- Crude oil stocks increased by 9.5 MMBbl, according to the weekly EIA report. Inventories of gasoline increased by 2.8 MMBbl and distillate inventories decreased 0.7 MMBbl. Total petroleum inventories increased by a massive 11.1 MMBbl. US production declined 1 MBbl/d and imports averaged 8.5 MMBbl/d, down 881 MBbl/d from the prior week. The EIA release was clearly bearish for WTI, as crude oil builds continued for a sixth straight week and total commercial inventories posted a large increase.
- WTI prices continue within the $50-$55/Bbl range. WTI remained in a small price range last week, with $1.27/Bbl separating the low from the high. The higher than anticipated compliance with OPEC quotas, and rumors of extending the quotas beyond the previously agreed six-month time period, continue to support the low end of the range. The speculative length continues to wait for higher prices. However, the inventory overhang is too large to normalize with the current supply deficit (650 MBbl/d) by mid-year, indicating the production quotas need to be extended beyond 1H2017. The market is also waiting to see whether quota compliance is going to fade with time after a strong start. Along with high inventories, the rising rig count in the US and the possibility of higher production from non-quota carrying OPEC members (Libya & Nigeria) continue to cap WTI prices. According to the latest CFTC report, producers have added another 45,864 contracts to their short position (hedging), signaling once more that current prices are sufficient to generate economic returns and guaranteeing production growth. Should rig additions continue at the current pace, inventory levels continue to send bearish signs, or speculators grow tired of waiting for higher prices, there could be downside risk.
- Natural gas production dropped below 70 Bcf/d last week (69.81 MMcf/d) as an explosion in the Gulf restricted flows and facilitated a decline of 400 MMcf/d from the prior week. These declines were offset by Canadian supplies, which increased 390 MMcf/d last week. Flow curtailments from the outage were lifted on Feb16th so expect the losses from the Gulf of Mexico to return this week.
- On the demand side, last week’s warm temperatures brought Res/com levels down 4.4 Bcf/d on average over the week. Power demand was also down by 720 MMcf/d compared to last week. LNG exports were down slightly but remain above 2.0 Bcf/d. Small gains are expected this week from the demand sector as temperatures will remain warmer than normal.
- The storage report last week came in below expectations with a 114 Bcf withdrawal extending the losses on prices. The warmth last week and the coming week should limit any price rally, as the next two reports will be well below the 5-year averages. While 2016 showed a very slight withdrawal during March (one week had an injection), early forecasts for March have a period of lower temperatures, which should allow for larger withdrawals this year compared to 2016. An increase in the likelihood of this forecast will bring a positive bias to the trade during March. Early estimates for inventories at the end of March are on either side of 2.0 Tcf.
- Price action provided a significant break down as prices closed the week below the closely watched 200-day simple moving average. Prices have not closed below that indicator since the break out of prices last June, which propelled the market during the summer months. While there was little follow through to the decline, expect prices to extend those declines this coming week as the market heads into expiration. This type of market behavior would be consistent to 2016, a warm winter as well, with the declines ending just after the expiration of the March contract. That said, the negative bias from the previous forecasts and subsequent storage withdrawals may start to be alleviated as April takes over as prompt. Trade will start confirming ending inventories and looking to the supply capability for injections during the summer season.
- Drillinginfo has been calling for a rise in prices to facilitate additional investment in drilling rigs. While crude has remained above the $50 level lately and the latest rig count points to additions, the associated gas from these rig increases will bring insufficient additional gas volumes to the market to provide the necessary volume the market will require to replenish inventories during the summer, especially if prices continue to decline. Drillinginfo continues to believe 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.
- Propane: Propane inventories decreased 2.6 MMBbl in last week’s EIA report, marking a twelfth consecutive withdrawal and the smallest withdrawal seen since early December 2016. This week’s weak withdrawal is attributed to warmer-than-normal winter temperatures and decreasing exports. Propane stocks now sit at 53.1 MMBbl, roughly 17.3 MMBbl lower than this time last year and the lowest we have seen since 2014. However, propane stocks are still well above the five-year average of 37.5 MMBbl for this time of year prior to 2015 (before the crude price crash). Propane prices dropped after the EIA’s inventory report showed a relatively small withdrawal. The slight withdrawal is likely the beginning of a short-term low. Drillinginfo believes that the mild weather and end of winter season will weaken propane prices further.
- Ethane: As Drillinginfo anticipated, there was a slight drop in ethane prices week-over-week. With natural gas prices on the decline, it is likely that this trend will continue in the short term. However, the new steam crackers anticipated to come online later this year will have a bullish impact on ethane prices.
- Butanes/Natural Gasoline: Normal butane, isobutane, and natural gasoline saw price drops this week, 13%, 15%, and 5%, respectively. The butanes saw such significant drops that they fell below natural gasoline prices, normalizing the stack with natural gasoline at the top. However, normal butane remains above isobutane, a trend that has continued since January. Drillinginfo expects that the butanes will continue to weaken as we approach spring/summer, as they cannot be used in summer gasoline blends.
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