US crude oil stocks posted an increase of 2.2 MMBbl from last week. Gasoline inventories increased 0.8 MMBbl and distillate inventories decreased 1.0 MMBbl. Yesterday afternoon, API reported a crude oil build of 4.9 MMBbl, alongside a gasoline build of 0.8 MMBbl and a distillate draw of 3.4 MMBbl. Analysts were expecting a smaller crude oil build of 80 MBbl. The most important number to keep an eye on, total petroleum inventories, posted a sizable increase of 9.3 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 down 0.3 MMBbl/d last week to an average of 7.6 MMBbl/d. Refinery inputs averaged 17.1 MMBbl/d (126 MBbl/d more than last week’s average), leading to a utilization rate of 93.2%. Prices sharply fell this morning due to another rise in crude oil and total petroleum stocks. In addition to continuously rising crude stocks the global economic growth concerns due to US–China trade war is also keeping the pressure on prices. Prompt-month WTI was trading down $1.31/Bbl, at $51.96/Bbl, at the time of writing.
Prices last Wednesday dipped to their lowest level since January due to significant petroleum stocks and crude oil builds as well as intensified global economic and demand growth concerns due to possible US tariffs on Mexican goods. Prices made up some of their losses on Friday due to remarks made by Saudi Energy Minister Khalid al-Falih, and have been trading relatively flat since, being pulled in opposite directions with a potential OPEC supply cut extension and concerns about the health of global economy and demand growth due to US–China trade wars.
Khalid al-Falih’s comments ahead of the official OPEC meeting, which is scheduled to take place in early July, have been the main catalyst for the price support, as he said that OPEC and its allies should extend oil production cuts and that OPEC was close to an agreement. He also said that Russia was the only oil exporter still undecided on the need to extend the output deal agreed on by top producers. Although Russia still seems to have not agreed to extending the cuts, Russian energy minister Alexander Novak’s comments sent mixed signals to the market in terms of where the country stands for the deal. Novak on Monday said that there is still a risk that oil producers pump out too much crude and prices fall sharply. He also said that he could not rule out a drop in oil prices to $30/Bbl if the global deal was not extended. In addition to al-Falih’s comments and expectation of the cut extension, prices have been getting support by the removal of the possible US tariffs on Mexican goods due to a deal between US and Mexico to combat the illegal migration at the border.
The ongoing trade tensions between the world’s two largest economies, the US and China, will continue to pressure prices even as they have already made an impact on the Chinese economy, and could further impact the overall global economic and demand growth. US President Donald Trump said the additional $200 billion of tariffs will be imposed following the G20 meeting unless the trade negotiations are finalized between the US and China. The expectation that OPEC and its allies will extend the supply cuts into the second half of the year will be working against the economic growth concerns and supporting prices.
Regardless of the preliminary jitters around supply cut extensions, prices maintain a distinctly bearish bias. Evidence is starting to mount that the US equity market and WTI move in the same direction, with both of these directly correlated to economic growth in the US and globally. Last week’s late gains were also met with a significantly lower dollar index, with further gains in US Treasury (10-year). Traders are still spooked by the current global markets, and the announcement from US Federal Reserve Chairman Jerome Powell, hinting at a possible rate cut, does little to bestow a bullish spin on growth in the markets. This outlook may be a catalyst to the equity/risk markets in the near term. A break above last week’s high ($54.63/Bbl) should carry the run to the key area from two weeks ago, between $56/Bbl and $57.33/Bbl, where the selling should intensify. Declines back to $51.23/Bbl and to last week’s lows of $50.60/Bbl will find significant buying. The market may be developing a new range between $50/Bbl and $57/Bbl for the near term as we head into the OPEC meeting and the G20 summit, which may bring news regarding the US and China tariff standoff.
Petroleum Stocks Chart
US crude oil stocks posted a large increase of 7.2 MMBbl from last week. Gasoline and distillate inventories decreased 1.8 MMBbl and 2.0 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 3.0 MMBbl alongside gasoline and distillate draws of 2.6 MMBbl and 1.0 MMBbl, respectively. To the contrary, analysts were expecting a crude oil draw of 0.4 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a large increase of 7.2 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production increased 100 MBbl/d last week, per the EIA. Crude oil imports were up 0.22 MMBbl/d last week, to an average of 6.8 MMBbl/d. Refinery inputs averaged 15.8 MMBbl/d (18 MBbl/d more than last week), leading to a utilization rate of 86.4%. The price rally lost its pace and stalled due to the large crude oil inventory and total petroleum stocks builds. However tightening supply levels and a more positive outlook in demand will continue to support prices, while increasing US production and the uncertainty around US-China trade disputes will pressure prices. Prompt-month WTI was trading down $0.12/Bbl, at $62.46/Bbl, at the time of writing.
Prices traded in the $60/Bbl to $63/Bbl range last week as they sharply rose at the beginning of the week, nearing five-month highs edging closer to the $63/Bbl level. WTI rose nearly 32% during the first quarter of 2019, logging the strongest quarterly rally since the second quarter of 2009. Continuing OPEC+ production cuts and further declines from Venezuela continued to support prices. The sharp increase at the beginning of the week came as long bullish bets on prices increased significantly due to news about tightening supply levels, and the easing of global economic growth fears.
Prices ended the week strong as Saudi Arabia seemed stern about bringing the Brent price at least to $70/Bbl and ignoring US President Donald Trump’s tweet about increasing the flow of oil to reduce prices. Money managers increased their bullish positions at the beginning of the week after a Reuter’s report showed OPEC production in March falling to its lowest levels in four years, with Saudi Arabia bringing its production below its committed quota, as well as Chinese factory activity posting the sharpest rise in the last eight months and easing the fears about a global economic slowdown.
The sentiment in the market shifted to bullish and will remain strong as Saudi Arabia is signaling and acting on its promise to do whatever it takes to bring balance to the market. Continuously declining Venezuelan production, a more positive outlook in global economic growth, and EIA signaling a possible slow down in US production will continue to support prices. The US sanctions on Iranian crude and the US government’s decision about the waivers granted to certain countries will also support prices in the near term as the market expects the sanctions to continue, possibly without the waivers in place.
Although prices increased significantly with rising long positions due to tightening supply levels and some bullish headlines around demand, the increasing US production and uncertainty about the US-China trade disputes will keep the pressure on prices. It is also important to note that significantly increasing long bets always poses a larger risk to prices if sentiment shifts quickly due to fundamentals or any bearish headlines.
Last week’s trade closed over the $60.00/Bbl milestone and was the highest weekly close since early November 2018. Prices increased further, with long positions rising significantly. The trade may extend the gains and break through the $63/Bbl range but will need more bullish headlines to support this level before it finds some selling. The market will closely watch any other news surrounding demand, and global economic health and will trade on the demand side as the long position rally was largely due to the supply side. Any slight shift in sentiment due to fundamentals or bearish news could cause a consolidation phase with a potential retracement back to the $60/Bbl range. In the long term, the OPEC+ decision on supply cuts for the second half of the year will be the key driver for prices as Brent currently is near the levels Saudi Arabia wanted to reach.
Petroleum Stocks Chart
Natural gas storage inventories increased by 66 Bcf for the week ending June 22, according to the EIA’s weekly report. This injection is lower than market expectations, however, a revision of 4 Bcf pushed the injection in line with expectations of a 70 Bcf injection. The August 2018 contract, which is trading as prompt for the first time today, was trading higher at $3.00 per MMBtu ahead of the storage report. Since then, the contract has dropped back below the $3.00 mark to $2.983, at time of writing.
Working gas storage inventories now sit at 2.074 Tcf, which is 735 Bcf below last year and 501 Bcf below the 5-year average.
Looking ahead, there are 18 weeks left of this injection season and if injections average 80 Bcf/week, inventories will end the season at 3.5 Tcf. This level compares to the previous low of 3.58 Tcf of 2012, which will likely put upward pressure on winter prices. This year, the injection season started late with the first injection reported during the last week of April and since, injections averaged 88 Bcf. However, as the peak summer months are ahead, unless production continues increasing over the summer, injections will likely become smaller during July and August and therefore increasing the likelihood of the end of the season inventory to the 3.5 Tcf level.
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 PointLogic’s flow data and DI analysis for the week ending June 28, 2018.
– Dry gas production is up 0.57 Bcf/d week-on-week. This change can mostly be attributed to the Rockies (+ 0.3 Bcf/d) with gains in the DJ and the Green River basin.
– Canadian imports are down 0.16 Bcf/d week-on-week.
– Domestic natural gas demand increased by 0.36 Bcf/d week-on-week led by the Res/Com sector.
– LNG exports were up 0.13 Bcf/d week-on-week while Mexican exports were relatively flat.
Total supply is up 0.42 Bcf/d and total demand is up 0.5 Bcf/d week-over-week. Since demand is outpacing supply this week, a smaller injection should be expected next week, but due to the revision reported in today’s report, the injection is expected to be in the mid-70s Bcf level. Last year’s injection for the same week was 62 Bcf while the 5-year average is 72 Bcf.
The Northeast region has traditionally been a demand market for gas produced in the SE/Gulf, Midcontinent, and Canada. But, this changed when the Marcellus and Utica formations were discovered and then developed.
Over the past 10 years, natural gas production in the Marcellus and Utica basins has risen sharply — from about 2 Bcf/d in 2008 to more than 26 Bcf/d as of February 2018 — and now represents about 33 percent of total U.S. dry gas production. While other basins also experienced growth during the same time period, the rates were much lower: Eagle Ford at 3.3 Bcf/d, Permian at 3.2 Bcf/d, and Anadarko at just 1.2 Bcf/d. The graph below shows historical dry gas production by region since 2010 and forecast through 2018.
U.S. Dry Gas Production by Region
This massive growth has created a lot of challenges to producers in the Northeast, the most significant being bottlenecked pipeline takeaway capacity. This became a real challenge in 2013, when production levels reached capacity limits.
Because of this, as shown below, pricing dropped in the region: trading at a premium (basis higher than Henry Hub) plummeted to trading at a discount (below Henry Hub), with basis as low as $2/MMBtu below Henry Hub.
Key Northeast Natural Gas Pricing Hubs
Pipeline infrastructure operators have responded to this new dynamic by changing flow direction in existing pipelines and expanding capacity through looping and compression as well as by installing new (greenfield) pipeline capacity. But so far, capacity additions haven’t kept up with production growth, and price basis has remained depressed. In fact, from 2013 through 2017, producers have filled up all capacity additions as soon as they became available.
Northeast Dry Gas Production and Takeaway Capacity
However, there’s good news ahead. As shown in the chart above, Drillinginfo expects pipeline capacity constraints to end in 2018, when key takeaway projects will come online and add over 5.0 Bcf/d of additional Northeast takeaway capacity. Energy Transfer Rover Phase 2, Transco’s Atlantic Sunrise, Nexus Gas Transmission, and Columbia’s Gulf Xpress projects will, in effect, debottleneck the region during the third quarter. Regional gas basis is therefore expected to trade within variable transport costs of about $0.20–$0.30 per MMBtu below Henry Hub.
Once the capacity constraint is lifted, production economics — the difference between market prices and breakeven prices — will start to dictate growth in the Northeast going forward. Based on Drillinginfo’s pricing expectations of Henry trading somewhere between $2.65 and $2.75 MMBtu over the next five years, by 2021, production will reach almost 30 Bcf/d, an increase of more than 5.0 Bcf/d from current levels.
Natural gas storage inventories decreased by 183 Bcf for the week ended Jan. 12, per EIA. The report is bearish, as the withdrawal came in below most market expectations. Natural gas prices declined following the release, with the February contract trading at $3.10 per MMBtu at time of writing.
Today’s storage withdrawal compares with a 243 Bcf draw reported last year and the 5-year average of 215 Bcf. Working gas storage inventories dropped to 2.584 Tcf, which is 368 Bcf below last year and 362 Bcf below the 5-year average.
See the chart below for projections of 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 PointLogic’s flow data and DI analysis for the week ending Jan. 18, 2018.
- Dry gas production is down 0.5 Bcf/d week-on-week, bringing January-to-date production to an average of 74.9 Bcf/d. This is 1.7 Bcf/d lower than December, but 2.4 Bcf/d higher than the 2017 average.
- Canadian imports are up 1.2 Bcf/d, as temperatures have cooled on the East Coast.
- Demand is up week-on-week, with lower temperatures and increased heating demand.
- Domestic natural gas demand is up 17.8 Bcf/d, with ResCom increasing by 11.6 Bcf/d, power by 4.7 Bcf/d, and industrial by 1.6 Bcf/d.
- LNG exports are up 1.1 Bcf/d, reversing the previous week’s decline as maintenance at the Gillis compressor station was completed.
- Total supply is up 0.8 Bcf/d, and total demand is up 20.3 Bcf/d. A higher withdrawal is expected next week, in the mid-200 Bcf range. This draw compares with a 119 Bcf withdrawal reported last year and a 5-year average of 140.