of two non-quota carrying OPEC members, increased production by 120 MBbl/d from the month prior to 1.65 MMBbl/d. Total OPEC production was down 20 MBbl/d from January to 32.19 MMBbl/d.
OPEC is set to release its monthly crude oil report on March 14th followed by the IEA’s release on March 15th. The IEA report will shed light on the global supply & demand situation in February. According to the IEA’s January data release, there is currently a 650 MBbl/d supply deficit. However, looking at the level of OECD stocks, even if the deficit was sustained for the whole year, it won’t facilitate a normalization of inventories back to average levels from before the price crash by year end.
The high inventory levels mean that, at the very least, OPEC would have to extend the quotas past the originally agreed upon six months to continue to facilitate stock withdrawals. Even a decision to extend the quotas may not be enough, as US, Libyan, and Nigerian production potential continues to worry on the supply side. Drillinginfo also continues to monitor the ~50 MMBbl/d of non-OPEC & non-US production, which will continue to decline and play its role in the normalization of inventories through lower supply.
Drillinginfo continues to expect the WTI range ($50-55/Bbl) to hold in the near term. However, the inability of prices to break out of the range on bullish compliance news, continues to signal that the market is having issues with the production potential of the US. Last week’s price action did little to settle those fears as prices traded below many of the commonly watched daily averages. The rebound on Friday allowed prices to close the week back above all except the 20-day moving average. Continuous daily closes below the other averages (around $53.00/Bbl) will provide the market additional reasons to cover some of the record length from the speculative community. According to the most recent CFTC data, the speculative sector reduced the collective length by 19,678 contracts and added an additional 17,048 contracts to the short positions. If this “flipping” of positions (declining length and adding shorts) continues, expect the February lows at $51.22/Bbl and the January lows at $50.71/Bbl to become targets. Any weekly close below the 200-day moving average (currently at $48.61/Bbl) will have a far more deleterious impact to future price movements.
Domestic natural gas production was basically flat last week, however, Canadian supplies declined 180 MMcf/d last week. The increase in rig count over the last few months has not impacted gas supply, with production levels remaining flat in the 70-71 Bcf/d.
On the demand side, last week’s cool down in the Midwest and Northeast brought Res/Com levels up 7.7 Bcf/d on average over the week. Power demand was also up 2.0 Bcf/d as temperatures in the south (MS and AL) climbed into the mid 70’s and Florida had several days in the mid 80’s which may have introduced HDD’s for the first time this spring. LNG exports were down significantly (770 MMcf/d) due to commissioning of Train 3 on Sabine Pass terminal, which is expected to be fully online later this month. These declines are similar to the commissioning effects with Trains 1 and 2 before they came online.
The storage report last week came in with a small injection of 7 Bcf. This is clearly a bearish release for late February but the immediate price decline on its release was totally erased as the day progressed. When markets do not extend declines (much less hold the day’s declines) on bearish news then the market may be signaling a change in directional assessment. Longer-term forecasts indicate expectations for the rest of March to be cooler than temperatures recorded in 2016 and the release this coming week to be a more seasonal withdrawal in the 50’s Bcf.
Price action since the capitulation trade two weeks ago has provided a building block to additional gains in the spring and summer. The CFTC reported (Feb 28th) that the speculative sector increased their length by 18,190 contracts and also increased their short position by 13,237 contracts as many traders are not convinced that higher prices are coming in the near term. At last week’s CFTC date for positions, the open interest was at 1,332,711 contracts, and during Wednesday and Thursday (Friday’s position has not been released yet) trade last week, open interest gained an additional 45,772 contracts with most of the gains coming in the summer months as prices advanced in those months.
Drillinginfo has been calling for a rise in prices to facilitate additional investment in drilling rigs. With the gains in open interest and increases in price during the summer months, Drillinginfo is not alone in the assessment of higher prices. The current price action does not indicate a dramatic increase in the price and there may be a period or series of periods where price will decline or consolidate the recent gains, but the general bias seems to have changed from the capitulation trade of two weeks ago. The key area to watch is the 200-day moving average ($2.924 and rising). Should the market close above that level on a weekly basis, expect an acceleration in price gains. When the market closed below this key indicator three weeks ago, it set up the environment for the capitulation trade.
The EIA released its December exports number on Tuesday, showing the highest number of ethane exports in history, at 4.26 MMBbl. Drillinginfo expects exports to grow throughout 2017 as demand for exports rises. Braskem, for example, recently booked two ethylene carriers to transport US ethane to its Brazilian ethylene complex, which is expected to be in service in late 2017.
As Drillinginfo anticipated, there was a slight drop in ethane prices week-over-week. If the upward pressure on natural gas prices continues, however, it is likely that the lower ethane price trend will reverse in the coming weeks.
Inventories decreased 0.54 MMBbl in last week’s EIA report, marking the smallest withdrawal seen this time of year since 2014, with the last 2 years averaging withdrawals of 3.9 MMBbl. This week’s weak withdrawal is attributed to warmer-than-normal winter temperatures and a 29% decrease in propane exports week-over-week.
Propane stocks now sit at 49.3 MMBbl, roughly 13.7 MMBbl lower than this time last year and the lowest we have seen since 2014. However, propane stocks are still well above the five-year average of 34.7 MMBbl for this time of year prior to 2015 (before the crude price crash). Drillinginfo expects that propane will see its first injection of the season over the next couple of weeks, in line with historical activity.
As Drillinginfo expected, prices dropped due to warmer-than-normal temperatures and a weak withdrawal. It is likely that the mild weather and end of winter season will weaken prices further.
Over the last two weeks of February, normal butane and isobutane saw significant price drops; 37% and 29%, respectively. Natural gasoline has only seen a 1% drop in the same time-period, securing its spot in the stack. Drillinginfo continues to believe that the butanes will weaken as we head into the spring season.
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