CRUDE OIL

  • US crude oil inventories decreased by 7.9 MMBbl last week, according to the weekly EIA report. Inventories of gasoline decreased by 1.6 MMBbl and distillates inventories increased by 3.1 MMBbl. The total petroleum inventories continued the recent trend and decreased by 3.9 MMBbl. US production increased this week by 59 MBbl/d, while imports declined by 132 MBbl/d to an average of 7.6 MMBbl/d versus the previous week.
  • The inventory release was interpreted as bullish by the market because of the larger-than-expected crude withdrawal. The additional declines in total petroleum inventories is also a bullish signal that will need to continue in the coming weeks if inventory levels are to be restored to levels from prior to the price crash. There was also some other bullish news in the market last week:
    • The EIA revised its US oil production forecast for 2018 down to an annual average of 9.9 MMBbl/d from 10.0 MMBbl/d citing their lower price expectations for crude for the balance of 2017 and in 2018.
    • Speculation that Nigeria and Libya may curb output following their invite to attend the OPEC quota monitoring committee meeting on July 24th in Moscow.
    • Euroilstock data showed crude oil intake increased and stocks of refined products decreased in June, adding to the bullish sentiment about the start of high demand season.
  • Accompanying that bullish news was a bearish news item from OPEC’s monthly report showing that OPEC production rose 393 MBbl/d in June to 32.611 MMBbl/d led by increases from Nigeria and Libya (exempt from quotas) alongside additional barrels from Saudi Arabia and Iraq. The IEA report that followed the next day also commented on the higher production from OPEC and waning compliance from the OPEC members (although this was somewhat offset by higher compliance by the quota carrying non-OPEC countries). Additionally, the report talked about the current lack of confidence in the market for timely rebalancing. The market remains cautious as it waits for continued inventory withdrawals to confirm the implied supply deficit.
  • Price action last week had a solid reversal off of the lows from Monday, showing strength throughout the trade week. Some of that strength came from additional declines in the managed money short positions (29,822 contracts). Rallies based on short covering are not characterized as sustainable as short positions run out. Last week’s action suggests that additional gains may be possible early this week, but expect prices to return to the middle of the recent range as the week goes on
  • Over the last three weeks, WTI price action has stayed within the recent support and resistance ($43/Bbl-$47/Bbl). As previously stated 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

  • Natural gas dry production fell this week by 580 MMcf/d on average, reversing some of the recent gains. Significant drops were observed in the Northeast and Southeast regions.  This pullback is concerning because continued growth must be maintained through the summer for the market to reach inventory levels over 3.7 TCF by the end of October.
  • As temperatures rose last week, power demand jumped by 2.30 Bcf/d while Res/Com was basically flat. Mexico exports increased 100 MMcf/d and LNG exports were flat week over week.  In total, supply was down 580 MMcf/d, demand rose by 2.81 Bcf/d and the net balance had a supportive impact on futures price movements.
  • The storage report last week came in below market expectations with an injection of 57 BCF. This had an immediate upward lift to prices that would not hold during the rest of the trade day.  Look for this week’s injections to be very close to the 2016 injection levels and well below the 5-year average.
  • The overall price action last week was a reversal with a distinct bullish bias. Prices tested the initial resistance associated with the May and June highs only to gradually decline through the remainder of the week. The bias change was associated with a large increase in volume as the prices rose (supportive characteristics of base building). According to the CFTC report (July 11), the action occurred without any significant modification to positions of the Managed Money participants. With the next two storage reports being supportive to price action and with a lack of significant changes to the weather forecasts, expect price action to continue to consolidate this week between $2.90-$3.05. That stated, there is a serious open interest short position in this market that sets up the potential for a series of short covering rallies that could be initiated if prices garner enough buying to break the significant resistance from the 200-day ($3.115) and/or the 20-week moving average ($3.107).

NGLs

Ethane

  • Last Wednesday, Enterprise and Navigator Gas announced the signing of a letter of intent (LOI) to jointly develop an ethylene marine export facility at Morgan’s Point Terminal in the Houston Ship Channel.

Propane

  • Inventories increased 1.7 MMBbl in last week’s EIA report, marking the twelfth consecutive injection.  The minimal injection compared to the last two weeks was due to exports increasing from 476 Mb/d to 910 Mb/d (significant week-to-week fluctuations are normal in LPG exports).  However, propane stocks are still slightly above the five-year average of 55.4 MMBbl for this time of year prior to 2015 (before the crude price crash).
  • Propane prices rose 7% week over week due to the increase in export demand along with a $2 gain in crude oil prices.

Butanes/Natural Gasoline

  • Normal butane and natural gasoline prices both saw gains of 5% due to the increase in crude oil prices, with isobutane close behind at a gain of 4%.  With volatility in crude prices, expect the same for propane plus in the coming weeks.

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