- US crude oil inventories decreased 4.5 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories increased 0.6 MMBbl and 1.1 MMBbl respectively. Total petroleum inventories showed another substantial withdrawal of 8.8 MMBbl. US production was estimated to be down 35 MBbl/d. Imports increased 159 MBbl/d to an average of 8.0 MMBbl/d versus the week prior.
- Prices firmed throughout the week, establishing the low early Tuesday and setting higher prices at week’s end (closing the week at levels not seen since end of May 2015). Much of the firming was due to the news that armed forces disrupted a pipeline carrying crude oil to the Es Sider port in Libya. The National Oil Corporation (NOC) stated that output would be reduced by 70-100 MBbl/d. That level of reduction may be considered significant (Libya produced 973 MBbl/d in November) but the NOC stated that repairs would take a week and the supply disruption would not have a major impact on exports. Also, Ineos pledged that the Forties pipeline would be operating at full capacity in early January. That pipeline started to operate at half capacity Wednesday. Anti-government protests in Iran ensured that prices made a positive start to the year given its geopolitical implications, but no supply disruptions linked to it have been reported as of yet.
- The price action last week continued the recent bullish bias from the speculative sector and the latest CFTC report showed managed money long positions increased 21,144 contracts and now represent 18.1% of total open interest. Last week’s gains also occurred on declining volume and open interest with the momentum indicators nearing near extreme over bought status. The run up and over $60/Bbl has been impressive, but the over-bought internals coupled with declining volume and interest trends signal that a brief period of correction or consolidation will likely be needed before prices can test the May 2015 high of $62.58/Bbl. Expect a more consolidative trading pattern in the coming weeks as speculative traders start to re-evaluate the fundamental supply and demand balance. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruption due to geopolitical issues may provide short term gains and volatility, the promise of additional growth from US producers is likely to limit longer term extensions. Drillinginfo continues to expect the trade to return to the mid-$50/Bbl levels in the near term.
- Natural gas dry production declined 310 MMcf/d on average as compared to the week before, with the majority of the losses likely associated with freeze offs due to significant cold coming on toward the end of the week. Canadian imports rose 570 MMcf/d, typical with the colder temperatures and increased demand in the East.
- On the demand side, the coldest temperatures (forecasted of the last three years) commencing at the end of the week brought Res/Com demand up dramatically at 18.4 Bcf/d and impacted industrial demand, which increased 2.26 Bcf/d. Power demand also increased 1.23 Bcf/d on average for the week. LNG exports rebounded last week, increasing 380 MMcf/d. Mexico exports were down slightly, losing 140 Mcf/d and leaving total demand up 24.05 Bcf/d while total supply was up 420 MMcf/d.
- The storage report last week came in just about in line with expectations posting a withdrawal of 112 Bcf. The price action was already in a bullish run as the Feb contract took over as prompt and the release had little impact on prices. The market now has to deal with two consecutive releases that will be well ahead of last year and the 5 year averages. This week’s release should challenge the 200 level and the following week may challenge the 300 withdrawal level.
- Price action last week maintained a negative bias until the Jan contract expired on Wednesday. From there, prices opened up strongly as the Feb contract rolled to prompt and created an upside weekly reversal. Much of the gains on Thursday were the result of short covering from the extensive speculative shorts as open interest declined 32,902 contracts. The latest CFTC (dated Tuesday Dec 26th) showed little change in the Managed Money short sector adding just 84 contracts to the short positions but the CFTC data may be starting to indicate a longer-term trend developing. Looking at the chart below, prices had consolidated during the summer 2015 just under $3.00. Then in the early winter 2015 and continuing into late winter of 2015, the Managed money short position climbed to over 40% of total open interest as prices declined to the multi-year low under $1.611.
- The following chart illustrates what this percentage of open interest gains meant in terms of volume of contracts short. The current level (latest CFTC report) of Managed Money shorts is 323,465 contracts (though this number is likely lower after last Thursday’s short covering) and is well below the 416,000 plus level that was reached in the first early winter ‘15 test below $2.00.
- The primary reason for the declines in price and the speculative shorts piling on in winter 2015/2016 was the lack of expected demand during the El Nino winter. This year’s declines are primarily focused on the production growth that has continued for the last few months and are expected to continue at some level in the coming months. The price consolidation that has been occurring since summer with a gradual increase in the speculative short position may be setting the stage for a negative price bias for an extended period. The current forecasts for early Jan 2018 will likely challenge some of the shorts with the increased demand and reduction of production from freeze-offs but should the cold moderate later in Jan and Feb, then expect the shorts to re-establish and take prices down into the spring. Any price rallies will likely be generated in the Feb and Mar contracts near term and should expand the spreads to the upcoming summer strip.
Ethane – EIA Monthly Update
- The EIA came out with their most recent monthly production and stock data last week, with data from October 2017. With ethane production increasing from 39.1 MMBbl/d to 48.0 MMBbl/d, a historical high, ethane stocks are up to the peak seen in history. Prices have not been affected by these historical highs, as rising natural gas prices have lifted ethane prices as well.
- Inventories decreased 2.7 MMBbl in last week’s EIA report. For the second week in a row, stocks decreased due to cold weather and high exports. Propane stocks now sit at 68.6 MMBbl, roughly 18.0 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 61.1 MMBbl for this time of year prior to 2015 (before the crude price crash).
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