Enverus Blog

Insights across the energy value chain

CRUDE OIL

  • Crude oil inventories decreased by 7.1 MMBbl last week according to the EIA. Gasoline and distillate inventories increased by 8.3 MMBbl and 10.1 MMBbl respectively. Total petroleum inventories posted a build of 6.1 MMBbl. The withdrawal in crude oil stocks was largely due to the lower imports (down 984 MBbl/d). Being the last week of the year, unexpected inventory report results can be expected, as tax strategies may incentivize newly arriving cargoes to remain on the water to avoid taxation onshore. Regardless, the decrease in crude oil inventories was larger than analyst expectations, which initially sent a bullish signal to the market. However, the withdrawal in crude oil was more than offset by the sizeable refined product builds, leading to a reversal of the bullish sentiment.
  • WTI prices have remained rangebound at the $50-55/Bbl levels since the OPEC announcement of a production cut. Now, the market waits for data regarding compliance with the cuts to move out of the range:
    • Bullish news of OPEC members discussing lower cargo loadings with their customers in the new year have boosted expectations that the quotas will be adhered to, at least in the early months. A Reuters survey showed that OPEC supply fell in December to 34.18 MMBbl/d from 34.38 MMBbl/d the prior month. The largest decline came from Nigeria due to an attack on pipeline infrastructure. Sources in Saudi Arabia have echoed that production was down to 10.06 MMBbl/d in January, which would mean that the largest OPEC producer was complying with its quotas. Adherence to the quotas, at least to some degree is expected by the market, as prices tested the high end of the range this week on the bullish news regarding the cuts. Data that will confirm or deny compliance with quotas will not be known until late January.
    • Periodic bearish news and lack of information regarding the success or failure of the anticipated OPEC cuts has limited upward price movement in recent weeks. WTI ran into selling from both the commercial short and the managed money sector after testing the $55/Bbl level as per the most recent CFTC report. News of higher production from Libya (who was completely exempted from the quotas along with Nigeria) continue to work against the goal of the production cut by OPEC. The continuously rising rig count in the US also underlines the ability of shale producers to ramp up activity and bring production on quickly as prices rise.
  • DrillingInfo expects prices to remain rangebound until new data pushes WTI out of the range. Although data signaling initial compliance may pull prices north of the current ceiling, upside will continue to be limited by US production potential and possibly degrading compliance in future months as prices climb. Partial or non-compliance could pull prices down to mid-$40/Bbl levels.

 

NATURAL GAS

  • Natural gas production declined 360MMcf/d week-on-week as the colder weather (towards the end of the week) limited production to the market, and freeze-offs in the South were observed. A portion of those declines were offset with gains in Canadian supplies as they increased 200 MMcf/d compared to the week before.
  • Last week the overall warmer temperatures from the previous week disappeared and Res/Com demand rose 10.3 Bcf/day; these temperature declines in the South and Gulf demand areas also pushed up power demand by 3.1 Bcf/day. This trend of higher res/com and power will continue early this week following some of the coldest temperatures observed so far this season (nationally) over the weekend. The picture for demand will soften as the week progresses and temperatures in the 6-10 day period look to be warming. There is a lack of confidence in the longer-term forecasts (beyond the 10-day period) and the longer range forecasts proposed by the primary models have been very inaccurate so far this winter season. This type of back and forth temperature pattern and issues with the longer range modeling is consistent with a weak to non-existent La Nina pattern.
  • The storage report last week was well below expectations at only a 49 Bcf withdrawal and sent spot prices to a recent low $3.172. This week’s storage report will provide a more seasonal withdrawal (around 140) while next week’s report should show a significantly higher withdrawal (+200). The report continues to leave inventories below the 5-year average and well below the year-on-year comparison.
  • Prices action was very bearish from the start of last week as prices opened $0.156 below the previous Friday close and never recovered to those levels during the week. As mentioned in this weekly report last week, price action in the futures market is much more focused on the longer-term forecasts. This focus is likely to create extreme volatility in the market. Any changes to the longer-range forecasts (especially due to the lack of confidence in the long term models) will continue to have a dramatic effect on price action. Even with the dramatic drop in prompt prices on Jan 3rd, the Managed Money sector of the market increased their length (as well as the short position) according to the Commitment of Traders Report dated Jan 3rd. The Managed Money Long sector now represents 22.2% of total open interest, second in percent of open interest only to the Commercial short (producers hedging) at 25%.
  • 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. While price declines for the upcoming summer did not drop as far as the winter months, the declines have delayed the ability to incentivize additional drilling. This process may take time to develop, allowing the market to fully comprehend the end of March storage levels to support the necessary rise in price.
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    NGLS

  • Propane: Propane inventories decreased 2.7 MMBbl last week as reported by the EIA, less than half the withdrawal seen in the previous week. Less severe temperatures have led to weaker storage withdrawals. Propane stocks now sit at 84.1 MMBbl, roughly 12.2 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 59.2 MMBbl for this time of year prior to 2015 (before the price crash). Drillinginfo expects a higher withdrawal in this week’s EIA report due to temperatures dropping last week.
  • Ethane: Prices dropped along with natural gas prices, due to warmer weather seen in the long term forecast. Prices will largely continue to move with natural gas and weather forecasts, however, the uncertainty of the long term weather forecast leaves the market volatile.
  • Butanes/Natural Gasoline: Towards the beginning of the week, normal butane prices appeared to normalize, sitting below natural gasoline and isobutane prices. However, toward the end of the week, normal butane prices surpassed isobutane prices. There is speculation that this is due to an increase in gasoline blending demand, which is backed by last week’s gasoline build of 8.3 MMBbl.
  • Last Wednesday, Phillips 66 and Spectra Energy announced the reorganization of DCP Midstream. The reorganization combines all midstream assets of DCP Midstream and DCP Midstream Partners into the new DCP MLP, creating the largest NGL producer and gas processor in the United States.
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