- US crude oil inventories decreased by 7.4 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories both increased 4.8 MMBbl and 8.9 MMBbl. Total petroleum inventories reversed the recent trend of withdrawals and posted an increase of 1.2 MMBbl . US production was estimated to be up 28 MBbl/d. Imports decreased 27 MBbl/d to an average of 8.0 MMBbl/d versus the week prior.
- Prices started the year above $60 on the back of news associated with the political unrest from the anti-government rallies in Iran. Gains continued after the release of the inventory data on Wednesday, as the market focused on the larger than expected crude withdrawal. Recent price action has focused on the bullish elements in the news, but seemed to be ignoring some bearish factors. The 450 MBbl/d Forties pipeline is back to full operations. The pipeline carrying crude to the Es Sider port in Libya has also restarted operations; the outage had previously reduced supply by 70-100 MBbl/d. The inventory report also provided some bearish news as US production increased last week, and is well on its way to surpass 10 MMBbl/d in early 2018 as long as prices stay above $55/Bbl.
- The positive price action last week took prices to $61.44/Bbl, the highest weekly close since May 2015 and the highest daily trade ($62.21/Bbl) since early May 2015. According to the latest CFTC report, the managed money long positions (speculative traders) decreased 18,151 contracts, hinting that they are starting to take some profits.
- Last week’s gains were achieved with gains in volume and open interest as the light holiday trade returned to normal trading action. However, with the slight gains in price, the momentum indicators are now at or very near extreme over bought levels. The failure of the run on Thursday, as prices tested the May 2015 high of $62.58/Bbl, indicates that this level will provide significant resistance for future advances. Expect a more consolidative trading pattern in the coming weeks as speculative traders start to re-evaluate the fundamental supply and demand balance. Headlines about geopolitical tensions in the Middle East or OPEC quota compliance will provide short term volatility, but supply growth from the US producers will limit extensions for prices. Drillinginfo continues to expect the trade to return to the established mid-$50/Bbl level for the near term.
- Natural gas dry production declined 3.04 Bcf/d on average as compared to the week before, with most of the losses associated with freeze offs from the cold snap that rocked the country in the first few days of the year. On average, the regions showing the largest production drops were the Northeast (down 1.2 Bcf/d), Texas (Permian lost 0.8 Bcf/d) and the Rockies (down 0.3 Bcf/d). Canadian imports offset some of the losses as imports rose 1.16 Bcf/d, an expected behavior with colder temperatures and increased demand in the U.S.
- On the demand side, as the coldest temperatures of the last few years reached new records in some areas, demand jumped with Res/Com up dramatically by 18.8 Bcf/d (after another 18 Bcf/d increase the week prior), industrial demand up 1.26 Bcf/d, and power demand up 4.9 Bcf/d on average for the week. LNG exports decreased 300 MMcf/d while Mexico exports were down 330 MMcf/d leaving total demand up 19.1 Bcf/d while total supply was down 1.3 Bcf/d.
- The storage report last week came in slightly below expectations with a withdrawal of 206 Bcf. The price action was slightly bearish after the release but then declined dramatically during the remainder of the day. This week’s release should challenge and surpass the 300 Bcf withdrawal level, a record high.
- Price action last week continued the previous week’s rally, taking prices to $3.097 before succumbing to selling pressures. As discussed last week, much of the gains between the Jan expiration and last week’s high were based on short covering from the Managed Money short sector. This was confirmed by the CFTC release (dated Tuesday Jan 2nd) which showed a decline of 60,609 contracts. With the weather forecasts changing around the Holiday and getting colder, many of the late shorts decided to cover until the forecasts stabilized. The Managed Money short sector still maintained 18.5% open interest and judging from the price collapse at the end of last week, those short positions have likely increased.
- The extraordinary production growth that has occurred (and is likely to continue due to strong crude prices) is going to cloud price action for the near future. While futures prices may be volatile around the slight changes in forecasts, it will require a long term cold to create concern about inventory levels (end-of-year storage inventories under 1.5 Tcf) to cause long term gains. The lack of a long and cold winter is expected to push prices down to levels not seen since early 2015.
- ONEOK announced plans to build a 900-mile pipeline from eastern Montana to Bushton, KS. Elk Creek Pipeline is designed to transport up to 240 Mbd of y-grade (expandable to 400 Mbd) and is expected to come online by end of 2019.
- Inventories decreased 0.7 MMBbl in last week’s EIA report. Propane stocks now sit at 68.0 MMBbl, roughly 16.1 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 59.5 MMBbl for this time of year prior to 2015 (before the crude price crash).
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