The Week Ahead For Crude Oil, Gas and NGLs Markets – November 11, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – November 11, 2019

CRUDE OIL

  • US crude oil inventories increased by 7.9 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories decreased 2.8 MMBbl and 0.6 MMBbl, respectively. Total petroleum inventories posted an increase of 3.9 MMBbl, generated primarily by the crude build. US crude oil production was unchanged from the previous week, per EIA, while crude oil imports were down 0.62 MMBbl/d to an average of 6.1 MMBbl/d.
  • WTI prices extended the gains from the previous Friday, showing some strength early in the week on continued optimism from the US economy, the expected confirmation of a Phase 1 deal between the US and China in the tariff disputes, and the upcoming OPEC+ meeting coming in early December. Prices also got support from the third-quarter earnings reports from the US E&P companies, which have been pointing toward lower capex plans in the coming year.
  • Over-supply concerns continue as the OPEC World Oil Outlook report provided a grim forecast of non-OPEC production (led by the US) outstripping demand over the next five years. The upcoming IEA World Energy Outlook (scheduled release November 13) should shed more light on the upcoming supply and demand situation in 2020.
  • The optimism early in the week was muted by the inventory release on Wednesday with the large gains in crude. This capped the gains from early in the week, but prices recovered most of the declines by the end of trade on Friday, in spite of the bullish recovery of the US dollar during the week.
  • Internal price relationships continue to show the prompt month maintaining a significant premium to the 2020 strip, confirming concerns regarding the supply and demand balance in the future.
  • The CFTC report released Friday (dated November 5) showed a support in the movement between the speculative expectations, with the Managed Money long sector increasing positions by 9,335 contracts, while the Managed Money short positions reduced by 9,414 contracts. This provided enough buying to maintain the strength early in the week.
  • Market internals last week brought a neutral with a slightly bullish bias, with prices closing up on the week with higher volume and gains in open interest.
  • Prices continued in the recent range between $53 and $57 while expanding the higher end of the range. Further extensions of support will take prices above the commonly traded 200-day moving average ($57.24 today), and a breakout above that level on a daily closing basis will send prices toward the highs from September between $58.49 and $59.39. It was this moving average zone that limited last week’s gains and where sellers were found. Bearish input from concerns about the global economy or hold-ups in the US/China trade deal could bring another test at the low end of the range at $53, which will likely find buyers.

NATURAL GAS

  • Natural gas dry production increased 0.07 Bcf/d last week as production came back from the weather-related issues. Canadian imports increased 0.12 Bcf/d on the week.
  • Res/Com demand increased 6.04 Bcf/d, while power demand decreased 1.33 Bcf/d and Industrial demand increased 0.56 Bcf/d. LNG exports declined 0.39 Bcf/d, while Mexican exports decreased 0.03 Bcf/d on the week.
  • These events left the totals for the week with the market gaining 0.20 Bcf/d in total supply while total demand increased by 5.09 Bcf/d.
  • The storage report last week showed the injections for the previous week at 34 Bcf. Total inventories are now 530 Bcf higher than last year and 29 Bcf above the five-year average. Current weather forecasts from NOAA in the near term (coming week) have below-average temperatures from the Midwest to the East, including eastern portions of Texas, with above-average temperatures in the West. The 8- to 14-day forecast shows warmer temperatures from the central Midwest and the Eastern Seaboard with normal temperatures in the Mississippi Valley.
  • The CFTC report released last week (dated November 5) showed a continuation of the short covering process by the Managed Money short position, as positions were reduced by 72,718 contracts, while Managed Money long positions increased by 10,777 contracts.
  • The market internals now have a neutral to slightly negative bias as prices rallied to a new high (only to correct lower) on higher volume, but open interest and remained relatively flat for the week. The week ended just about where it started; after trading to a new high, it is not bullish.
  • The extension of the previous week’s advances sent prices to the highest level since the end of February ($2.905). From that advance there was a steady amount of selling, and with the large gap opening today ($2.755-$2.716) offsetting the large gap last Monday, the trade has developed an “island top” for traders to consider. With the flip in the weather forecasts, declines between $2.575 and $2.52 should occur in the coming weeks. Any reversals stronger than that will run into sellers at the gap formed today between $2.716 and $2.755.

NATURAL GAS LIQUIDS

  • NGL prices were up week-over-week. Ethane was up $0.010 to $0.203, propane up $0.023 to $0.516, normal butane up $0.038 to $0.679, isobutane up $0.007 to $0.813, and natural gasoline up $0.012 to $1.167.
  • US propane stocks gained ~320 MBbl for the week ending November 1. Stocks now sit at 100.17 MMBbl, roughly 15.64 MMBbl and 22.97 MMBbl higher than the same week in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil rose for the week ending November 8, 2019, according to Enverus’ analysis of manifests from US Customs & Border Patrol. As of November 11, aggregated data from customs manifests suggested that overall waterborne imports increased by nearly 600 MBbl/d from the previous week. The increase was driven by higher imports into PADD 5, which were up 650 MBbl/d from the prior week. PADD 1 and PADD 3 both fell slightly, down 13 MBbl/d and 40 MBbl/d, respectively.

  • West Coast imports of Nigerian crude have been strong in 2019, averaging more than 60 MBbl/d ytd. The highest month so far was August, when imports were over 110 MBbl/d. November looks like it will be a strong month as well, with imports over the first 10 days nearing the monthly totals for September and October, closing in on 2 MMBbl for the month. On a per-day basis, they are at 190 MBbl/d. This has been roughly split between Erha and Bonga grades, both medium sweets. The Bonga cargo appears to have been taken by Marathon’s Carson refinery while the Erha was split between Phillips 66 Los Angeles and Phillips 66 Ferndale. Vessel tracking data analyzed by Enverus shows that this might be the last Nigerian cargo received on the West Coast this month. The next tanker from Nigeria headed to the West Coast appears to be the Pentathlon, a suezmax capable of holding 1 MMBbl of crude, which departed the Agbami terminal 18 days ago and is showing an ETA to Richmond, CA, of December 1, 2019. Chevron took the last cargo of Agbami to Richmond in late June.

Injection Lower Than Market Expectation, Prices Rise

Injection Lower Than Market Expectation, Prices Rise

Natural gas storage inventories increased 34 Bcf for the week ending November 1, according to the EIA’s weekly report. This is lower than the market expectation, which was an injection of 43 Bcf.

Working gas storage inventories now sit at 3.729 Tcf, which is 530 Bcf above inventories from the same time last year and 29 Bcf above the five-year average.

Prior to the storage report release, the December 2019 contract was trading at $2.811/MMBtu, roughly $0.017 lower than yesterday’s close. At the time of writing, after the report, the December 2019 contract was trading at $2.860/MMBtu.

The start of the winter season is officially here, and volatility already is making an appearance. During the last few trading days of October, the December 2019 contract gained ~$0.17/MMBtu from October 25 to October 31 to reach $2.633. The gains have not slowed down during November, as the December 2019 contract closed on November 5 at $2.862, the highest close for the contract since September 16. This rally can be attributed mostly to the weather forecasts adjusting to show cooler temperatures in the northern Midwest. However, weather forecast changes likely do not explain the entire rally. Initial stages of short covering were seen on the CFTC report, dated October 29, as the Managed Money short positions decreased 21,951 contracts, while the long positions increased 12,085 contracts. This short covering was brought on by the price rally with the weather forecast changes. As prices increased, traders sold off their short positions, adding fuel to the price rally.

See the chart below for projections of the end-of-season storage inventories as of April 1, the end of the withdrawal season.

 

This Week in Fundamentals

The summary below is based on Bloomberg’s flow data and DI analysis for the week ending November 7, 2019.

Supply:

  • Dry production increased 0.07 Bcf/d on the week. Most of the increase came from the South Central (+0.36 Bcf/d) and the East (+0.20 Bcf/d), with an offset coming from the Mountain region (-0.53 Bcf/d). The Midwest and Pacific saw small gains.
  • Canadian imports decreased 0.06 Bcf/d.

Demand:

  • Domestic natural gas demand increased 5.69 Bcf/d week over week. Res/Com demand accounted for most of the increase, rising 6.39 Bcf/d. Industrial demand also increased 0.69 Bcf/d, while Power demand decreased 1.39 Bcf/d.
  • LNG decreased 0.21 Bcf/d, while Mexican exports decreased 0.02 Bcf/d.

Total supply increased 0.01 Bcf/d, while total demand increased 5.64 Bcf/d week over week. With increased demand and relatively flat supply, expect the EIA to report a weaker injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 4 Bcf. Last year, the same week saw an injection of 39 Bcf; the five-year average is an injection of 10 Bcf.

Bearish Inventory Report Keeps the Pressure on Prices

Bearish Inventory Report Keeps the Pressure on Prices

US crude oil stocks increased by 7.9 MMBbl. Gasoline and distillate inventories decreased 2.8 MMBbl and 0.6 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 4.26 MMBbl alongside gasoline and distillate draws of 4.0 MMBbl and 1.6 MMBbl, respectively. Analysts were expecting a crude oil build of 1.5 MMBbl. Total petroleum inventories posted a decrease of 3.9 MMBbl.

US crude oil production remained unchanged last week. Crude oil imports were down 0.62 MMBbl/d last week, to an average of 6.1 MMBbl/d. Refinery inputs remained low. Averaging 15.8 MMBbl/d (0.24 MMBbl/d less than last week’s average), which was a major factor behind the large crude build.

West Texas Intermediate for December delivery settled higher on Tuesday at $57.23/Bbl, up 69 cents per barrel from the prior day. Flat price had been up for the past three sessions and was approaching five-week highs. Sentiment was lifted by reports that US and Chinese officials may be close to reaching an agreement to partially roll back some tariffs as part of the Phase One trade deal currently under negotiation. Prices had also been bolstered with the release of third quarter earnings reports from US E&Ps, which so far have been pointing toward lower capex plans in the year ahead. Oversupply concerns continue to linger, though, capping gains. Indeed, OPEC’s World Oil Outlook report released yesterday made headlines due to its grim forecast of non-OPEC production (led by the United States) outstripping global demand over the next five years. OPEC plans to meet next month to discuss further cuts to production.

Petroleum Stocks Chart

The Week Ahead For Crude Oil, Gas and NGLs Markets – November 4, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – November 4, 2019

CRUDE OIL

  • US crude oil inventories increased by 5.7 MMBbl last week, according to the weekly EIA report. Gasoline inventories decreased 3.0 MMBbl while distillate inventories decreased 1.0 MMBbl. Total petroleum inventories posted a decrease of 2.2 MMBbl. US crude oil production was unchanged from the previous week, per EIA, while crude oil imports were up 0.84 MMBbl/d to an average of 6.7 MMBbl/d.
  • WTI prices spent most of the week giving back the gains made from the previous week that were based on the upcoming OPEC+ meeting in December that may add more production cuts and may result in the Chinese increasing oil import quotas. There are conflicting reports on whether Russia will be interested in participating in additional production cuts, and lingering concerns regarding global economic growth seemed to fuel the selling until Friday. Good economic news from the Labor Department on the US economy, surprising positive manufacturing data released from China, and supportive news on the upcoming signing of the initial phase of the trade deal between the US and China sent both the US equities market and the crude market up on the bullish economic outlook. By the end of the day, crude had regained most of the losses from earlier in the week and closed the week just below the previous week.
  • Regardless of the spot price action during the week, the spot contract is holding a significant premium to the 2020 strip. While the January contract continues a slight premium to December, the rest of the year represents discounts, as the trade remains concerned about global economic demand and the potential for a supply glut during 2020.
  • The CFTC report released Friday (showing positions from October 29) showed little change in the expectations of price direction by the speculative sector. The Managed Money long sector reduced positions by 2,706 contracts, while the Managed Money short sector reduced positions by 14,307 contracts. The current speculative sector is noncommittal to the crude oil trade.
  • Market internals last week also confirmed a nondirectional neutral bias, with prices closing just $0.46 below the previous week’s high close on higher volume and slightly lower open interest (according to preliminary reporting from the CME).
  • Prices continued in the recent mini-range of $53-$57, waiting for the development of a trend for near-term prices. Bullish news will take prices upward toward the commonly traded 200-day moving average ($57.15 today), and a breakout above that level on a daily closing basis will send prices toward the highs from September between $58.49 and $59.39. Bearish input from the declining rig count and concerns about the global economy could bring another test at the low end of the range, at $53, which will likely find buyers.

NATURAL GAS

  • Natural gas dry production decreased 0.93 Bcf/d last week, largely due to weather issues in the Rockies, while Canadian imports increased 0.12 Bcf/d.
  • Res/Com demand increased 6.47 Bcf/d, while power demand decreased 5.83 Bcf/d and industrial demand increased by 0.93 Bcf/d. Secondary components had LNG exports gaining 0.26 Bcf/d, while Mexican exports decreased 0.07 Bcf/d on the week.
  • These events left the totals for the week showing the market dropping 0.81 Bcf/d in supply while demand increased by 2.34 Bcf/d.
  • The storage report last week showed the injections for the previous week at 89 Bcf. Total inventories are now 559 Bcf higher than last year and 52 Bcf above the five-year average. The current near-term (coming week) weather forecasts from NOAA show below-average temperatures from the Rockies to the East Coast (including the TX area), while there are above-average temperatures in the West. The 8-to-14-day forecast continues the pattern.
  • The CFTC report released last week (dated October 29) showed initial stages of a short covering process by the Managed Money short position, as they reduced positions by 21,951 contracts, while Managed Money long positions increased by 12,085 contracts. This short covering is due to the weather forecasts bringing higher Res/Com demand in the coming two weeks.
  • The market internals now have a neutral to positive bias, as the market gained during the course of the week on large weekly volume gains, but with a reduction in total open interest (according to preliminary data from the CME). The falloff in total open interest is the result of the contract expiration and the continued short covering. Rallies based solely on short covering are historically short in duration. If the market is to maintain a longer-term bullish bias into the winter season, it will need to be based on gains in total open interest, offsetting the short covering losses.
  • The market blew through several areas of resistance last week and now seems poised to continue gains above the September high of $2.71 (on daily close), which will catch additional short covering by the speculative sector. Expect additional volatility this week with short covering, depending on how the weather forecasts play out. Momentum indicators are becoming overbought, but that will not dramatically affect short covering. Additional gains may take prices to the February and March highs between $2.824 and $2.908. A reversal in the forecasts and adjustments to demand will pressure prices down to a key area around $2.50.

NATURAL GAS LIQUIDS

  • Purity product prices were mostly up week-over-week, with the exception of isobutane. Ethane was up $0.014 to $0.193, propane was up $0.033 to $0.493, normal butane was up $0.031 to $0.641, and natural gasoline was up $0.014 to $1.155. Isobutane dropped $0.011 to $0.806.
  • US propane stocks fell ~137 MBbl for the week ending October 25. Stocks now sit at 99.85 MMBbl, roughly 16.83 MMBbl and 21.50 MMBbl higher than the same week in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil fell for the week ending November 1, 2019, according to Enverus’s analysis of manifests from US Customs & Border Patrol. As of November 4, aggregated data from customs manifests suggests that overall waterborne imports decreased by more than 450 MBbl/d from the previous week. The decline was driven by lower imports into PADD 5, which fell by more than 630 MBbl/d from the prior week. PADD 1 rose slightly, up by more than 50 MBbl/d, and PADD 3 increased by more than 120 MBbl/d.

  • October’s imports of Brazilian crude oil reached the highest level since June 2018, with the biggest driver being PADD 5 imports. The grade with the highest share of imports was Iracema, with Sapinhoa second and Lula third. The biggest importers of Brazilian crude were Marathon Carson and Chevron El Segundo.

Prices Steady as Gas Injection Reported Below Expectation

Prices Steady as Gas Injection Reported Below Expectation

Natural gas storage inventories increased 89 Bcf for the week ending October 25, according to the EIA’s weekly report. This is slightly lower than the market expectation, which was an injection of 91 Bcf.

Working gas storage inventories now sit at 3.695 Tcf, which is 559 Bcf above inventories from the same time last year and 52 Bcf above the five-year average.

Prior to the storage report release, the December 2019 contract was trading at $2.675/MMBtu, roughly $0.016 lower than yesterday’s close. At the time of writing, after the report, the December 2019 contract was trading at $2.655/MMBtu. Earlier this week, the November 2019 contract expired at $2.597/MMBtu, rallying ~$0.30/MMBtu from October 25 to the close on October 29.

Injections over the summer have been strong compared to last year as well as to the five-year average. Injections during the 2019 summer season have been consistently above the five-year average injection, with the exception of a brief period in July. During summer 2019, injections have averaged 18 Bcf/week stronger than the five-year average and 25 Bcf/week stronger than injections during summer 2018. Lower-48 demand has strengthened over the past five years, with more natural gas power plants and LNG exports. However, that demand hasn’t been able to keep up with supply, allowing for strong injections throughout the summer and storage inventories to recover the deficit at the start of injection season.

See the chart below for projections of the end-of-season storage inventories as of April 1, the end of the withdrawal season.

This Week in Fundamentals

The summary below is based on Bloomberg’s flow data and DI analysis for the week ending October 31, 2019.

Supply:

  • Dry production decreased 0.59 Bcf/d on the week. Most of the decrease came from the Mountain region (-0.28 Bcf/d), the South Central (-0.27 Bcf/d) and the East (-0.04 Bcf/d), with small gains in the Midwest and the Pacific.
  • Canadian imports increased 0.21 Bcf/d.

Demand:

  • Domestic natural gas demand increased 4.37 Bcf/d week over week. Res/Com demand accounted for most of the increase, rising 4.95 Bcf/d. Industrial demand also increased 0.73 Bcf/d, while Power demand decreased 1.31 Bcf/d.
  • LNG exports increased 0.14 Bcf/d, while Mexican exports decreased 0.07 Bcf/d.

Total supply decreased 0.38 Bcf/d, while total demand increased 4.53 Bcf/d week over week. With increased demand and a decrease in supply, expect the EIA to report a weaker injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 51 Bcf. Last year, the same week saw an injection of 65 Bcf; the five-year average is an injection of 46 Bcf.