The Week Ahead For Crude Oil, Gas and NGLs Markets 01-23-17

January 23, 2017

CRUDE OIL

Crude oil inventories increased by 2.3 MMBbl last week according to the EIA. Gasoline inventories increased by 6.0 MMBbl and distillate inventories declined 1.0 MMBbl. Total petroleum inventories posted a withdrawal of 2.0 MMBbl. Lower refinery runs (down 639 MBbl/d) was the main reason behind the unexpected crude oil build. The unexpected rise in crude oil and the sizeable gasoline build were both bearish and prices moved accordingly after the release. It also must be noted that large weekly swings in crude imports, refinery runs, propane stock withdrawals, and products supplied have limited the market’s ability to interpret the weekly data release with certainty. DrillingInfo will be watching these specific details of the data releases for additional clarity in the coming weeks.

The release of the bearish inventories sent the soon to expire WTI February contract down to the previous week’s low before expiring at $51.37/Bbl. The new prompt month March contract opened just above the February expiration but rallied, closing the week at $53.22/Bbl. The rally was driven by the speculative sector, who took more (14% increase in long positions) bullish positions ahead of the OPEC quota compliance meeting this weekend. The meeting ended with officials from the quota carrying countries praising compliance levels.

Ministers of the quota carrying countries including OPEC kingpin Saudi Arabia’s Khalid al-Falih and non-OPEC giant Russia’s Alexander Novak were quick to label the cuts a success following this weekend’s meeting. They estimated that 1.5 MMBbl/d of the agreed upon 1.8 MMBbl/d has already been cut. Saudi Arabia is saying current production is below 10 MMBbl/d. Russia is claiming to have cut oil output by 100 MBbl/d already to an average of 11.15 MMBbl/d for January.

Although no fundamental supply data from a third party source is yet available, the oil ministers’ comments following the meeting will support bullish market sentiment. Prices have recently been rangebound between $50-$55/Bbl. Following the successful meeting, prices are likely to test the high end of the range. It is prudent to remember, however, that third party reporting of supply (analyst estimates expected later this month and official estimates expected by mid-February) may tell a different story. Analysts expect lower compliance than the levels touted following this meeting. Meanwhile, the productive potential of US shale will continue to keep a ceiling on how high prices can possibly go. Both the EIA and IEA raised their expectations for 2017 US shale production this week. The sizeable increase (+35 rigs) reported by the BHI rig count once again reinforced the flexibility of US shale production with rising prices.

NATURAL GAS

Natural gas production reversed from the previous week and increased 500 MMcf/d. Some of the increases can be attributed to freeze offs coming back as most of the gains were seen in the Rockies, Northeast, and Texas, which all showed the largest declines from the previous week. The rig count showed a build in natural gas rigs and the Haynesville rig count is now back up to levels not seen since early 2015. It would seem that hedges activated in late 2016 on the price runs (CFTC data showed that the producer community took advantages of higher prices and substantively increased short positions) have now started to show up in the rig counts. However, these rig additions are still not high enough to meet the expected demand growth. Canadian supplies also increased slightly 210 MMcf/d as compared with the week before.

On the demand side, with the significant warming in the East and Atlantic coast during the week, Res/Com levels declined by 10.85 Bcf/d on average over the week. Power demand also declined 4.06 Bcf/d from the previous week. LNG exports rose last week 200 MMcf/day (on average) indicating that commissioning of Train 3 has now started at Sabine Pass. Demand is expected to stabilize in the upcoming week with temperatures starting warmer and then moderating to more normal levels. The result should be higher week-on-week demand levels. The storage report last week was slightly above expectations at a 243 Bcf withdrawal. With the warmer temperatures, this week’s withdrawal will be well under the 5-year average in the low 100s compared to the 202 Bcf draw reported last year.

Price action was very bearish as prices reversed from the early highs to finish the week with a bearish reversal for the week. Expect an extension of the declines early this coming week. The speculative sector (Managed Money) continues with disproportion length and reduced its short position as reported in the Commitment of Traders Report dated Jan 17th. Some of that length may have been reduced as prices declined precipitously at the end of the week.

Drillinginfo has been calling for a rise in prices to facilitate additional investment in gas-directed drilling. While the latest rig count points to slight additions as hedges and prices rose temporarily above $3.50, growth at this pace will not be fast enough to offset the imbalance that currently exists and will continue into the summer. Expect storage withdrawals to remain relatively strong and inventory levels to approach the 5-yr min level this winter. Based on S/D fundamentals, and despite recent price declines, DrillingInfo continues to forecast $4+ average Henry Hub prices for 2017.

NGLS

Propane inventories decreased 7.4 MMBbl in last week’s EIA report, marking an eighth consecutive withdrawal and the largest withdrawal seen in history. Demand from cold weather along with a significant drop in propane production from refiners led to the substantial drop. The refiners’ propane production drop was the largest seen since 2012 which was largely due to the drop in refinery utilization (from 93.6% down to 90.7%). Propane stocks now sit at 72.2 MMBbl, roughly 17.7 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 48.4 MMBbl for this time of year prior to 2015 (before the price crash).

Ethane: Prices have dropped along with natural gas prices, due to a mild weather forecast for the next few weeks. Prices will largely continue to move with natural gas and weather forecasts.

Propane: Propane prices have increased since the EIA reported the highest withdrawal in history. However, the weather for the next few weeks is forecasted to be mild so Drillinginfo believes those price gains will be reversed.

Butanes: Normal butane prices remain above isobutane prices as the demand for gasoline blending continues, but the spread has tightened significantly. The Mt. Belvieu normal butane price was 1 cent per gallon higher than isobutane at the end of last week and only 0.125 cents per gallon by the end of this week. Conway is also making its way towards normalization after the rumors of a fractionator outage in the Midcontinent have subsided. Normal butane was 5.75 cents higher than isobutane at the close of last week and 1.25 cents higher by the end of this week. Drillinginfo expects these markets to stabilize soon and normal butane prices to fall back below isobutane prices.