Crude Oil Inventory Draw First Time in 3 Weeks Lends Some Support to Prices

Crude Oil Inventory Draw First Time in 3 Weeks Lends Some Support to Prices

US crude oil stocks posted a decrease of 2.7 MMBbl from last week. Gasoline and distillate inventories increased by 0.3 MMBbl and 2.6 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 3.5 MMBbl, while reporting a gasoline draw of 0.4 MMBbl and a distillate build of 1.8 MMBbl. Analysts were expecting a crude oil draw of 1.9 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 4.0 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production remained unchanged last week, per the EIA. Crude oil imports were down 0.49 MMBbl/d last week, to an average of 7.2 MMBbl/d. Refinery inputs averaged 17.7 MMBbl/d (0.40 MMBbl/d more than last week’s average), leading to a utilization rate of 95.9%. The crude oil draw for the first time in three weeks brought some support to prices, but the total petroleum stocks build is limiting the price gain. Prompt-month WTI was trading up $0.30/Bbl, at $56.43/Bbl, at the time of writing.

Prices dipped below the $55/Bbl level last Wednesday, after disappointing global economic data as well as the inversion of US bonds, which increased concerns of a possible recession. Since then prices have recovered some of their losses due to a slight softening of the trade war between the US and China. The optimism regarding a possible thaw of US–China tensions came after US President Donald Trump remarked that he would be talking with Chinese President Xi Jinping to discuss trade issues, and was furthered bolstered by the US stating it would extend a reprieve that permits China’s Huawei Technologies to buy components from US companies. The hopes that major economies around the globe will take stimulus measures to battle the economic slowdown also gave some support to prices. Although there is some hope that US–China tensions will ease off and major governments will become more aggressive in delivering stimulus, the current gloomy outlook on global economic health and demand projections, as well as the warnings from OPEC and IEA reports that an oil glut in 2020 is likely, are still keeping the pressure on prices and limiting any significant gains.

In addition to expectations of greater monetary stimulus by central banks across the globe to battle a possible recession, prices also got support from a drone attack by the Houthi group on an oilfield in eastern Saudi Arabia on Saturday. The attack caused a fire at a gas plant, adding more concern to existing tensions in the Middle East and possible supply disruptions in the region. However, the effect on prices were minimal, as Saudi Aramco stated that oil production was not affected, and because the market seems to keep its focus on the gloomy and further-deteriorating global economic health and demand projections.

Evidence is mounting that without a large reduction in output from OPEC or some level of conflict occurring with Iran, price rallies (up to $61 to $64) will be sold until the tariff issues between the US and China come to some sort of pause or solution. The market remains within a range of $50 to $61. Expect this type of environment to continue until further evidence of solutions occur. That said, due to the precarious nature of the tariff struggle, there remains the possibility of China ignoring the bans on buying Iranian crude (in place of US crude) as a retaliatory posture, likely pressuring prices below $50. This event could flood the global crude market going into an already oversupplied 2020.

Petroleum Stocks Chart

The Week Ahead For Crude Oil, Gas and NGLs Markets – August 19, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – August 19, 2019

CRUDE OIL

  • US crude oil inventories posted an increase of 1.6 MMBbl last week, according to the weekly EIA report. Gasoline inventories decreased 1.4 MMBbl, while distillate inventories also decreased, shedding 1.9 MMBbl/d. Total petroleum inventories posted a build of 2.4 MMBbl. US crude oil production was flat versus the week before, per EIA, while crude oil imports were up 0.57 MMBbl/d, to an average of 7.7 MMBbl/d.
  • Prices finally got some bullish news early last week after taking a pounding with the announcement of an additional 10% in tariffs on $300 billion of Chinese goods, when the Trump administration announced delaying imposing the 10% tariff on certain items until December rather than September. Cellphones, laptops, and other consumer products showed an easing of the escalating trade tensions that have developed between the world’s largest economies. The market was also reassured that Saudi Arabia will do whatever it takes to support prices and is in discussion with other members to achieve this outcome. The OPEC report released on Friday confirmed that the Kingdom has reduced production 134 MBbl/d from June to July. The market is expecting the Saudis to limit exports to under 7 MMBbl/d during August and September, in an attempt to drain crude inventories. This should offer support for prices prior to the IPO of Saudi Aramco.
  • The inventory release on Wednesday had a negative impact on prices, but several markets took it on the chin during the day as the 10-year and 2-year US bonds became inverted for a while (the 2-year had a higher interest rate than the 10-year). Many economists suggested this action in the debt market portends a recession in the US is coming. While history shows that a recession may occur, the timing could be between four and 22 months. Regardless, talk of a recession hit equity markets hard and lent no support for WTI.
  • The crude trade has become intrinsically linked to the global economy, and concerns about global demand currently directs the trade. The Saudis will support restricting the supply side of inventories; but for prices to catch a bid, progress will have to occur in the tariff dispute between China and the US. The aforementioned OPEC report stated that the demand for OPEC crude will be lower next year than this year, and 1.3 MMBbl/d lower than 2018. Short of reaching a “deal,” the market will need to see a “truce” of some sort between the parties, thereby reducing the escalation of tariffs.
  • The CFTC report released last week (dated August 16) provides a slight bullish bet, as the Managed Money long sector added 13,033 contracts and the short positions covered (reduced) 18,707 contracts. The gains by the long sector are surprising considering the collapse in price the week prior. It also indicates the level of support the market has if prices return to the $50 area again.
  • Market internals shifted with the gains early in the week, to a neutral to slightly negative bias. Volume gained week over week, while open interest decreased (not surprising with expiration of September contract coming).
  • Evidence is mounting that without a large reduction in output from OPEC or some level of conflict occurring with Iran, price rallies (up to $61 to $64) will be sold until the tariff issues between the US and China come to some sort of pause or solution. The market remains in a range of $50 to $61. Expect this type of environment to continue until further evidence of solutions occur. That said, due to the precarious nature of the tariff struggle, there remains the possibility of China ignoring the bans on buying Iranian crude (in place of US crude) as a retaliatory posture, likely pressuring prices below $50. This event could flood the global crude market going into an already over-supplied 2020.

NATURAL GAS

  • Natural gas dry production showed a slight decrease of 0.05 Bcf/d, while Canadian imports decreased 0.32 Bcf/d.
  • Res/Com demand decreased 0.02 Bcf/d, while power demand fell by 0.91 Bcf/d. Industrial demand was up slightly on the week, gaining 0.02 Bcf/d. LNG exports gained 0.06 Bcf/d on the week, while Mexican exports increased 0.01 Bcf/d. These events left the totals for the week showing the market decreasing 0.37 Bcf/d in total supply while total demand decreased by 0.86 Bcf/d.
  • The storage report last week showed the injections for the previous week at 49 Bcf. Total inventories are now 357 Bcf higher than last year and remain 111 Bcf below the five-year average. Current weather forecasts, in the coming two weeks, are indicating above average temperatures on the East coast and Gulf region and Western US, with more moderating temperatures forecasted in the Central US. This represents a slightly moderating shift from the previous forecast.
  • The moderation associated with the longer-term forecasts may pressure prices early this week. A lack of late-summer demand will exert more pressure on prices, as the ending inventories for storage may end well over 3.6 TCF.
  • The CFTC report released last week (dated August 16) provides added emphasis of what the speculative trade is expecting for prices. The Managed Money short position increased their exposure by adding 10,502 contracts, while the Managed Money long positions decreased positions by 4,045 contracts.
  • Market internals continue a bearish bias on the week as volume was slightly lower than the previous week, while total open interest also declined week over week, (according to preliminary data from the CME).
  • The fundamentals may allow for some weakening of prices this week as the market heads into a historically bearish time of the year (either side of the Labor Day weekend). Nothing fundamentally has changed in the past week, and an additional test of the August lows at $2.029 should be expected, perhaps with the September contract, or with the October contract as it takes over as prompt month. Should prices for either contract break below $2.02, additional declines will push prices lower to support dating back to May ’16 between $1.952 and $1.909. Any rally will run into selling at the highs from last week at $2.267, up to the July expiration high of $2.324.

NATURAL GAS LIQUIDS

  • Ethane was up $0.002 to $0.152 on the week, while propane was down $0.018 to $0.403, normal butane was down $0.025 to $0.468, isobutane was down $0.057 to $0.628, and natural gasoline was up $0.019 to $1.00.
  • US propane stocks increased ~3.21 MMBbl for the week ending August 9. Stocks now sit at 86.51 MMBbl, roughly 16.73 MMBbl and 17.27 MMBbl higher than the same week in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil fell for the week ending August 16, according to Drillinginfo’s analysis of manifests from US Customs & Border Patrol. As of August 19, aggregated data from customs manifests suggests that overall waterborne imports fell by 110 MBbl/d from the previous week. PADD 1 imports rose by 331 MBbl/d, while PADD 3 imports fell by 214 MBbl/d and PADD 5 imports were down by more than 225 MBbl/d.

  • US imports of crude from Ecuador have been elevated in August and are on pace to see the highest level since January 2017. PADD 5 is the biggest consumer of Ecuadorian crude, with Oriente being the dominant grade. The biggest difference has been imports to Valero’s Benicia refinery. That refinery has taken two cargoes of more than 300 MBbl this month, roughly double the usual imports for the refinery, which has received Ecuadorian crude each month in 2019 with the exception of March and June.

Gas Injection Below Expectations, Prices Steady

Gas Injection Below Expectations, Prices Steady

Natural gas storage inventories increased 59 Bcf for the week ending August 16, according to the EIA’s weekly report. This is below the market expectation, which was an injection of 65 Bcf.

Working gas storage inventories now sit at 2.797 Tcf, which is 369 Bcf above inventories from the same time last year and 103 Bcf below the five-year average.

At the time of writing, the September 2019 contract was trading at $2.177/MMBtu, roughly $0.007 higher than yesterday’s close and $0.055 lower than last week’s.

Weather forecasts for the coming two weeks show above-average temperatures in the early part of the forecast, but show a gradually declining curve into the back half of the forecast, as temperatures are expected to cool. Should forecasts turn warm for the remainder of the summer, injections will be impacted. However, end-of-summer weather will have only minimal impacts on injections, and injections are still expected to be somewhere between average and above average for the remainder of the season.

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

This Week in Fundamentals
The summary below is based on Bloomberg’s flow data and DI analysis for the week ending August 22, 2019.

Supply:

  • Dry gas production increased 0.29 Bcf/d on the week.
  • Canadian net imports increased this week, gaining 0.47 Bcf/d.

Demand:

  • Domestic natural gas demand increased 0.47 Bcf/d week over week. Power demand led the increase, gaining 0.28 Bcf/d, while Res/Com and Industrial demand increased 0.10 and 0.08 Bcf/d, respectively.
  • LNG exports ramped back up this week, gaining 1.03 Bcf/d, as Sabine Pass maintenance has been completed. Mexican exports also increased, gaining 0.23 Bcf/d.

Total supply is up 0.76 Bcf/d, while total demand increased 1.76 Bcf/d week over week. With demand outpacing the gain in supply, expect the EIA to report a weaker injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 60 Bcf. Last year, the same week saw an injection of 70 Bcf; the five-year average is an injection of 65 Bcf.

Gas Storage Injection Misses Low, Prices Rally

Gas Storage Injection Misses Low, Prices Rally

Natural gas storage inventories increased 49 Bcf for the week ending August 9, according to the EIA’s weekly report. This is well below the market expectation, which was an injection of 61 Bcf.

Working gas storage inventories now sit at 2.738 Tcf, which is 357 Bcf above inventories from the same time last year and 111 Bcf below the five-year average.

At the time of writing, the September 2019 contract was trading at $2.262/MMBtu, roughly $0.119 higher than yesterday’s close and $0.134 higher than last week’s.

The injection this week missed well below the market expectation. This bullish report sent prices up to ~$2.26 post report. Before the report, prices gained slightly on yesterday’s close, and were trading between $2.15 and $2.18. As prices rallied up to the highs for the morning, there was a slow down to the rally around $2.26.

As we near the end of summer, the chances for a significant price rally are becoming limited. Extended heat will cause slight gains in prices, but any run will likely be limited. Another factor that could come into play is that we are entering peak hurricane season. Hurricanes and tropical storms have the potential to shut-in production, which will cause prices to increase. However, with LNG cargoes can be halted from entering the Gulf, causing a drop in demand and falling prices. The uncertainty of storms in the Gulf, while historically bullish, now have uncertain outcomes in terms of pricing. It is unlikely that the market will get an extreme price run this summer, especially with GCX expected to hit the market in late September. This pipeline runs from the Permian to the Gulf Coast and can carry ~2.0 Bcf/d. This will be the first major pipeline out of the Permian to hit the market and will be the start of relieving the pipeline bottleneck out of the basin.

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

This Week in Fundamentals

The summary below is based on Bloomberg’s flow data and DI analysis for the week ending August 15, 2019.

Supply

  • Dry gas production was relatively flat week over week, gaining 0.04 Bcf/d.
  • Canadian net imports decreased this week, falling 0.20 Bcf/d.

Demand

  • Similar to production, domestic natural gas demand was relatively flat on the week, falling 0.09 Bcf/d week over week. Power demand fell 0.17 Bcf/d, while Res/Com demand fell 0.02 Bcf/d and Industrial demand increased 0.10 Bcf/d.
  • LNG exports decreased week over week, falling 0.19 Bcf/d. Mexican exports gained slightly, increasing 0.02 Bcf/d.

Total supply is down 0.16 Bcf/d, while total demand decreased 0.30 Bcf/d week over week. With the lack of movement in supply and demand week over week, expect the EIA to report a similar or slightly stronger injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 69 Bcf. Last year, the same week saw an injection of 48 Bcf; the five-year average is an injection of 51 Bcf.

Prices Drop Due to an Inventory Build and Trade Wars Will Keep the Pressure On Prices

Prices Drop Due to an Inventory Build and Trade Wars Will Keep the Pressure On Prices

US crude oil stocks posted an increase of 1.6 MMBbl from last week. Gasoline and distillate inventories decreased by 1.4 MMBbl and 1.9 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 3.7 MMBbl, while reporting a gasoline build of 3.7 MMBbl and a distillate draw of 1.3 MMBbl. Analysts, to the contrary, were expecting a crude draw of 2.8 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 2.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production remain unchanged last week, per the EIA. Crude oil imports were up 0.57 MMBbl/d last week, to an average of 7.7 MMBbl/d. Refinery inputs averaged 17.3 MMBbl/d (0.48 MMBbl/d less than last week’s average), leading to a utilization rate of 94.8%. Prices drop due to crude oil and total petroleum stocks inventory build. Prompt-month WTI was trading down $2.37/Bbl, at $54.73/Bbl, at the time of writing.

Prices soared nearly 5% on Tuesday due to easing US-China trade tariff issues, with the additional US tariffs on Chinese goods being delayed, making up some of the losses seen in the first week of August. The beginning of August, until yesterday, has been tough on prices, as WTI fell nearly to the $50/Bbl level due to the Trump administration’s announcement of additional 10% tariffs on $300 billion of Chinese goods and further deteriorating US-China tariff issues, which raised the concerns about the health of global economic and demand growth once again.

Prices got some support following the decline to near $50/Bbl after Saudi Arabia once again reassured the market that the Kingdom is ready to do whatever it takes to increase prices. Saudi Arabia last week said that it plans to chat with other OPEC producers to discuss additional steps to bring a balance to the market and said that the country would limit its crude exports below 7 MMBbl/d in August and September to drain crude inventories to prompt prices, as the Kingdom is still seeking a higher price environment before the IPO of Saudi Aramco.

The news from Saudi Arabia and their willingness to continue with supply cuts have certainly supported prices; however, the significant uptick in prices yesterday, the largest daily increase of the year, was due to the announcement by the US that it would delay imposing a 10% tariff on certain Chinese products. These products include laptops and cellphones, and the tariffs will be put in place in December instead of September. The announcement eased some of the concerns about the global economy and demand taking higher tolls than they already have. The US-China trade war has been one of the major catalysts of weakening economic health and demand growth, putting immense pressure on prices. Given the state of the US-China trade wars, any positive news surrounding this issue gives some hope to the market, but only time will tell whether the world’s two largest economies can ever reach a deal or make any progress in this prolonged trade war.

Even with the substantial fall and recent rebound of WTI prices in the past couple of weeks, the market continues to trade in a range between $50/Bbl and $61/Bbl. The announcement of delayed tariffs on Chinese goods does not change the already gloomy economic and demand outlook. Until a deal is reached, US-China trade wars will keep the pressure on prices. Reaching and possibly breaking the higher side of the range will depend on further bullish news from Saudi Arabia and additional substantive aggression by Iran, forcing a conflict. Should China cease buying oil from the US in retaliation for the tariffs and reinitiate buying oil from Iran, the global market could be flooded going into an already oversupplied 2020. This event would pressure prices below the key $50/Bbl area, possibly taking prices down to December ’18 levels of around $47/Bbl and the same month’s lows of $42.36/Bbl.

Petroleum Stocks Chart