The Week Ahead For Crude Oil, Gas and NGLs Markets – August 12, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – August 12, 2019

CRUDE OIL

  • US crude oil inventories posted an increase of 2.4 MMBbl last week, according to the weekly EIA report. Gasoline inventories increased 4.4 MMBbl, while distillate inventories increased 1.5 MMBbl. With all these increases, total petroleum inventories posted a large build of 10.4 MMBbl. US crude oil production increased 100 MBbl/d, while crude oil imports were up 0.49 MMBbl/d to an average of 7.1 MMBbl/d.
  • Prices were down all week as the market continued to struggle with the tariff and trade issues between the US and China. The prior week, the Trump administration’s announcement of an additional 10% tariff on $300 billion of Chinese goods, effective September 1, added more skepticism of any agreement between the world’s largest economies. WTI then had to absorb the trade news of China devaluing its currency (the yuan) to nearly a 10-year low. Adding to the WTI trade woes was the China announcement to state-run companies to halt the imports of US agricultural products. In response to these events, the US promptly branded China a currency manipulator.
  • If that bearish news weren’t enough, the inventory release on Wednesday added fuel to the collapse. The large gains in total petroleum inventories forced selling that took prices to the lows of the week, just above that critical area of support around $50 that had held the market twice in early June.
  • The only reprieve the market got from the bullish side was at the end of the week when Saudi Arabia announced it was going to be contacting other OPEC participants to develop a plan to offset the decrease in global demand growth. This news brought prices back above $54, but with no plans announced yet, it is unlikely to support additional gains, with global economic issues exerting pressure on prices. The only other bullish issue for the market to consider is the Iranian meddling in the Strait of Hormuz, which was dormant last week.
  • The CFTC report released Friday (dated August 6) provides little new information, as the report date was before the inventory release and the positions had not shifted in any dramatic form. The Managed Money long sector (speculating on higher prices) added 5,124 contracts. The Managed Money short positions increased by 7,095 contracts.
  • Market internals shifted to a negative bias with the declines to $50 as volume gained (Wednesday was the highest daily volume since May 29) week over week and open interest declined, suggesting that a large portion of the losses associated with the inventory release were speculative longs aborting positions. This week’s CFTC report will likely confirm the exodus.
  • Even with the substantial fall of WTI prices in the past couple of weeks, the market continues to trade in a range between $50 and $61. Depending on the outcome of the Saudi talks with other OPEC nations, and without additional substantive aggression by Iran forcing a conflict, it is unlikely that prices will garner the support to trade up to the April highs of $66.60. 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 area, possibly taking prices down to December ’18 levels of around $47 and the same month’s lows of $42.36.

NATURAL GAS

  • Natural gas dry production showed an increase of 0.49 Bcf/d, while Canadian net imports increased 0.20 Bcf/d.
  • Res/Com demand decreased 0.16 Bcf/d on the week, while the power demand sector increased by 1.46 Bcf/d. Industrial demand was up slightly on the week, gaining 0.19 Bcf/d. LNG exports fell 1.78 Bcf/d due to maintenance at Sabine Pass, while Mexican exports gained 0.08 Bcf/d. These events left the totals for the week showing the market gaining 0.69 Bcf/d in total supply while total demand decreased by 0.21 Bcf/d.
  • The storage report last week showed injections for the previous week at 55 Bcf. Total inventories are now 343 Bcf higher than at the same time last year and 111 Bcf below the five-year average. Current weather forecasts for the coming two weeks are indicating warmer temperatures from the Rocky Mountains to the East, which will enhance some late-summer demand.
  • The next-two-week weather forecasts have a chance to support prices throughout this week, but additional tests of $2.00 are likely coming as the market remains in a historically bearish period and the opportunity for late-summer demand is nearing an end. Without late summer demand, ending storage inventories should be more than 3.6 Tcf.
  • The CFTC report was released last week (dated August 6) and provides little indication of any shift in the speculator’s directional bias. The Managed Money short position increased exposure by adding 2,149 contracts, while the long position increased by 4,144 contracts. Last week’s low range trade between $2.029 and $2.155 gave no indication of a directional change in the speculative trade.
  • Market internals maintained the bearish bias on the week, as volume was higher than that of the previous week. Total open interest also gained week over week, according to preliminary data from the CME.
  • The fundamentals will allow for some late-summer demand to support prices. However, with the summer season nearing an end, the possibility of extended heat is minimal, which will limit any price run. Expect another test of the $2.00 area either this week or later in the September contract’s life. Should prices break below $2.00, additional declines will push prices lower to support dating back to May ’16 of between $1.952 and $1.909. Any rally will run into selling at the July expiration at $2.29, up to the July expiration high of $2.324.

NATURAL GAS LIQUIDS

  • NGL prices bounced around this week between the products. Ethane was up $0.037 to $0.150, propane down $0.014 to $0.421, normal butane up $0.001 to $0.493, isobutane down $0.009 to $0.685, and natural gasoline down $0.050 to $0.985.
  • US propane stocks increased ~2.85 MBbl for the week ending August 2. Stocks now sit at 83.30 MMBbl, roughly 16.92 MMBbl and 15.67 MMBbl higher than the same weeks in 2018 and 2017, respectively.
  • Targa last week reported the startup of its Grand Prix pipeline, which runs from the Permian in West Texas to Mont Belvieu. The pipeline has capacity of 300 MBbl/d out of the Permian and can be expanded to 500 MBbl/d. Targa reported in its 2Q2019 earnings release that Grand Prix is currently flowing 150 MBbl/d to 170 MBbl/d into Mont Belvieu, and flows are expected to increase through the remainder of 2019 as additional pipeline extensions are completed.

SHIPPING

  • US waterborne imports of crude oil rose slightly for the week ending August 9, according to Drillinginfo’s analysis of manifests from US Customs and Border Protection. As of August 12, aggregated data from the customs manifests suggested that overall waterborne imports rose by 23 MBbl/d from the previous week. PADD 1 imports rose by a little over 125 MBbl/d, and PADD 5 imports were up by more than 30 MBbl/d. Imports to PADD 3 fell by nearly 140 MBbl/d.

  • Last week’s EIA weekly preliminary imports placed crude imports from Saudi Arabia at 277 MBbl/d. That is the lowest level since the EIA started reporting this level of granularity in 2010. Our customs manifests had imports from Saudi Arabia at nearly 303 MBbl/d for that week. One important driver of this was a lack of Saudi imports by Motiva Port Arthur. That refinery, owned by Saudi Aramco, is the biggest US refinery for Saudi crude. This week indicates we should see that number rise, with imports tallying roughly 638 MBbl/d for the week and imports returning to Motiva Port Arthur.

Prices Rally on Bullish Storage Release

Prices Rally on Bullish Storage Release

Natural gas storage inventories increased 55 Bcf for the week ending August 2, according to the EIA’s weekly report. This is below the market expectation, which was an injection of 61 Bcf.

Working gas storage inventories now sit at 2.689 Tcf, which is 343 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 $2.133/MMBtu, roughly $0.050 higher than yesterday’s close and $0.069 lower than last week.

A week after the explosion on TETCO, the line remains down, with very minimal gas flowing from the Berne compressor in Ohio south to the Kosciusko compressor in Mississippi. However, the impact of the line shutdown was the opposite of that expected. It was expected that prices would be pressured upward, as the ~1.7 Bcf/d of gas that was flowing south on the line was stopped. That did not happen; instead, prices trended downward from $2.20 to $2.12 from August 1 to August 2. A bullish event in the explosion was offset by the bearish LNG planned maintenance at Sabine Pass and drops in deliveries to Corpus Christi. In total, LNG deliveries dropped ~2.2 Bcf/d from August 1 to August 7. Earlier in the year, Sabine Pass performed maintenance on trains 1 and 2, which took 2 to 3 weeks to complete. A similar timing is expected for trains 3 and 4. TETCO has announced that nominations south through the Danville compressor will not be accepted until at least August 12.

Looking ahead to the rest of the summer, it is unlikely that natural gas prices will gain traction. The bullish event of the explosion on TETCO couldn’t move prices higher, and with peak summer weather nearing an end, it is unlikely that prices will gain significantly on temperature increases in the forecasts.

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 8, 2019.

Supply:

  • Dry gas production saw an increase of 0.65 Bcf/d week over week. The South Central/Gulf region led the charge, gaining 0.40 Bcf/d, with multiple states and the gulf showing slight increases.
  • Canadian net imports increased this week, gaining 0.21 Bcf/d.

Demand:

  • Domestic natural gas demand increased 1.79 Bcf/d week over week. Power demand gained 1.81 Bcf/d, while Res/Com demand dropped 0.17 Bcf/d and Industrial demand increased 0.16 Bcf/d.
  • LNG exports decreased significantly week over week, falling 1.50 Bcf/d. This can be attributed to the planned maintenance on trains 3 and 4 at Sabine Pass. Mexican exports gained slightly, increasing 0.08 Bcf/d.

Total supply is up 0.86 Bcf/d, while total demand gained 0.47 Bcf/d week over week. With the maintenance at Sabine Pass taking away from demand for a couple of weeks and production getting back to full strength after Hurricane Barry, expect the EIA to report a stronger injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 66 Bcf. Last year, the same week saw an injection of 33 Bcf; the five-year average is an injection of 48 Bcf.

Prices Fell Sharply Due to Bearish Inventory Report and Concerns on Global Economic Growth

Prices Fell Sharply Due to Bearish Inventory Report and Concerns on Global Economic Growth

US crude oil stocks posted a increase of 2.4 MMBbl from last week. Gasoline and distillate inventories increased by 4.4 MMBbl and 1.5 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 3.4 MMBbl, while reporting a gasoline draw of 1.1 MMBbl and a distillate build of 1.2 MMBbl. Analysts were expecting a crude draw of 2.8 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a very large increase of 10.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production increased by 100 MBbl/d last week, per the EIA. Crude oil imports were up 0.49 MMBbl/d last week, to an average of 7.1 MMBbl/d. Refinery inputs averaged 17.8 MMBbl/d (0.79 MMBbl/d more than last week’s average), leading to a utilization rate of 96.4%. Prices sharply fell due to larger-than-expected crude oil and significant total petroleum stocks. Prompt-month WTI was trading down $2.82/Bbl, at $50.81/Bbl, at the time of writing.

Oil prices crashed 8% last Thursday, the largest daily drop since February 2015, in reaction to the US President Donald Trump’s announcement that the US would impose 10% tariffs on $300 billion of additional Chinese goods and products on September 1. The news came in as the market was skeptical yet optimistic about the outcome of the meeting between the US and China in Beijing in an attempt to discuss the faith of trade disputes. The trade tensions between the US and China increased even further this week, as China let its currency, the yuan, drop to a nearly 10-year low and told its state-run companies to halt the imports of US agricultural products in retaliation for the US tariffs, which then was followed by the US branding China as a currency manipulator. China also pledged to impose new “necessary countermeasures” to protect its interests after the tariff announcement last week.

The recent trade escalations between the US and China further increased worries about the global economic and demand growth, and now have the market speculating about what could happen if China were to stop importing oil from the US and reinitiate crude purchases from Iran. This move by China could help Iran increase its production and flood the market, which is already expected to be oversupplied in 2020. The trade disputes and demand worries have now taken the main stage for prices, and the tensions in the Strait of Hormuz and declining production by OPEC at best will try to prevent prices from spiraling down below $50/Bbl levels. Increasing production from the US also is another factor that will keep the pressure on prices.

WTI has traded in a range between $50/Bbl and $61/Bbl this summer, and without additional substantive aggression by Iran forcing a conflict, it is unlikely that prices will garner the support to trade up to the higher side of the range. The market has defined the global economic slowdown as the most important element to trade. Due to the focus on the tariff issue and slowing global growth, the market should drift down, with brief rallies on Middle East news. Prices will test the major support zone at around $50.00/Bbl that held the market in May, as concerns around economic and demand growth intensifies.

Petroleum Stocks Chart

The Week Ahead For Crude Oil, Gas and NGLs Markets – August 5, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – August 5, 2019

CRUDE OIL

  • US crude oil inventories posted a decrease of 8.5 MMBbl last week, according to the weekly EIA report. Gasoline inventories decreased 1.8 MMBbl, while distillate inventories decreased 0.9 MMBbl/d. With the draw in crude inventories, total petroleum inventories posted a significant decrease of 10.1 MMBbl. US crude oil production increased 900 MBbl/d last week, per EIA, as the hurricane-related shut-ins came back online. Crude oil imports were down 0.37 MMBbl/d to an average of 6.7 MMBbl/d.
  • Prices started the week on solid footing with concerns around the shipping lanes in the Strait of Hormuz. With Iran’s confiscation of a British vessel the previous week, the market remained concerned about the navigation channel, as one-fifth of the world’s oil supply travels through this critical area. Currently, the US, Britain, and France have pledged to secure safe passage through the waterway, and last week these countries asked Germany to assist in combating any altercations by Iran. As long as Iran continues this disruptive behavior pattern, WTI will likely be supported, but in a diminutive way, as trade seems more focused on the demand side.
  • That focus became evident after a bullish inventory release, which only held the gains up to $58.82 temporarily. When the Trump administration announced additional tariffs on Chinese products on Thursday, most objective traders realized that the trade issues between the US and China are not close to a deal and that global economic growth dissipates as the two largest economies spar. This news was especially troubling to the market when the two sides agreed to a “truce” at the G-20 meeting in June only to have the Chinese back off their commitments to buy US agricultural products, forcing the US hand into adding the new tariffs in September.
  • Last week’s price action clearly displays the market’s reaction to news regarding the major issues of Iran’s meddling and the global economy. The immediate knee-jerk response to these struggles should continue if there are no long-term solutions to these issues. Neither issue is likely to be solved quickly (especially the US-China trade dispute), so the market may gradually drift lower due to global economic weakness while experiencing rapid runs due to Iranian misbehavior.
  • The CFTC report released Friday (dated July 30) provides little new information as the standoff in the market continues. The Managed Money long sector added 4,131 contracts. The Managed Money short positions increased their positions by 2,235 contracts.
  • Market internals maintain a neutral to slightly negative bias with the trade last week. Weekly volume was higher week over week, and open interest showed gains, as prices rallied only to decline on the tariff news.
  • WTI has traded in a range between $50 and $61 this summer, and without additional substantive aggression by Iran forcing a conflict, it is unlikely that prices will garner the support to trade up to the April highs of $66.60. The market has defined the global economic slowdown as the most important element to trade. Due to the focus on the tariff issue and slowing global growth, the market should drift down, with brief rallies on Middle East news. Prices will test the major support zone around $50.00 that held the market in May.

NATURAL GAS

  • Natural gas dry production showed an increase of 1.22 Bcf/d, as significant gains were made from the Gulf shut-ins coming back online. Canadian imports increased by 0.33 Bcf/d.
  • Res/Com and industrial demand increased 0.07 Bcf/d and 0.08 Bcf/d, respectively, while power demand increased 2.28 Bcf/d with warmer temperatures returning. LNG exports dropped 0.08 Bcf/d, while Mexican exports lost 0.02 Bcf/d. These events left the totals for the week showing the market gaining 1.55 Bcf/d in total supply while total demand increased 2.48 Bcf/d.
  • The storage report last week showed the injections for the previous week at 65 Bcf. Total inventories are now 334 Bcf higher than last year and 123 Bcf below the five-year average. Current weather forecasts show the coming two weeks with moderating temperatures in the Midwest and East, with heat contained within the Southwest, Texas, and the Southeast.
  • The moderating forecasts will continue to pressure prices, with a test of $2.00 coming. The only areas with bullish temperatures are the Southwest and the Southeast. Those areas may increase regional demand, but are unlikely to change the bearish perceptions of market participants. Without significant demand, inventories for storage should end over 3.6 TCF.
  • The CFTC report released last week (dated July 30) continued the recent trend of expanding short positions by the speculators. The Managed Money short position increased its exposure by adding 40,315 contracts, while the Managed Money long position increased by 893 contracts. This additional selling by the speculators covered the expiration time period and can only be interpreted as very bearish.
  • Market internals continued an increasing bearish bias on the week, as the volume was up to the previous week, while total open interest gained week over week (according to preliminary data from the CME).
  • The fundamentals continue to promote a bearish bias, continuing the trend developed over the summer. This week will likely have a test of the $2.00 area. From there, 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 July expiration at $2.29 and up to the July expiration high of $2.324, as that area found selling last week.

NATURAL GAS LIQUIDS

  • NGL prices were mainly up this week, except for ethane. Ethane dropped $0.029 to $0.114, propane gained $0.017 to $0.435, normal butane gained $0.048 to $0.492, isobutane gained $0.050 to $0.694, and natural gasoline gained $0.010 to $1.034.
  • US propane stocks increased ~1.40 MBbl the week ending July 26. Stocks now sit at 80.45 MMBbl, roughly 14.18 MMBbl and 12.85 MMBbl higher than the same week in 2018 and 2017, respectively.
  • EIA reported record NGL production for May 2019, reporting production of ~4.84 MMBbl/d. This tops the previous record daily production by 51 MBbl/d, reported for April 2019. PADD 3 production led the production increase, gaining 79 MBbl/d. All other PADDs showed slight decreases from April to May, slightly offsetting the PADD 3 increase.

SHIPPING

  • US waterborne imports of crude oil fell for the week ending August 2, according to DrillingInfo’s analysis of manifests from US Customs & Border Patrol. As of August 5, the data showed PADD 1 imports fell by more than 375k Bbls/d while PADD 5 imports fell by more than 50k Bbls/d. PADD 3 waterborne imports rose, increasing by nearly 250k Bbls/d.

TETCO Explosion Causes Price Rally, Bearish Inventory Release Counters

TETCO Explosion Causes Price Rally, Bearish Inventory Release Counters

Natural gas storage inventories increased 65 Bcf for the week ending July 26, according to the EIA’s weekly report. This is slightly above the market expectation, which was an injection of 60 Bcf.

Working gas storage inventories now sit at 2.634 Tcf, which is 334 Bcf above inventories from the same time last year and 123 Bcf below the five-year average.

At the time of writing, the September 2019 contract was trading at $2.240/MMBtu, roughly $0.007 higher than yesterday’s close. The August 2019 contract closed earlier this week at $2.141/MMBtu.

On expiration, the August contract was down early in the day but rallied and added a couple of pennies to close at $2.141/MMBtu. Since August expiration, the September contract was up as much as ~$0.16. However, this rally wasn’t fully weather related. During the early morning of August 1, an explosion on Texas Eastern occurred near Lexington, Kentucky. This explosion has taken off ~2.0 Bcf/d of pipeline capacity by taking the operating capacity at the Danville compressor to zero. During July, the Danville compressor station averaged ~1.64 Bcf/d of gas flowing south toward the Gulf. This incident will likely put upward pressure on Gulf prices, as seen prior to the inventory release this morning, and potentially put downward pressure on Northeast basis prices, as the gas will need to find an alternate route to get out of the region until TETCO returns to operations. The timing of the Danville compressor coming back online is currently unknown.

With the explosion on TETCO, prices rallied and were up ~0.07 this morning, but could not hold. The bearish inventory release sent prices back down near the close of yesterday of $2.233 and currently sit near $2.24.

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 1, 2019.

Supply:

  • Dry gas production saw an increase of 0.98 Bcf/d week over week. Once again, the South Central/Gulf region accounted for nearly all the increase, gaining 0.95 Bcf/d, as production has fully recovered from Hurricane Barry.
  • Canadian net imports increased this week, gaining 0.11 Bcf/d.

Demand:

  • Domestic natural gas demand increased 1.19 Bcf/d week over week. Power demand saw the biggest increase on the week as temperatures heated up, gaining 1.08 Bcf/d. Res/Com demand showed a slight gain of 0.03 Bcf/d, while Industrial demand gained 0.09 Bcf/d.
  • LNG exports saw a slight decline during the week, falling 0.16 Bcf/d, while Mexican exports were flat.

Total supply is up 1.09 Bcf/d, while total demand gained 1.14 Bcf/d week over week. With this week’s supply and demand numbers being tight, expect the EIA to report a similar to slightly 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 46 Bcf; the five-year average is an injection of 50 Bcf.