Prices Drop Due To Crude Oil Inventory Build

Prices Drop Due To Crude Oil Inventory Build

US crude oil stocks increased by 5.7 MMBbl. Gasoline and distillate inventories decreased 3.0 MMBbl and 1.0 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 0.6 MMBbl alongside gasoline and distillate builds of 1.6 MMBbl and 1.9 MMBbl, respectively. Analysts were expecting a crude oil build of 0.7 MMBbl. Total petroleum inventories posted a decrease of 2.2 MMBbl.

US crude oil production remained unchanged last week, per the EIA’s estimates. Crude oil imports were up 0.84 MMBbl/d last week to an average of 6.7 MMBbl/d. Refinery inputs averaged 16.0 MMBbl/d (0.13 MMBbl/d more than last week’s average), leading to a utilization rate of 87.7%. Prices are pressured by crude oil build and stocks in Cushing posting a 31.9 MMBbl build. Prompt-month WTI was trading down $0.29/Bbl, at $55.25/Bbl; at the time of writing.

Crude prices have been retracting since last week after nearly reaching their one-month-high levels. The boost in prices last week was due to reports that OPEC+, led by Saudi Arabia, could reach an agreement in December to potentially cut more supply from the market, as well as positive sentiment around China increasing its oil import quota and optimism surrounding the US – China trade deal. Although prices gave up some of their gains from last week, they are still near their monthly highs because of support from the optimism surrounding a deal materializing between the world’s two largest economies, the upcoming OPEC+ meeting in December, and possible tensions in the Middle East. While the bullish sentiment in the market may have increased amid the factors mentioned, conflicting reports from Russia that the country may not be interested in participating in another round of supply cuts as well as the lingering threat of slowing economic growth and demand growth for oil products are continuing to pressure prices, and these factors will keep a lid on prices. The market will pay close attention to any news regarding the US – China trade deal negotiations and any developments on the upcoming OPEC+ meeting in December. Prices are expected to trade in the narrow range of $53/Bbl-$57/Bbl for the near term as any positive news around these developments may cause prices to challenge the 200-day average just above last week’s close at $57.02/Bbl, while any negative news could pressure prices to $53/Bbl levels, where it will likely find selling.

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Equity Markets Closed for Energy Companies and Bond Markets Challenging Amid a Down Market

Austin, TX (October 30, 2019) – Enverus, the energy industry’s leading SaaS and data analytics company, has released its Q3 2019 Capital Markets Review which reports $40 billion raised via energy company debt offerings and $500 million in equity offerings. Bond issuances were actually up 198% from 2Q19 and 114% YOY, driven by Occidental’s $13 billion bond raise to support its Anadarko buy, plus offerings by midstream and utility companies. Meanwhile, equity raises were down 85% sequentially and 79% YOY.

“On the upstream side, a lack of access to capital for shale companies is becoming a defining story of 2019,” said Enverus Analyst, Andrew Dittmar. “Their stock has significantly underperformed the broader market with the S&P E&P Index (XOP) down nearly 20% in 3Q19 versus flat performance for the S&P 500. That has eroded investor appetite for new issuances or IPOs and equity capital raised at these prices may be viewed as dilutive for existing shareholders.”

The bond market has also become largely closed off except for large issuers and those carrying an investment grade rating. Those best positioned have kept debt in check and have longer-dated maturities on their bonds, giving time for the market to hopefully recover before they need to refinance. Enverus experts tracked $12 billion of total energy bonds maturing by YE19 with ~$3 billion of that from upstream companies.

With struggles in the equity and bond market, credit facilities look to be an important source of liquidity for some companies. Enverus analysts found $47 billion in facilities launched or amended in 3Q19 across 56 agreements with $15 billion of upstream facilities that are set to expire between 2019–2021.

“Upstream companies may be relying on credit facilities at an increasing rate just as banks take a more conservative outlook in their borrowing base redeterminations,” added Dittmar. “Investors will also be closely watching how drawdowns are spent. They want any use of this credit to be a short-term plug, not another way to delay getting to positive free cash flow while adding leverage to the balance sheet.”

“Companies are working hard towards hitting free cash flow goals and we expect more to reach the inflection point as CapEx is held in check and companies focus on corporate-level efficiency and full-cycle returns. Ultimately, that is likely to be what restores investor confidence in the sector and helps energy companies find some traction on stock prices. However, it may take some additional time and a tailwind from commodity prices wouldn’t hurt.”

Unfortunately, it is likely not all companies will be able to successfully transition to positive free cash flow from their current positioning, and with financing options sparse, Chapter 11 filings have also accelerated in the latest quarter. The number of bankruptcies filed in 3Q19 increased by 186% YOY, with a disclosed debt value of ~$15B. Upstream companies accounted for 16 of the 20 companies filing in 3Q19. Notable names entering restructuring include STACK-focused Alta Mesa, Eagle Ford-focused Sanchez Energy, and Permian-focused Halcon Resources.

“Companies have found themselves facing restructuring in a number of ways, but it usually boils down to overly aggressive CapEx to fund growth, wells substantially underperforming expectations, or some combination of the two,” added Dittmar. “However, companies are overall better prepared and more responsive to a changing market than past years, and we don’t expect to reach the level of filings from 2016, which peaked with around 40 upstream companies filing in 2Q16.”

“The majority of plans call for restructurings, with creditors taking control of the companies. White Star Petroleum (formerly one of the American Energy Partner companies) went the relatively rare route of selling its assets via a 363 process in bankruptcy. However, we could see additional liquidations if creditors decide they would rather get out what cash they can rather than own an E&P company.”

Outside of public markets, there is still some private capital being cautiously put to work. Enverus experts tracked 27 new management teams receiving commitments in 3Q19, including six upstream teams.

The largest disclosed upstream commitment went to WildFire Energy, with more than $1 billion committed from Warburg Pincus, Kayne Anderson, and its management team. WildFire is led by former WildHorse co-founder Anthony Bahr, while fellow WildHorse co-founder Jay Graham is leading KKR-sponsored Spur Energy Partners. Spur has been acting as a consolidator on the New Mexico Shelf, including a $925 million acquisition from Concho Resources. New upstream acquisitions by private capital have been focusing on buying assets with existing cash flow capable of organically funding development. Private money has also been deployed on midstream assets and select areas of the services sector that may be poised for further innovation and growth.

Full copies of the report are available upon request.

The Week Ahead For Crude Oil, Gas and NGLs Markets – October 28, 2019

The Week Ahead For Crude Oil, Gas and NGLs Markets – October 28, 2019

CRUDE OIL

  • U.S. crude oil inventories decreased by 1.7 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories decreased 3.1 MMBbl and 2.7 MMBbl, respectively. Total petroleum inventories posted a substantial decline of 9.0 MMBbl. U.S. crude oil production was unchanged from the previous week, per the EIA, while crude oil imports were down 0.44 MMBbl/d to an average of 5.9 MMBbl/d.
  • WTI prices spent the week gaining on the expectations of OPEC+ increasing the production cuts at the upcoming meeting in early December. Saudi Arabia has not committed to this strategy of making additional cuts until some members (Iraq and Nigeria) come into full compliance with the cuts that had previously been agreed upon.
  • Additional support came from the news that China has increased its crude oil import quotas for independent refiners. This latest announcement will have total quotas awarded in 2019 at 3.3 MMBbl/d, up nearly 0.3 MMBbl/d as compared to quotas awarded during the full year 2018. Rarely do Chinese independent refiners allow crude import quotas to go unused as it affects the government’s computation of future quota awards.
  • The week’s strength in WTI was impressive and left the contract at the highest weekly close since September, and the market continues to limit rallies on the geopolitical economy concerns about growth. The IMF (International Monetary Fund) expects economic growth in Asia to slow, and it adjusted its projections to 5% in 2019 and 5.1% in 2020. This represents a 0.4% decline in 2019 and a 0.3% decline in 2020. The WTI market reflects the concerns about growth in 2020 as the monthly contract prices trade at a discount to the December and January contracts in 2020.
  • The CFTC report released Friday (showing positions from October 22) showed a slight adjustment in the trader’s expectations as the Managed Money long sector added 18,752 contracts, while the Managed Money short positions increased positions by 9,362 contracts. The gains in both of the speculative sectors continue to reflect the indecision of the current market direction, and this tug-of-war between the sectors is likely to continue.
  • Market internals last week developed a more neutral bias with prices closing at recent highs. Those highs were met with lower volume and a loss in open interest.
  • Prices started strong and maintained that direction all week. They closed the week above the tested resistance area above $56.00 and will likely find some follow-through strength to open this week. The lack of volume during the rallies brings a momentum question to additional gains. The commonly traded 200-day average is just above last week’s close at $57.02, and then the highs from late September at $58.49-$59.39 will find additional selling. Declines to last week’s low at $55.60 and the key area of $55.00-$53.00 will likely find buying.

NATURAL GAS

  • Natural gas dry production increased 0.84 Bcf/d last week, while Canadian imports decreased by 0.21 Bcf/d.
  • Res/Com demand increased 0.02 Bcf/d, while power demand increased 0.53 Bcf/d, and industrial demand declined 0.09 Bcf/d. LNG exports gained 0.52 Bcf/d on the week, while Mexican exports decreased 0.13 Bcf/d.
  • These events left the totals for the week showing the market gaining 0.63 Bcf/d in total supply while total demand increased by 0.90 Bcf/d.
  • The storage report last week showed injections for the previous week at 87 Bcf. Total inventories are now 519 Bcf higher than last year and 28 Bcf above the five-year average. Current weather forecasts from NOAA in the near term (coming week) have below-average temperatures throughout the nation (including the Texas area), with exceptions in California and Florida. The eight- to 14-day forecast has below-average temperatures continuing in most of the lower 48, but it shows above-average temperatures in the Deep Southeast, Florida, and California.
  • The CFTC report that was released last week (dated October 22) showed further expansion of the Managed Money short position, adding 19,250 contracts, while Managed Money long positions increased by 1,459 contracts.
  • Prices started with weakness and spent the rest of the week building back support. Market internals now have developed a neutral bias as the market gained during the course of the week, but with a slight reduction in total open interest (according to preliminary data from the CME). If the market is to develop a positive or bullish bias going into the winter, rallies higher will need gains in volume and open interest.
  • The market continues to be in a range environment ($2.18 to $2.39). Weather forecasts may provide strength in the coming week with the colder temperatures. However, extended strength in prices will need winter forecasts supporting demand into December. Should the current forecast trend continue to support heating demand, there is the potential for some volatility as the speculative short position is forced to cover. Should the forecasts adjust warmer, the declines will extend below the $2.18 area, and they may even go down to $2.12.

NATURAL GAS LIQUIDS

  • Enterprise stated in their 3Q2019 earnings release that the Front Range pipeline will ramp up to 225 MBbl/d in 2021, up ~63 MBbl/d. Additionally, Front Range’s interconnect, Texas Express, will also receive an uptick in capacity, reaching ~330 MBbl/d in 2022, up ~44 MBbl/d. These pipeline expansions will allow more y-grade produced in the Rockies to reach Mont Belvieu.
  • Ethane was down $0.005 to $0.179, propane was flat on the week, normal butane was down $0.010 to $0.610, isobutane was down $0.016 to $0.816, and natural gasoline was up $0.023 to $1.141.
  • U.S. propane stocks fell ~461 MBbl for the week ending October 18. Stocks now sit at 99.99 MMBbl, roughly 17.99 MMBbl and 22.37 MMBbl higher than the same week in 2018 and 2017, respectively.

SHIPPING

  • We were expecting a low import number on last week’s import report, as that’s what the customs manifests were indicating, and the EIA did not disappoint. Weekly U.S. imports were reported at 5.857 MMBbl/d, the lowest level since February 1996. The EIA reported PADD 3 crude imports at their lowest level since the agency began reporting that level of detail in 1990. Looking forward to this week’s report, it appears that U.S. waterborne imports for the week ending on the 25th rose slightly, according to our analysis of manifests from U.S. Customs and Border Protection. As of October 14, aggregated data from customs manifests suggested that overall waterborne imports rose by 134 MBbl/d. In PADD 3, imports actually appear to have decreased, down 92 MBbl/d from the previous week. PADD 1 and PADD 5 increased their imports, up by 15 MBbl/d and 211 MBbl/d respectively.

  • As we approach the end of October, we are seeing lower imports from all the major Persian Gulf producers.  Iraq will see one of the lowest levels we’ve seen over the past 2 years, around 190k bbls/d right now.  Imports from Saudi Arabia are also very low, just above 300k bbls/d.  The current low since 2017 is 417k bbls/d.  The US has not imported Kuwait crude since August.

Injection Meets Market Expectation, Prices Steady

Injection Meets Market Expectation, Prices Steady

Natural gas storage inventories increased 87 Bcf for the week ending October 18, according to the EIA’s weekly report. This is slightly lower than the market expectation, which was an injection of 88 Bcf.

Working gas storage inventories now sit at 3.606 Tcf, which is 519 Bcf above inventories from the same time last year and 28 Bcf above the five-year average.

Prior to the storage report release, the November 2019 contract was trading at $2.296/MMBtu, roughly $0.014 higher than yesterday’s close. At the time of writing, post-report, the November 2019 contract was trading at $2.286/MMBtu.

During October, day-ahead Henry Hub prices have traded in a range of $2.214 to $2.352. Last year during October, day-ahead Henry Hub prices averaged $3.21 for the month. The main difference between this year and last is the market has storage levels sitting over 0.5 Tcf higher than 2018. Storage levels also topped the five-year average last week for the first time since September 2017. These storage levels, in addition to record production, have the market comfortable heading into the winter season. The current November weather forecast shows some cold spikes, but prices will likely have trouble gathering strength. Outside the cold shots, the forecast currently shows average to warmer temperatures.

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 24, 2019.

Supply:

  • Dry production increased 0.93 Bcf/d on the week. Most of the increase came from the South Central (+0.44 Bcf/d), the Mountain region (+0.28) and the East (+0.19 Bcf/d), with small gains in the Midwest and the Pacific.
  • Canadian imports decreased 0.18 Bcf/d.

Demand:

  • Domestic natural gas demand increased 0.35 Bcf/d week over week. Power demand accounted for most of the increase, rising 0.22 Bcf/d. Res/Com demand also increased 0.17 Bcf/d, while Industrial demand decreased 0.04 Bcf/d.
  • LNG exports increased 0.59 Bcf/d due to Cove Point’s resumed operations, while Mexican exports decreased 0.15 Bcf/d.

Total supply increased 0.75 Bcf/d, while total demand increased 0.85 Bcf/d week over week. The ICE Financial Weekly Index report is currently expecting an injection of 94 Bcf. Last year, the same week saw an injection of 48 Bcf; the five-year average is an injection of 52 Bcf.

Prices Pressured Despite Crude Oil and Stocks Withdrawals

Prices Pressured Despite Crude Oil and Stocks Withdrawals

US crude oil stocks decreased by 1.7 MMBbl. Gasoline and distillate inventories decreased 3.1 MMBbl and 2.7 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 4.45 MMBbl alongside a gasoline draw of 0.7 MMBbl and a distillate draw of 3.5 MMBbl. Analysts were expecting a crude oil build of 2.2 MMBbl. Total petroleum inventories posted a large decrease of 9.0 MMBbl.

US crude oil production remained unchanged last week, per the EIA’s estimates. Crude oil imports were down 0.44 MMBbl/d last week, to an average of 5.9 MMBbl/d. Refinery inputs averaged 15.9 MMBbl/d (0.43 MMBbl/d more than last week’s average), leading to a utilization rate of 85.2%. Despite crude oil and total stocks withdrawals, prices are pressured with stocks in Cushing posting a 30 MMBbl build and due to lack of news from the US-China trade deal negotiations. Prompt-month WTI was trading down $0.86/Bbl, at $53.62/Bbl; at the time of writing.

Crude prices got a boost on Tuesday amid reports that parties to the OPEC+ agreement are mulling additional cuts to production when they meet again in December. In its last session before expiry, CME WTI futures for November delivery settled at $54.16/bbl, up from $53.31/bbl the day before. WTI for December delivery was also up $0.81/bbl on the day’s news. Sentiment was also bolstered by earlier news that China increased its crude oil import quota for independent refiners. With the latest announcement, total quotas awarded in 2019 will come to 3.3 MMBbl/d, up nearly 0.3 MMBbl/d compared to quotas awarded in the full year of 2018 (largely due to a spate of recent refinery capacity additions). Chinese independent refiners seldom allow crude import quotas to go unused because this would affect the government’s computation of future quota awards. Despite these bullish developments, however, our global liquids balance for 2020 still appears to be well supplied amid continued weakness in the economic growth and, therefore, demand for petroleum products. Indeed, yesterday’s OPEC+ news came with a big asterisk beside it as talk of future cuts was prompted by growing demand concerns. Furthermore, Saudi Arabia has not committed to making further production cuts and will instead press Iraq and Nigeria to come into full quota compliance.

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