The Week Ahead For Crude Oil, Gas and NGLs Markets 01/03/2017

January 3, 2017

CRUDE OIL

Crude oil inventories increased 0.6 MMBbl last week according to the EIA. Gasoline and distillate inventories decreased by 1.6 MMBbl and 1.9 MMBbl respectively. Total petroleum inventories posted a substantial decline of 12.9 MMBbl. The increase in crude oil inventories was higher than analyst expectations, which sent a bearish signal to the market. However, the build in crude oil was more than offset by the refined product withdrawals, which led to a neutral environment for trade during the lighter volume holiday trade.

WTI traded within a $1.34/Bbl range last week and stayed well within the $50-$55/Bbl range that has been established since OPEC agreed on quotas at the end of November. Due to the light trade heading into the new year, there was no significant changes to trader’s positions according to the most recent CFTC report. Market participants continue to wait for fundamental data (expected later this month) to understand whether the OPEC and non-OPEC producer quotas are being properly enforced. This data will be the key to breaking out of the current range. If data seems to confirm the production cuts, prices will continue their march up towards the $60/Bbl mark. Any data that could suggesting non-compliance, on the other hand, could push prices back to the high $40/Bbl level. Until the data is available, Drillinginfo expects the WTI price range to remain intact.

NATURAL GAS

Natural gas production increased 1.3 Bcf/d last week to 71.8 Bcf.d as some of the freeze-off losses returned with the warmer temperatures. The warmer weather also reduced the need for Canadian supplies as they dropped 800 MMcf/day compared with the week before.

On the demand side, the warmer temperatures pushed Res/com demand down 11.3 Bcf/day and pushed power demand down another 6.3 Bcf/day week-on-week. Demand should rebound in the coming week as temperatures are expected to decline significantly. Cold weather levels similar to those endured in the 3rd week of December are expected to return in the coming 6-10 day period. In the 11+ day period, forecasts are currently calling for warmer temps. This type of back and forth temperature pattern is consistent with a weak to non-existent La Nina pattern.

The storage report last week was a little above expectations at a 237 Bcf withdrawal. This week’s storage report is expected to be relatively weak (either side of 70), while next week’s report should return to normal withdrawal level (normal for this week in the year). Inventories are now below the 5-year average and well below last year levels.

Prices action was bullish with the expiration of the January contract but the gains could not be held as the Feb contract took over as prompt and quickly declined nearly $0.20/MMBtu on the last two days of the year. This week’s forecasts may support the cash market early this week but the forecasts are trending warmer further out which will limit gains. The recent trend for the NYMEX price action has been to focus on the longer term forecasts which will pressure prices near term. In addition to weather, another factor that may hold prices down are the long positions accumulated by the speculative community. Should the forecast updates continue to trend warmer into the late part of January, these positions will have to be addressed.

With the current forecast, another 200+ withdrawal is likely coming in a couple of weeks but additional changes will need to occur later in the forecast period to bring significant support for higher prices. 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 reached levels necessary to incentivize additional gas-directed drilling, despite significant demand growth expectations for this year. Higher prices may take time to develop (stretching into late Jan and Feb), as the market tightens up expectations around the end-of-March storage levels and reconciles that against growing demand needs.

NATURAL GAS LIQUIDS

Propane inventories decreased 5.7 MMBbl last week as reported by the EIA, marking a fifth consecutive withdrawal. The withdrawals have been driven by the cold weather. Propane stocks now sit at 86.9 MMBbl, roughly 10.7 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 61 MMBbl for this time of year prior to 2015 (before the price crash).

Butanes/Natural Gasoline: Normal butane prices continued to be above natural gasoline prices through most of the week, but then lowered to normal levels (natural gasoline above normal butane) toward the end of the week. The higher price was attributed to short covering by a couple of major players in the market. DrillingInfo expects normal butane prices to stay below natural gasoline moving forward.