• US crude oil inventories decreased by 6.3 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 3.7 MMBbl and 1.9 MMBbl respectively. Total petroleum inventories continued their recent trend and decreased by a sizeable 13.4 MMBbl. US production increased this week by 88 MBbl/d last week erasing the decline posted a week earlier. Imports declined by 274 MBbl/d to an average of 7.7 MMBbl/d versus the prior week.
• The inventory release was bullish and prices rallied up following the large price decline in WTI on Wednesday when a Reuters report showed OPEC’s exports rose in June. OPEC exported 25.92 MMBbl/d in June, up 450 MBbl/d from May and 1.9 MMBbl/d more than a year earlier. On the same day, Russia ruled out any additional cuts to production. Along with this information, increasing Libyan, Nigerian, and US production caused the rally to fall short and succumb to the pressures from the general bearish sentiment in the market on Friday. For price rallies to be sustained, the market needs to see continued high compliance with quotas and the materialization of the demand growth projected by the IEA. Without these two elements occurring concurrently, there is little chance for global inventories to normalize and provide the environment for higher prices.
• Price action last week provided some interesting elements as short covering on Monday led to a reduction of 20,881 contracts by the managed money market. These reductions brought early strength to the market, but when this buying dried up, the bearish elements discussed above took over. Over the last two weeks, WTI price action has tested both support and resistance between $43/Bbl and $47/Bbl every week. As previously mentioned here, expect volatile trade in the coming weeks as the market grapples with the current bearish bias with the potential for short term declines possibly testing the lows from last August at $39/Bbl. Drillinginfo expects the primary range around $45/Bbl to hold the near-term trade as the market looks for global inventory normalization.
• Natural gas dry production continued to gain this week by increasing 300 MMcf/d and reaching 72.2 Bcf/d. This marks the first week of 2017 when production averages above the 72 Bcf/d mark. Year-to date, production levels remain 1.5 Bcf/d below 2016. In order to refill storage inventories, production gains must continue through the summer. Based on ICE trading activity last week on end-of-season inventories, the market seems convinced that the production volumes will allow the market to leave Oct over 3.84 Tcf.
• On the demand side, power demand jumped 3.01 Bcf/d as temperatures rose last week, which also caused Res/Com to decline by 1.56 Bcf/d. Mexico exports declined 230 MMcf/d on the week and LNG exports increased 390 MMcf/d. The more interesting aspect of the week’s action was the increase in total demand of 1.46 Bcf/d while total supply only increased 0.56 MMcf/d and prices declined during the week (as supposed to gaining)
• The storage report last week came in surprisingly above market expectations with an injection of 72 Bcf. This had an immediate downward effect on prices, but only for a short period as prices came back during the trade day only to fall off at the end of the day with position’s squaring for the weekend. While temperatures were seasonal for this last week, look for injections around 60 Bcf this week, which is in line with last year’s build.
• The price action during the week followed the historical pattern of weakness around the July 4th holiday. According to the CFTC report (July 3), the Managed Money short position decreased by 7,596 contracts during the week. As mentioned last week, the market did re-visit support zones in the mid $2.80’s near term and broke below the June low for a brief period. With the surprisingly bearish storage report, it is concerning that the bears were not able to push the declines back to the weekly low or extend the declines further. When markets do not go down with significant bearish news, the markets are telling you something. Due to the negative bias, expect additional probes lower but caution on prices is prudent. There is a significant amount of open interest short in this market that sets up the potential for a series of short covering rallies to break the significant resistance from the 200-day ($3.115) and or the 20-week moving average ($3.081).
• Inventories increased 2.1 MMBbl in last week’s EIA report, marking the eleventh consecutive injection. Propane stocks now sit at 60.6 MMBbl, roughly 24.2 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 53.2 MMBbl for this time of year prior to 2015 (before the crude price crash).
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