- US crude oil inventories decreased 5.6 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories increased 6.8 MMBbl and 1.7 MMBbl respectively. Total petroleum inventories posted a withdrawal of 2.5 MMBbl. US production was estimated to be up 25 MBbl/d and imports decreased 127 MBbl/d to an average of 7.2 MMBbl/d versus the week prior.
- Prices started the week soft as traders looked for any new bullish information to extend the speculative long trade. At the end of November, OPEC and other producers agreed to extend the quotas until the end of 2018. Quotas were also placed on Nigeria and Libya (2.8 MMBbl/d combined), which was bullish as growth from these countries had undermined a large portion of the cuts by the twelve quota carrying OPEC members in 2017. These two countries had increased production by more than half of the OPEC pledged cuts last year, raising concerns about their output growth in 2018.
- There was some selling last week after Tuesday, which is likely due to some profit taking by the over-extended bullish speculative sector. The latest CFTC report showed that managed money long positions increased by only 1,491 contracts, but still remain at a healthy 17.4% of total open interest. It should also be noted that the commercial short sector (producer hedging) jumped 40,373 contracts and the commercial long sector (refiner hedging) rose 48,984 contracts. The action between November 29th and December 5th seems to indicate that participants are mitigating near-term price risk in both directions.
- Prices continued to decline on Wednesday after the inventory release, but stayed well above the November low of $54.88/Bbl, only declining to the low of the week at $55.82/Bbl. The prices for the next six months closed the week within $0.23/Bbl of each other as the near-term curve has flattened out. Beyond the July 2018 contract, the market is in backwardation, which likely prompted producers to take advantage of hedging opportunities when they did.
- The recent bullish bias has been generated by the speculative interests. Last week’s volume decline below the last four weeks is an indicator that the speculative appetite may be running its course. Bull market runs need to be pushed forward by higher volume and open interest gains in the direction of price movement. Last week is the fifth consecutive week of declining open interest and the lowest volume of the last five weeks. These are not healthy signals for an extension of the run. The long speculative excess now leaves the price action subject to profit taking and a correction. Expect producers to continue to take short-term hedges into early 2018 while the backwardation remains minimal. Drillinginfo expects the trade to return to the established range between $52-$56/Bbl in the near term.
- Natural gas dry production fell 700 MMcf/d as compared to the week before on average, with the losses coming from the TX, Gulf and Northeast production zones. Canadian imports picked up for some of the losses, rising 350 MMcf/d.
- With temperatures flipping from well above average to below, especially with the snow in TX and the Southeast, Res/Com demand was up 7.16 Bcf/d and Industrial demand increased 830 MMcf/d. Power demand also rose 3.25 Bcf/d on average for the week. LNG exports were nearly flat, declining just 90 MMcf/d. However, with the Cove Point beginning the commissioning process, gains in this demand sector should be expected in the coming weeks. Mexico exports declined 290 Mcf/d leaving total demand up 11.36 Bcf/d while total supply was down 330 MMcf/d. Watch the flows early this week for any indication of additional reductions in production due to freeze-offs as they will have to be factored in to the market when colder temperatures return around Christmas.
- The combination of the unseasonably warm temperatures two weeks ago and the increases in production provided a rare injection of 2 Bcf for the storage report last week. The market had expected this bearish release as it had fallen to $2.78 prior to the release, then added just another $.03 after the release, closing the day on the low. With the warm weather at the beginning of last week before the cold pattern arrived, this week’s report is likely to be below last year’s and the 5-year average withdrawal.
- Price action was weak during the week as trade started with early gains before starting the capitulation on Monday morning. The declines took prices to the low end of the longer-term range that has existed since June between $2.72 and $3.23. This is the fourth time that price declines have fallen to this key support area around $2.72 since the middle of Oct. The three previous times, prices have found a bid and prevented a break down into the abyss of substantively lower prices (down to the Feb lows of $2.522).
- Much of the declines can be sourced by the speculative shorts entering the market by the Managed Money sector and the Other Reportable sector monitored by the CFTC report. The latest report (dated Dec 5th, prior to the substantive declines on Wednesday and Thursday) showed the Money Manager sector increasing the short position by another 27,960 contracts. Looking at the chart below, this short position now takes the Managed Money shorts and the Other Reportable sector to the highest level of combined positions short since May 2015 and now represents over 34% of total open interest. Price movement after Tuesday suggests that additional selling (likely late-coming shorts) occurred which may have also been from winter liquidation by the Managed Money long participants. This combination would explain the explosion in volume in all three remaining winter contracts (Jan-Mar) on Thursday.
- While near term forecasts may have some impact on price action, last week’s high volume likely signals that bullish interests have mitigated their collective exposure. On the other hand, the warm weather forecasts enticing the recent declines have all been built into the price; should any colder modifications occur, this may pressure prices upward and could be a catalyst for short covering. Looking at the chart, last December and last April are two of the latest occurrences when that upward pressure was evident. As trade heads into the end of the year there may be a need for some of the short interests to monetize their gains. Whether it is forecast changes or monetizing requirements, this market seems to be nearing a flexion point. Until the resolution, the summer/fall range between $2.72 and $3.23 should be expected to hold.
- INEOS announced plans for the world’s largest ethane carrier last week. The ship will hold up to 95,000 cubic meters of ethane, taking American-produced ethane to China starting in the second half of 2019.
- Enterprise announced plans to convert one of its NGL pipelines that transports NGLs from the Permian Basin to the Texas Gulf Coast to crude oil service. Enterprise currently has three NGL pipelines from the Permian to the Gulf Coast (Seminole Blue, Seminole Red, and Chaparral) and are currently building a fourth (Shin Oak). They are currently evaluating which pipeline to convert but have plans to complete the conversion by the first half of 2020.
- Ethane prices dropped 17% week-over-week aligning with the drop seen in gas prices. With gas demand increasing over the past few days and expected colder weather, ethane prices are expected to recover.
- Inventories increased 1.3 MMBbl in last week’s EIA report. The unusual increase for this time of year was due to warmer than normal temperatures and a 40% decrease in exports week over week. Propane stocks now sit at 74.5 MMBbl, roughly 24.8 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 65.8 MMBbl for this time of year prior to 2015 (before the crude price crash).
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