CRUDE OIL

  • US crude oil inventories increased by 4.6 MMBbl, according to the weekly EIA report. Given refinery outages associated with Harvey, inventories of both gasoline and distillates were down 3.2 MMBbl and 1.4 MMBbl respectively. The total petroleum inventories posted an increase of 7.0 MMBbl. US production was down 749 MBbl/d with the lower 48 declining 783 MBbl/d, (from the effects of Harvey) per the EIA estimates. Imports decreased 822 MBbl/d to an average of 7.1 MMBbl/d versus the previous week.
  • The market continued its strength from the previous week with shut-in production coming back online and refineries restarting service helping to provide additional momentum for the bulls. There remains additional refinery capacity that has yet to come back online and additional delays or issues restarting operations have been reported. There is also some concern about Hurricane Irma’s impact on demand for refined products in heavily populated parts of Florida in particular. Some negative news globally, largely ignored by the market, was that Libya’s crude production from the Sharara field started to return to the market after a two week pipeline blockade impacted 300 MBbl/d of production. Counteracting this is the news that Saudi Arabia has embarked on a campaign to extend the quotas beyond March 2018. Over the weekend, Saudi Arabia’s energy minister discussed the extension with Venezuela and Kazakhstan. The news of these talks should be supportive to prices.
  • The price action last week reversed off early highs and finished the week just off the weekly low as participants seemed to shift the focus back to longer term issues. According to the latest CFTC release, the speculative short positions declined 18,001 contracts, reversing the substantial increase from the previous week. Additionally, money managers increased their long positions by 13,115 contracts.
  • Continue to expect volatility in the trade during the coming weeks as the market digests the short-term vs. long-term issues for crude prices. Last Friday’s decline of $1.61/Bbl (3.3%) is a brief reminder of the volatility this market will face. The outlook for near-term price movement should find buyers at the low end of the recent range $45.50-$46.00/Bbl. Should that range break to the downside the lows from June and July ($42.05/Bbl & $43.65/Bbl) will become the target for the bears. Positive moves should find sellers at last week’s highs and the 200-day simple moving average up to the late July highs around $50.50/Bbl. Drillinginfo continues to expect the primary range around $45-$46/Bbl to hold the trade as the market continues to monitor the normalization of inventories. The next scheduled OPEC is meeting is the Ministerial Committee meeting on Sept 22; this committee oversees the negotiated quotas and production cuts deal and includes ministers from Saudi Arabia, Kuwait, Russia, Venezuela, Algeria, and Oman. As mentioned above, early rumors suggest Saudi Arabia may push to extend the cuts through 2Q2018 (from the current agreement to continue through 1Q2018). Expect additional price volatility between now and Sept 22 as pre-meeting.

NATURAL GAS

  • Natural gas dry production increased this week by 1.43 Bcf/d on average, some of the increases were due to production coming back from losses associated with Harvey, however, there were also increases from production growth in the Northeast, which set a new high for average weekly production. Some of this growth is having an impact on Canadian imports which showed a decline for the second consecutive week.
  • On the demand side, a combination of Harvey impacts and weak temperatures sent power demand down 1.09 Bcf/d. LNG exports declined 850 MMcf/d on average as tankers remained offshore until late in the week. Towards the end of the week, LNG exports started rebounding and reached over 1 Bcf/d. Mexico exports rebounded at a quicker pace, increasing 330 MMcf/d, basically offsetting the previous week’s declines. Total supply increased 1.2 Bcf/d while total demand declined 1.45 Bcf/d.
  • The storage report last week came in above market expectations with an injection of 65 Bcf. Despite the surprise, prices rallied on the release, sending prices back above $3.00, only to spend the rest of the day and week giving ground down to $2.89. Look for this week and next week’s injections to be well above last year’s injections and perhaps above the 5- year average.
  • The price action shifted from a slightly positive bias back to a neutral bias for trade last week. The losses last week continued the recent pattern of directional movements being unsupported by internals. As prices declined from the highs from the pre-Holiday Friday, each day’s declines were on lower volume. As discussed last week, price movements on lower volume and declining open interest are not indicative of longer term directional changes. According to the CFTC report (September 5th), the Managed Money participants short position decreased 11,119 contracts while the Managed Money long positions decreased by just 376 contracts. This data confirms the market’s lack of directional commitment.
  • The behavior of prices this last week followed historical patterns with some brief strength during the Holiday period only to have prices action decline into the month. In the last four years the Holiday weakness has formed a low by the 9th of September before prices rebound into the middle of the month. Expect some potential weakness in prices early this week, with the expectations of fundamental demand destruction due to Hurricane Irma, followed by a potential small run. The issue to watch for is when the market buys back on the facts after selling the rumors of demand losses this last week. Longer term the market will eventually break out of the summer range between $2.75 and $3.05, seasonal expectations of the upcoming winter (normal to colder-than-normal) suggests that the break out will be to the upside.

NGLs

Propane 

  • Inventories increased 6.4 MMBbl in last week’s EIA report, the largest injection seen since 2002. Hurricane Harvey shut down export terminals, causing exports to drop from 607 MBbl/d to 191 MBbl/d; a low last observed in 2013. Propane stocks now sit at 79.9 MMBbl, roughly 19.2 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 66.2 MMBbl for this time of year prior to 2015 (before the crude price crash).
  • With the Gulf Coast accounting for a significant amount of propane exports, Harvey caused a noticeable jump in the spread between Mt. Belvieu and FOB Houston, but has since normalized. Prior to Harvey, the spread was around 14 cents/gal and during the hurricane it was about 23 cents/gal. Now that the storm has subsided the spread is almost to normal levels at 15 cents/gal.

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