US crude oil stocks increased by 6.5 MMBbl, according to the EIA report. Gasoline and distillate inventories were also up by 3.9 MMBbl and 1.6 MMBbl respectively. Total petroleum inventories posted a significant increase of 5.3 MMBbl. The EIA release should have had a bearish impact on WTI, but price action remained supportive as news of compliance amongst OPEC members ruled over the market.
The market continued to weigh the bullish news regarding compliance with the OPEC and non-OPEC production quotas against the potential of rising US production throughout the week. The sanctions imposed on some Iranian individuals and entities provided more bullish geopolitical news to the market on Friday. However, prospects of production growth from Libya and Nigeria, in addition to the continued rising rig count in the US, somewhat counteracted the bullish sentiment.
Headline risk for prices will continue this week. The Reuters survey regarding OPEC production in January along with ministers’ comments following the meeting of the quota compliance committee in mid-January has encouraged the bulls. Reuters showed crude oil supply from quota carrying OPEC members declined 1.16 MMBbl/d in January. Ministers had said that 1.5 MMBbl/d of the 1.8 MMBbl/d had been cut following the quota compliance meeting in mid-January. Analysts still expect third party data to show partial compliance. The market will finally receive confirmation (starting Friday with the IEA data release). Until Friday, Drillinginfo expects WTI to continue to trade in a narrow range between $50-$55/Bbl.
WTI price action has been consolidating in the $50-$55/Bbl range for over two months, with speculators continuing to build length and the producer community selling (hedging) and increasing their short position (according to the January 31st CFTC report) while continuing to add rigs. Many commonly watched technical data points have been “catching up” with price during this two-month consolidation pattern. These simple moving averages (20-day, 40-day, 50-day) are now within the recent range and violation of these levels may provide significant volatility to price action. The managed money segment (speculators) are betting on acceptable levels of quota compliance and with that higher prices closer to $60/Bbl. Prices will likely take a period of time to reach those lofty levels, however, as producers have consistently sold the rallies, stunting price advances. This behavior would continue, especially if the price advance brings up the whole forward curve. On the other hand, should third party data suggest insufficient compliance, prices could fall below the aforementioned averages and bring about significant downward volatility as speculators will be forced to scramble and cover length.
The market was focused on the FERC this week, as outlined in Drilinginfo’s blog FERC Commissioner Norman Bay’s Resignation Throws a Wrench in Natural Gas Pipeline Construction Plans For 2017 published on Feb.1. The resignation of Commissioner Bay put several key pipeline projects at risk, however several last minute certifications by FERC at the end of last week eased concerns and added clarity to 2017 construction activity. The Rover certificate was one of the most significant orders and Energy Transfer continues to anticipate a July in-service date for Phase I and November for Phase II (DrillingInfo is tracking this closely as the likelihood of delay is high with such a tight timeline). In addition to Rover, National Fuel’s Northern Access 2016 and Transco’s Atlantic Sunrise also received certificates. Despite receiving certificates, they were subject to many conditions that must be met before bringing these facilities in-service therefore, the biggest loser appears to be Nexus which was not certified ahead of the Friday cutoff. Drillinginfo does not expect a large amount of capacity from these projects to be available this winter.
Natural gas production declined slightly (170 MMcf/d) last week but those declines were more than offset with gains in Canadian supplies of 410 MMcf/d, leaving the total supply for the week up slightly. The more interesting number to watch is the overall level of US dry gas production of 70.3 Bcf/d; this level is below summer-2014 levels and still continues to decline. This level is significantly below the 73.3 Bcf/d peak observed in early 2016 and will not be sufficient to meet summer injections and growing demand in 2017.
On the demand side, more seasonal temperatures arrived last week and brought Res/com levels up 6.5 Bcf/d on average compared to the previous week. Power demand was basically flat week-on-week. Small declines in LNG exports were offset with small gains in Mexican exports although both remain strong at 1.9 and 4.0 Bcf/d, respectively.
The storage report last week came in a little above expectations with an 87 Bcf withdrawal, but well below historical draws for the week pushing inventories above the 5 year average. Storage withdrawals are expected to be much closer to the historical averages over the next two weeks.
After rallying briefly at the storage release, prices closed the week at the lowest weekly close since the middle of Nov and left a negative bias for the market in the coming week. Breaking key support around $3.10 should embolden trade for tests below $3.00 in the coming weeks as traders seem to be convinced that the winter is over and that ending inventories will be fine. Changes in the longer-term forecasts (models vary and have carried low confidence all winter) may forestall or reverse the current bias. Eventually, participants will change their focus from winter forecasts to re-supplying storage inventories this summer. This will alter the analysis from demand driven (as it is in winter) to a supply driven issue. With production levels below levels seen in 2014 and declining rather than growing, the markets response could be very volatile as the focus comes clearer.
Drillinginfo continues to believe that prices will need to rally back above $3.50 and likely $4.00 to offset the imbalance currently in the market, however prices will likely trade lower in the short term due to lack of consistent cold weather.
Propane inventories decreased 5.5 MMBbl in last week’s EIA report, marking a tenth consecutive withdrawal seen this season. This week’s strong withdrawal is attributed to normal winter weather, along with a 15% increase in propane exports compared to the week prior. Propane stocks now sit at 62.6 MMBbl, roughly 15.4 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 42 MMBbl for this time of year prior to 2015 (before the crude price crash).
Ethane: Prices jumped on Monday, increasing 34% from the previous Friday. The price rebound is likely due to the completion of Enterprise’s week-long maintenance at Morgan’s Point ethane export terminal conducted the week prior.
Propane: Bullish signs from the EIA’s weekly export and stocks reports instigated a jump in propane prices on Wednesday. Propane prices continued to rise the following day, hitting a three-year high on Thursday. The factors that contributed to this jump were that export volumes fell just below the all-time high seen in history and stocks are 20% lower than they were this time last year.
Butanes: Once again, butane prices switched their typical price relationship, with normal butane ending the week 8.75 cents/gallon higher than isobutane. Both commodities saw three-year highs on Thursday’s close, which was driven by the EIA’s release of November stocks and export reports. The largest normal butane withdrawal seen in history, along with record high exports drove up prices.
Natural Gasoline: Natural gasoline prices also jumped on Monday, but not enough to account for the high butane prices, keeping the price of natural gasoline below the butanes for the second week in a row.