The Week Ahead For Crude Oil, Gas and NGLs Markets – 02/13/17

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CRUDE OIL

  • Crude oil stocks increased by 13.8 MMBbl, according to the weekly EIA report. Inventories of gasoline decreased by 0.9 MMBbl and distillate inventories were unchanged. Total petroleum inventories increased 1.4 MMBbl as significant withdrawals in propane (down 6.9 MMBbl) offset the increase in crude oil stocks. US production increased 63 MBbl/d and imports were up 1.1 MMBbl/d to an average of 9.4 MMBbl/d from the prior week. The EIA release should have had a bearish impact on WTI prices, but the market chose to focus on the unexpected gasoline withdrawal instead.
  • IEA released the anticipated third party confirmation of 90% compliance with OPEC production quotas on Friday. At the same time, demand growth expectations were revised upwards by 0.1 MMBbl/d to 1.4 MMBbl/d. The current fundamentals imply a 650 MBbl/d supply deficit. However, the IEA also commented that given the high global stock levels and other producers’ production growth potential (ex: US, Libya, Nigeria), the current supply deficit still does not normalize stock levels by the end of 1H2017. OPEC is due to release their monthly report on Monday.
  • WTI prices continued within the $50-$55/Bbl range. Following the IEA report, prices rallied, only to stop at Monday’s high (below last week’s highs), signaling that high quota compliance was already built into prices. According to the latest CFTC report, managed money sector reduced their speculative length slightly and increased their short positions. The volatile risk in the current market is to the downside. The market remains aware that continued price gains are being sold by producers hedging forward production and capping gains. Should speculative trade grow impatient waiting for $60/Bbl WTI and start selling their current length, this could put a disproportionate amount of sellers in the market. Drillinginfo continues to expect the range to hold near term, but is growing increasingly concerned that the current consolidation phase may also lead to a period of volatility as the market reassess expectations and participant behaviors.
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    NATURAL GAS

  • US natural gas production gained slightly (120 MMcf/d) last week with declines in the Northeast offset by gains in the Rockies and the Haynesville. The Haynesville has added 14 rigs this winter, up over 50% from last fall levels when prices increased through early December providing forward strips at $3.50 per MMBtu. Despite the recent gains in rig count, current drilling levels are still not enough to offset the current declines in production over the last year.
  • On the demand side, last week’s temperatures warmed again and brought Res/com levels down 5.95 Bcf/d on average over the week. Power demand for the week was also down compared to the week before by 150 MMcf/d. LNG exports were up significantly at 360 MMcf/d (2.2Bcf/d) as the Sabine Pass terminal continues commissioning Train 3.
  • The storage report last week included a re-classification (up 5 Bcf) but still came in just a little shy of expectations. With the warmer weather last week and early this coming week, expect the next two storage withdrawals to be under the 5-year average.
  • Price opened the week at $3.015, rallied $0.18, then fell dramatically and finished the week at $3.034. The market continues to focus on the demand side in the price action (winters follow this pattern) and should the forecasts continue to show warming temperatures this week, then some small additional price declines should occur (perhaps down to $2.89). That said, the negative bias from the forecasts is already quite prevalent in the price action therefore the price risk associated with volatility is to the high side. Eventually one of two events will force the direction upward: 1) forecast modify slightly out of this warm pattern; or 2) the traders will focus on supply rather than demand in their positions when realizing the summer injection will short fall due to lack of production growth.
  • While crude has remained above the $50 level lately and the latest rig count points to additions, the additional associated gas volumes from these rig increases will not provide the necessary volume the market will require to replenish inventories during the summer. Drillinginfo continues to forecast that prices will need to rally back above $3.50 and possibly $4.00 to offset the summer injection short fall currently in the market.
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    NGLS

  • Propane inventories decreased 6.9 MMBbl in last week’s EIA report, marking an eleventh consecutive withdrawal seen this season. This week’s strong withdrawal is attributed to high exports and less propane produced at refineries compared to the week prior. Propane stocks now sit at 55.8 MMBbl, roughly 19 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 40 MMBbl for this time of year prior to 2015 (before the crude price crash).
  • Ethane: Prices started out lower last week, but steadily increased for the majority of the week, tracking closely with natural gas prices. On Friday, however, natural gas prices took a dive, causing ethane prices to follow suit. Prices will continue to track closely with natural gas prices.
  • Propane: Propane prices decreased through the first half of the week due to mild weather forecasts, but reversed that trend when the EIA reported a bullish inventory report. If the mild winter temperatures continue in the forecasts, it is likely that prices will revert to a downward trend.
  • Butanes/Natural Gasoline: Both isobutane and normal butane prices saw similar trends to propane, with normal butane still hovering over isobutane for the second week in a row. Natural gasoline prices, however, saw gains throughout the week, pushing past isobutane but not normal butane. The gains are likely due to rising crude oil prices seen this last week.
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