- US crude oil inventories increased by 8.0 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories decreased 0.5 MMBbl and 1.8 MMBbl respectively. Total petroleum inventories showed an increase of a substantial 8.0 MMBbl. US crude oil production was estimated to remain flat, while crude oil imports were up 163 MBbl/d to an average of 8.0 MMBbl/d versus the week prior.
- The bearish inventory hardly put a dent in the strength in prices last week. The gains continue to be driven by the upcoming sanctions on Iranian production, as Iran exports have been showing signs of declines as countries like India and China are starting to reduce their export levels, complying with the wishes of the US government. The price run last week was also supported by the US-Canada-Mexico agreement announced early last week. This action mitigated some of the concerns around the trade issues that have cast some doubts on extended price gains. However, continued tariff talks around the European Union and China continue and will bring some doubt about this price run’s long-term viability. The decision to release 11 MMBbl of crude from the Strategic Petroleum Reserve will also give pause to gains, although it is inconsequential in the long term. Saudi Arabia’s Crown Prince Mohammed bin Salman confirmed that Saudi Arabia could increase production by another 1.3 MMBbl/d if necessary to offset declines from Iran in an interview last Wednesday. Clearly, the trade is not convinced about this potential, as prices started the week strong and maintained through the bearish inventory news and the Saudi interview.
- Oddly, the price gains are not due to a large gain in speculative positions, as the latest CFTC report showed a slight increase of 1,133 Managed Money long contracts. Meanwhile, Managed Money short positions increased 5,275 contracts.
- Prices continued gains throughout the early part of the week, reaching a high at $76.41/Bbl despite the bearish inventory release. From there, some participants took profits and prices softened, but the week still closed higher than the early July 2018 highs. Market internals were stronger last week, as volume increased as prices increased. However, total open interest declined as the prices ran, signaling profit-taking. With the recent extension higher despite some bearish indicators, the potential for volatility has risen, especially if some of the speculative fervor wanes. Price gains should continue to be expected, but this run may end similar to the July 2018 run with a potentially violent correction. The large range in prices since July 2018 has now been extended above $76/Bbl and the low end of the range, the 200-day moving average, is now at $66.82/Bbl. The intermediate support sits at $71/Bbl. When the fundamentals regarding inventory despite the sanctions start to show in the data, crude prices are likely to consolidate into a lower range before the end of the year. Drillinginfo believes the long-term range will occur between $60-$65 for an extended period of time once this occurs.
- Natural gas dry production declined 0.50 Bcf/d last week, with the primary regions for the losses coming from the Northeast and the Rocky Mountain supply zones. Canadian Imports increased 0.30 Bcf/d.
- Transco’s Atlantic Sunrise was placed in-service late last week. Atlantic Sunrise offers additional takeaway from the Marcellus/Utica supply area to higher demand areas south on the East Coast and into the Gulf. Since it’s in-service on Oct. 6, an additional 0.85 Bcf/d has been moving out of Pennsylvania on Transco.
- The late summer heat returned last week, and power demand rose by 1.24 Bcf/d. Res/Com decreased 0.48 Bcf/d and industrial demand declined by 0.05 Bcf/d. LNG Exports and Mexican Exports both increased by 0.02 Bcf/d on average for the week. These events left the totals for the week with the market losing 0.21 Bcf/d in total supply while total demand gained 0.78 Bcf/d.
- The storage report last week came in with an injection of 98 Bcf, which was above expectations. Prices declined directly after the release but strengthened slightly throughout the remainder of the day. The November 2018 contract ultimately closed the week at $3.143/MMBtu, above the previous week’s close of 3.008/MMBtu.
- According to the CFTC report (dated Oct. 2), the Managed Money long position (speculators) increased positions by 32,112 contracts while the Managed Money short positions decreased by 36,450 contracts. This continues the recent trend of the speculative sector shifting expectations for prices to continue to gain as the market enters the winter season.
- With the speculative sector providing over 68,000 contracts of buying, it was no surprise that prices went up to the gap that has remained in the market since they collapsed last January at $3.259. The rally left prices over-extended on the momentum indicators, leaving prices due for some backfilling. Price drops occurred on the storage release and Friday as prices went down and tested the $3.11 area (beginning support). By not extending the declines on the close of the week on Friday prices rallied slightly to close the week with a gain. The market has now shifted the trade based on how the market will be set up for the upcoming winter season. While production levels remain strong and near record levels, whether that production will be enough to maintain a lid on prices in the coming winter has now taken precedence and early indications are concerning to traders. Last week’s internals had volume gains with price gains (the speculative sector driving the gains) and lower volume on declining days. This is a bullish internal trend. While the momentum indicators were over-extended early in the week, with the late week decline to support, those indicators relaxed from being over-bought. Expect prices to test the highs of last week before consolidating by the expiration process.
- EPIC Midstream is converting its NGL pipeline to a crude pipeline until January 2020, while the company constructs its actual crude line and fractionator. The 400 MBbl/d line will have receipt connections in the Permian, and several terminal and refinery delivery points in Corpus Christi and Ingleside, Texas.
- Enbridge and the state of Michigan reached an agreement on the replacement of Enbridge’s Line 5 oil and NGLs pipeline. The line currently runs above ground across the Straights of Mackinac but will be replaced with an underground tunnel. The potentially $500 million-dollar project will take 7 to 10 years to complete.
- Mariner East 2 was expected to enter service last quarter, but is still held up by regulatory issues. The project continues to be investigated by the PA Public Utility Commission despite mainline construction being 99% complete, but several outstanding permitting issues and complaints stand in its way.
- The EIA reported a build of 2.4 MMBbl in this past week’s inventories. Propane stocks now sit at 78.7 MMBbl, approximately 0.3 higher than this time last year and 5.6 MMBbl lower than the 5-year average.
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