The Week Ahead For Crude Oil, Gas and NGLs Markets 01-16-17

January 16, 2017

CRUDE OIL

Crude oil inventories increased by 4.1 MMBbl last week according to the EIA. Gasoline and distillate inventories increased by 5.0 MMBbl and 8.4 MMBbl respectively. Total petroleum inventories posted a build of 13.4 MMBbl. The large build in crude oil was due to the higher imports (up 1.9 MMBbl/d). Higher refinery inputs (up 418 MBbl/d) did not offset the higher imports. In fact, although higher volumes were refined, the additional refined products also went into storage. Additionally, US production was estimated to be up 176 MBbl/d last week. The higher than expected builds in crude oil, gasoline, and distillate along with rising production was undoubtedly bearish.

The bearish EIA inventory report was just one of the factors behind the first weekly loss in crude oil prices since the beginning of December. Concerns regarding compliance with the OPEC quotas, demand from China, and US production potential added to bearish sentiment.

Saudi Arabia, Qatar, Kuwait, and Oman are amongst the OPEC members that have informed their customers they may be exporting lower volumes in the new year. Shipping data from Iraq, on the other hand, shows exports to date in 2017 remained steady at all-time highs. Fundamental data regarding the implementation of the quotas has not materialized yet. However, analysts only expect partial compliance at best.

With only partial compliance, rising US production and increasing supply from OPEC members exempted from the cuts (Libya & Nigeria) could largely offset the desired effects of the OPEC quotas.

Chinese overall exports fell 7.7% last year, marking a second annual decline in a row. This continues to fuel fears regarding the health of the largest Asian outlet for crude exports.
If demand growth is lower than the 1.2% expected by the IEA next year, OPEC quotas are not fully enforced, and production growth from the US and others offset a large part of the production cuts, prices can’t rise above current levels.

OPEC will release their Monthly Oil Market Report on Wednesday and the IEA’s monthly report is due on Thursday. Although these releases will only shed light on production data through December, it will give an indication as to the levels from which production needs to be cut to conform with quotas. The value of the dollar will also drive crude price movement this week, as president-elect Trump’s inauguration speech will be watched closely for economic and foreign policy related indicators. Drillinginfo expects WTI prices to remain rangebound between $50-55/Bbl until data regarding January production levels is public.

NATURAL GAS

Natural gas production declined 1.0 Bcf/d last week compared to the previous week. Most of the declines are spread across multiple regions and likely due to freeze offs in Texas, Gulf and the West regions as cold weather impacted those areas in the beginning of the week. It is becoming more evident that the market is headed for re-assessment of production expectations. At $3.00 plus and hedges being taken at higher levels, the market is not seeing any additional production and, rather, is witnessing declines. A portion of those declines was offset with gains in Canadian supplies as they increased 470 MMcf/d as compared with the week before.

On the demand side, some of the coldest temperatures this winter were registered at the beginning of last week, driving Res/Com up 1.15 Bcf/d on average over the week. Power demand for the week was up and showed a gain of 2.1 Bcf/d from the previous week. Demand will decline in the coming week as current weather forecasts indicate moderating temperatures during the upcoming 6-10 day period.

The storage report last week was well above expectations at a 151 Bcf withdrawal. This surprise partially offset the previous week’s weak withdrawal and the report initially supported a price run to $3.45. However by the end of the day, prices retraced to $3.386. This week’s storage report may provide another opportunity for a 200+ Bcf withdrawal as the early week cold set the stage for significant pulls on storage.

Price action developed a bullish bias last week as the Monday low (low for the week) at $3.098 found buying immediately and finished the week with a bullish weekly reversal. The early week declines can be linked to the liquidation of speculative length (Managed Money) and an increase in the speculative short position, as reported in the Commitment of Traders Report dated Jan 10th. After the volatility of Monday and Tuesday, the price action settled into a consolidation trade with slight gains and seemed to be focused on changes in the longer term (+11 day) forecasts again. As the week continued, these bullish changes were confirmed across several of the popular forecast models. Trade did not take a knee-jerk reaction to the changes, but rather a cautious approach with less volatile gains. Should the forecasts continue with a bullish bias, volatility may soon return to the price action.

Drillinginfo has been calling for a rise in prices to facilitate additional investment in drilling rigs. To date, the price action in the summer and fall 2017 has not responded to incentivize additional gas-directed investment. In fact, the market is witnessing declines in production as prices have remained below $3.50. It also must be noted that although 2017 summer prices did not drop as far as the winter months’ when prices declined during the early week volatility, any decline delays the gains necessary to incentivize additional drilling. DrillingInfo continues to forecast a $4+ average Henry Hub price for 2017.

NGLS

Propane inventories decreased 4.5 MMBbl last week as reported by the EIA, marking a seventh consecutive withdrawal. The withdrawals have been driven by the cold weather. Propane stocks now sit at 79.7 MMBbl, roughly 12.2 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 51.8 MMBbl for this time of year prior to 2015 (before the price crash).

Ethane: Prices made gains this week comparable to what we have seen in natural gas prices, but have not rebounded to levels seen before last weeks’ drop. The long term weather forecast (+10-day) is showing a return of the cold temperatures, so we expect upward pressure in prices. However, mild temperatures are expected over the next 6-10 days which could limit the gains in prices this week.

Butanes/Natural Gasoline: For the second week in a row, Mt. Belvieu normal butane prices came in higher than isobutane prices. The Mt. Belvieu normal butane price was 7.75 higher than isobutane at the end of last week and only 1 cent by the end of this week. A similar story holds true with Conway prices, with normal butane 10.75 cents higher than isobutane at the close of last week and 5.75 cents higher by the end of this week. The recent strength in Normal Butane is a result of strong gasoline blending demand; gasoline blending demand remains high despite strong gasoline stock builds (there was a build of 5 MMBbl in gasoline stocks this last week). The relatively stronger impact at Conway compared to Mt. Belvieu is widely believed to be the result of rumors of a fractionator outage in the Midcontinent. Drillinginfo expects these markets to stabilize soon and normal butane prices to fall back below isobutane prices.