Prices Extend Gains Due to Larger than Expected Crude Draw and Total Petroleum Stocks Withdrawal

Prices Extend Gains Due to Larger than Expected Crude Draw and Total Petroleum Stocks Withdrawal

US crude oil stocks posted a decrease of 4.8 MMBbl from last week. Gasoline and distillate inventories decreased by 2.4 MMBbl and 2.5 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 0.4 MMBbl, while reporting gasoline and distillate draws of 0.88 MMBbl and 1.2 MMBbl, respectively. Analysts, to the contrary, were expecting a crude oil draw of 3.5 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 4.9 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production decreased 100 MBbl/d last week, per the EIA. Crude oil imports were up 0.9 MMBbl/d last week, to an average of 6.9 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (27 MBbl/d less than last week’s average), leading to a utilization rate of 94.8%. Prices extend gains due to larger than expected crude draw and total petroleum stocks withdrawal. Prompt-month WTI was trading up $1.18/Bbl, at $57.44/Bbl, at the time of writing.

Prices had a busy week and continued their volatility as the market kept its focus on the developments and news regarding the US-China trade tensions, global economic health and data, and eroding crude demand led by a weakening economic growth. Prices bounced up to their highest of the week last Thursday, only to give up most of their gains before the long weekend due to strengthening of the US dollar. The decline in prices continued as crude futures sank more than 2% on Tuesday, due to the US starting to impose 15% tariffs on some Chinese imports Sunday, while China began placing new duties on US crude oil. Also supporting bearish sentiment and bringing prices down was the US manufacturing data showing activity in August falling for the first time in three years and the lingering fears about a global recession.

Although the overall gloomy economic outlook and the ongoing trade war between the world’s largest economies still persists, the positive news from China’s services sector caused a surge in prices on Wednesday. Oil prices rose more than 4% on Wednesday along with global markets after a private survey showed that activity in China’s services sector grew at the fastest pace in three months in August. Also supporting prices was a possible sign of easing tensions from the Middle East, as Iran stated that Tehran would free seven crew members from the detained British-flagged tanker that was seized by Iran in retaliation for Britain’s previous detention of an Iranian tanker.

Despite the brief support provided by positive news from China’s services sector, the overall global economic outlook remains dim and troublesome as the trade tension between the US and China continues to linger and progressively worsen due to tit-for-tat tariffs imposed by both countries. The supply side unfortunately does not provide too much support to prices either, despite the historical low productions from Iran and Venezuela and the OPEC+ countries’ continuing efforts to reduce supply. OPEC is set to meet on September 12 in Abu Dhabi. Although the market is very much focused on the impact of the US-China trade war on the economy and oil demand, developments from this meeting will be closely watched, as the IEA has already given signals that without further supply reductions, an oil supply glut could resurface again in 2020.

The recent range between $53.00 and $58.00 may hold in the coming week without developments in the US and China trade war, while the long-term range between $50.00 and $61.00 will likely hold without similar developments. China’s attempt to bring tariffs on US crude imports may indicate a shift to utilize Iranian imports. Prices would be pressured if Iran were to increase output because of demand from China or a nuclear deal with France. The market will trade around the news event or Twitter feeds in the coming week, but also will keep an eye out for any news regarding supply cuts from the OPEC meeting.

Petroleum Stocks Chart

The Week Ahead For Crude Oil, Gas and NGLs Markets – September 3, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – September 3, 2019

CRUDE OIL

  • US crude oil inventories posted a substantial decrease of 10.0 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories both decreased 2.1 MMBbl. Total petroleum inventories posted a significant decline of 11.2 MMBbl. US crude oil production was up 200 MBbl/d from the week before, per EIA.
  • The market continues to follow trends of late, correlating any directional movements in prices to the tweets of President Trump and the statements of the Chinese regarding the trade war between the world’s two largest economies. Confusion reigns as the US and China appear to be willing to reduce the recent escalating tensions. Trump stated that China was seeking a trade deal and that US officials had received requests from the Chinese negotiators to return to discussions. That was followed by the Chinese trade negotiator, Vice President Liu He, stating that Beijing hopes to resolve the trade war through calm negotiations without escalating tensions any further. However, when the Chinese declined to confirm the Trump announcement regarding the requests, the market could not confirm a potential trade deal and lost any support brought by the comments. It is becoming evident that any trade deal will have to allow both parties in the negotiations to declare success. Price action does not show evidence of any success, as the highs sold off toward the end of the week.
  • The EIA inventory release on Wednesday confirmed substantial crude inventory declines that were announced by an industry report on Tuesday. This decline, coupled with a very strong decline in total petroleum inventories, brought a positive impact to prices. The rally sent prices to the highs of the week on Thursday, before giving up many of those gains on Friday as traders were forced to assess a dramatic gain in the US dollar going into the long weekend.
  • In the coming week, the market will have to assess the impact brought about by the French announcement that the Iranian minister is traveling to France to further negotiations on the nuclear agreement that the Trump administration left last year. Clearly, the goal of the Iranians is to increase exports by working around the US restrictions. Any success in this endeavor will add more crude to the already oversupplied market going into 2020.
  • The CFTC report released Friday (dated August 27) showed the Managed Money long sector (speculating on higher prices) reducing positions by 19,191 contracts while the short position added 7,560 contracts.
  • As prices closed $0.93 over the previous week’s close, market internals shifted to a neutral bias. Volume gained week over week, while open interest increased slightly. The market remains in a consolidation phase for prices, having failed four times in the past seven weeks to break above the commonly watched 20-week moving average ($57.60/Bbl, currently).
  • This consolidation phase has prices in a tight range on either side of the 50-day average (currently $56.46/Bbl). The recent range between $53.00 and $58.00 may hold in the coming week without developments on the US and China trade war, while the long-term range between $50.00 and $61.00 will likely hold without similar developments. China’s attempt to bring tariffs on US crude imports may indicate a shift to utilize Iran imports. Prices would be pressured if Iran were to increase output because of demand from China or a nuclear deal with France. Once again, the market will trade around the news event or Twitter feeds in the coming week.

NATURAL GAS

  • Natural gas dry production showed a decrease of 0.31 Bcf/d. Canadian imports decreased 0.55 Bcf/d.
  • Res/Com demand fell 0.38 Bcf/d, while power demand dropped 4.66 Bcf/d as temperatures became more seasonal. Industrial demand was up on the week, gaining 0.21 Bcf/d. Secondary components had LNG exports rising by 0.96 Bcf/d, while Mexican exports gained 0.11 Bcf/d.
  • These events left the totals for the week showing the market decreasing 0.86 Bcf/d in total supply while total demand decreased 3.93 Bcf/d.
  • The storage report last week showed the injections for the previous week at 60 Bcf. Total inventories are now 363 Bcf higher than last year and 100 Bcf below the five-year average. Current weather forecasts, in the near term (coming week), show above-average temperatures throughout the central and southern US, with the hurricane potentially lowering power demand along the east coast in the near term, according to current tracking information.
  • The contract expiration last week followed the recent two-year trend of providing strength to prices. Prices held strength as the October contract took over as prompt, with some concerns over the direction of the hurricane. This week the support provided by the hurricane path may pressure prices, as it becomes a demand liability in the southern and eastern US. The new LNG facilities are adding additional demand for natural gas (last two week’s gains), bringing support for prices.
  • The CFTC report released last week (dated August 27) provides a slight reversal of the data from the previous week’s data, as the Managed Money short position increased their exposure by adding 2,764 contracts, while the long positions decreased 2,289 contracts. The total Managed Money short position remains at levels not seen since late December ’17.
  • Market internals reflect a neutral to bearish bias. Volume was higher last week than the previous week, while total open interest declined week over week (according to preliminary data from the CME), likely due to the expiration of the September contract.
  • The fundamentals may allow for strength in prices in the coming week as the market heads into a historically bearish time of the year (either side of the Labor Day weekend). The market has ranged between $2.03 and $2.30 since the breakdown in July. While the storage levels will provide some daily volatility, the market has received enough information on summer injections to start looking forward to the upcoming winter forecasts. It is important for the market to hold $2.244 (the commonly traded 50-day average). A break below this price will likely set up a test of the $2.10 to $2.12 area. Should prices break below this zone, a test of $2.02 will find buyers. Should prices hold the initial support at $2.24, a test of the July expiration high at $2.324, up to $2.333, is likely. Significant additional strength will be necessary to push the run up to the breakdown area from the spring, at $2.49.

NATURAL GAS LIQUIDS

  • EIA reported another record for daily NGL production in May, producing 4,838 MBbl/d. This tops the previous daily production record set in April 2019 of 4,786 MBbl/d. All the increase in production came from PADD 3, which increased ~79 MBbl/d, while all other PADDs showed slight declines month over month. May 2019 production was ~516 MBbl/d and 1,067 MBbl/d higher than May 2018 and May 2017, respectively.
  • Ethane was down $0.007 to $0.170, propane was up $0.017 to $0.423, normal butane was up $0.017 to $0.478, isobutane was down $0.005 to $0.548, and natural gasoline was down $0.015 to $0.988.
  • US propane stocks increased ~3.66 MMBbl for the week ending August 23. Stocks now sit at 94.16 MMBbl, roughly 22.76 MMBbl and 20.60 MMBbl higher than the same week in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil rose for the week ending August 30 according to Enverus’s analysis of manifests from US Customs & Border Patrol. As of September 3, aggregated data from customs manifests suggested that overall waterborne imports increased by nearly 1.1 MMBbl/d from the previous week. PADD 1 and PADD 3 both increased somewhat, with PADD 1 up by nearly 220 MBbl/d and PADD 3 up by nearly 80 MBbl/d. The big driver of the increase was PADD 5, which increased by 813 MBbl/d.

  • US crude imports from Nigeria appeared to have ticked up in August to the highest level since February 2019. On the East Coast, refiner PBF appears to have resumed importing barrels from the West African country for the first time since February 2018, while Phillips 66 Freeport has imported a cargo of medium sweet Ebok in each of the past two months.

Gas Injection Meets Market Expectation, Hurricane Dorian On the Way

Gas Injection Meets Market Expectation, Hurricane Dorian On the Way

Natural gas storage inventories increased 60 Bcf for the week ending August 23, according to the EIA’s weekly report. This is spot on with the market expectation, which was an injection of 60 Bcf.

Working gas storage inventories now sit at 2.857 Tcf, which is 363 Bcf above inventories from the same time last year and 100 Bcf below the five-year average.

At the time of writing, the October 2019 contract was trading at $2.275/MMBtu, roughly $0.053 higher than yesterday’s close. The September 2019 contract expired yesterday, rallying to close at $2.251/MMBtu, up $0.049 from the prior day’s close.

Hurricane Dorian is headed toward the lower 48, but recent forecasts for the storm show that it is expected to hit the eastern part of Florida and stay away from the Gulf. With this current path, production isn’t expected to be impacted. However, should the forecasted path take a turn toward the Gulf, crews will be evacuated, and production will decrease for a short period of time. This path change must happen soon for production to be impacted, as Dorian is expected to hit the eastern coast of Florida this weekend. Additionally, should the hurricane path stay true, production will stay near current levels and demand will decrease, pressuring prices lower.

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 29, 2019.

Supply:

  • Dry production decreased 0.30 Bcf/d on the week. Most of the decrease came from the South Central (-0.44 Bcf/d), where Texas production dropped 0.23 Bcf/d and GoM production fell 0.11 Bcf/d. To slightly offset the decrease, the East region gained 0.12 Bcf/d.
  • Canadian imports decreased 0.64 Bcf/d, largely due to decreased imports in the Midwest.

Demand:

  • Domestic natural gas demand fell 5.24 Bcf/d week over week. Power demand saw the largest decrease, falling 5.03 Bcf/d, which accounts for nearly the entire decrease in domestic demand. Res/Com demand fell 0.41 Bcf/d, while Industrial demand gained 0.21 Bcf/d on the week.
  • LNG exports gained 1.39 Bcf/d, mainly due to Sabine and Corpus ramping back up to full export capacity. Mexican exports remained relatively flat on the week, gaining only 0.01 Bcf/d.

Total supply decreased 0.93 Bcf/d, while total demand decreased 4.01 Bcf/d week over week. With the drop in demand outpacing the drop in supply, expect the EIA to report a stronger injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 80 Bcf. Last year, the same week saw an injection of 62 Bcf; the five-year average is an injection of 63 Bcf.

BP Divests Alaska Business to Hilcorp for $5.6 Billion

BP Divests Alaska Business to Hilcorp for $5.6 Billion

Houston-based private oil & gas producer Hilcorp has agreed to acquire BP’s Alaska business for $5.6 billion consisting of $4 billion payable near-term and $1.6 billion payable through earnouts. The deal adds 74,000 boe/d from a number of fields including a 26% interest in Prudhoe Bay.

“BP was a pioneer in Alaskan drilling and one of the key players in building the Alaskan oil industry, including drilling the confirmation well for the massive Prudhoe Bay field in the 1960s and participating in the Trans Alaska Pipeline in the 1970s,” said Enverus Senior M&A Analyst, Andrew Dittmar. “Their exit and replacement by Hilcorp marks a changing of the guard for the Alaskan petroleum industry.”

For Hilcorp, buying BP’s assets, including assuming operatorship of Prudhoe Bay, is a crowning achievement to the Alaska business they have built since 2012 to become the largest private operator in the state with more than 75,000 boe/d gross operated production.

The deal additionally extends Hilcorp’s lead as the largest private producer in the United States based on gross operated production, which stood at just over 610,000 boe/d as of the end of July 2019. Alaska has played an instrumental role in Hilcorp’s remarkable growth including an earlier $1.5 billion purchase from BP of North Slope interests in 2014. Hilcorp and other private operators have stepped up to take the place of BP as it dialed back exposure to its mature, legacy Alaska portfolio to pursue more growth opportunities elsewhere.

In departing Alaska, BP is choosing to focus on higher growth opportunities elsewhere, including in U.S. unconventionals. The company made a major commitment to growth in U.S. shale by acquiring Permian, Eagle Ford, and Haynesville assets from BHP for $10.5 billion in 2018. That value is being offset by this sale and a U.S. Lower 48 divestment program that targets the bulk of BP’s assets outside of its three key growth shale plays.

The dynamic in Alaska is global IOCs exiting to be replaced by private operators more interested in managing still high-value but largely mature assets. That is very similar to the story in North Sea, which has also seen a series of sales by global companies to private operators. Conoco stands somewhat uniquely among the major international oil producers in retaining its commitment to Alaska as a key growth region including acquisitions from BP and Anadarko in 2018.

The Increase in Prices Continued Following The EIA’s Bullish Inventory Report

The Increase in Prices Continued Following The EIA’s Bullish Inventory Report

US crude oil stocks posted a very large decrease of 10.0 MMBbl from last week. Gasoline and distillate inventories both decreased by 2.1 MMBbl. Yesterday afternoon, API reported a very large crude oil draw of 11.1 MMBbl, while reporting gasoline and distillate draws of 0.35 MMBbl and 2.5 MMBbl, respectively. Analysts were expecting a much smaller crude oil draw of 2.1 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a significantly large decrease of 11.2 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production increased 200 MBbl/d last week, per the EIA. Crude oil imports were down 1.3 MMBbl/d last week, to an average of 5.9 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (0.3 MMBbl/d less than last week’s average), leading to a utilization rate of 95.2%. The report is bullish due to significantly large crude oil and total petroleum stocks withdrawals. The increase in prices yesterday due to API’s report continued today, following the bullish EIA report. Prompt-month WTI was trading up $1.06/Bbl, at $55.99/Bbl, at the time of writing.

Prices saw a sharp increase on Tuesday due to a significantly large crude oil draw reported by API and the expectation of a similar drop from today’s report by EIA. The sharp increase in prices came despite the news from the G7 summit where France’s president lifted hopes for a deal between the US and Iran, which could mean Iran ramping up production, and despite the concerns about a recession and uncertainty around the lingering US–China trade wars

The developments around the US–China trade war continue to drive price movements in both directions, and the sentiment on the issue is changing rather fast, although no resolution and no deal between the world’s two largest economies seem to be possible anytime soon. Prices in the last two weeks have swung in both directions on this issue. Prices got some support the previous week from US President Donald Trump’s statement that he would be talking with his Chinese counterpart to discuss trade issues. Prices were further bolstered by the US stating it would extend a reprieve that permits China’s Huawei Technologies to buy components from US companies. The bullish sentiment from this news was short-lived as China last Friday announced it would impose retaliatory tariffs on $75 billion worth of imports from the US, which include crude oil. This announcement was followed by President Trump’s twitter posts in which he said he said he would be imposing higher tariff rates on some Chinese imports.

Monday brought more volatility to prices due to uncertainty and confusion about the US–China trade dispute. Prices first moved higher as both the US and China made statements and appeared to be willing to ease the rising tensions – first, with Trump stating that China was seeking a trade deal and that US officials had received calls from Chinese negotiators to return to discussions, and second, comments by China’s trade negotiator, Vice President Liu He, saying that Beijing hopes to resolve the trade war through “calm” negotiations without escalating the tensions any further. The hopes for a possible round of discussions perhaps a trade deal increased the bullish sentiment; however, news that Beijing did not confirm the phone call mentioned by Trump between Chinese and US officials reversed the sentiment and once again increased the doubts and concerns over whether any progress will be made regarding the US–China trade disputes.

Prices have had trouble consistently trading above the $56/Bbl level in the last couple of weeks and market remains in the range of $50 to $58 as bearish sentiment is slowly taking over the market while tensions in Middle East prevents any significant decline in prices. At this point the only catalyst that could break the resistance and take prices close to the $60/Bbl range would be tensions in the Middle East drastically intensifying or a large reduction in output by OPEC. Prices can be further pressured in the near term if the US and Iran make any progress toward a deal and if US–China trade tensions worsen and further deteriorate global economic and demand growth. There also 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.

Petroleum Stocks Chart