The Week Ahead For Crude Oil, Gas and NGLs Markets

February 27, 2017

CRUDE OIL

US crude oil stocks increased by 0.6 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 2.6 MMBbl and 4.9 MMBbl respectively. Total petroleum inventories showed a large decline of 11.0 MMBbl. US production increased 24 MBbl/d and imports declined by 1.2 MMBbl/d to an average of 7.3 MMBbl/d versus the previous week. The EIA data release provided bullish support for WTI prices, as analysts had expected a larger build in crude oil stocks and did not anticipate the large withdrawal in total petroleum inventories. The high for WTI for the week came in on the heels of the stocks data release at $54.94/Bbl. Trade continues to be buoyed by the 90+% compliance on OPEC quotas and hopes that the quotas will normalize the inventories.

According to the IEA’s latest release, there is currently a 650 MBbl/d supply deficit. However, looking at the level of OECD stocks, even if the deficit was sustained for the whole year, it would not be sufficient to bring inventories back normal levels by year end.
Despite overall bullish stock and OPEC compliance news, prices have failed to break through $55/Bbl due to the potential of additional production from Nigeria and Libya (exempt from quotas) and the rising US rig count (and production).

The record speculative length continued this week as confirmed by the latest CFTC release with the managed money sector continuing to add to their length. Due to the expiration of the March contract, both the commercial longs and shorts significantly reduced their position.

Drillinginfo continues to expect the WTI range ($50-55/Bbl) to hold in the near term. However, the inability of prices to break out of the range on bullish news, continues to signal that the market is having issues with the production potential of the US. Last week’s price range continued the trend of tight trade ranges as the week’s high/low price action was limited to $1.59/Bbl. Low volatility often works as a coil for prices to spring from. By not being able to break the $55/Bbl mark this week, the market may be signaling that a correction down is coming.

NATURAL GAS

Natural gas production increased 220 MMcf/d last week as flows returned from interruptions in the Gulf of Mexico from the previous week. With the lack of demand in the Northeast and pressure on prices, Canadian supplies declined 1.06 Bcf/d last week.
Last week’s warm temperatures brought Res/com levels down 9.08 Bcf/d on average over the week. Res/Com demand at 21.8 Bcf/d is at levels usually found in late March or early April. Power demand was basically flat to the previous week, LNG exports were up slightly, and there was a slight decline in Mexican exports.

The storage report last week came in slightly above expectations with an 89 Bcf withdrawal, which allowed for a momentary gain in prices. The record warmth last week should provide a single digit withdrawal for this week’s storage release with some models are even projection a slight injection. An injection during this late winter period is not unheard of; in early March 2016, there was a small injection. Despite this recent warm week, weather forecasts for March continue to indicate lower temperatures than those recorded in 2016.

Price action last week was spectacular and clearly bearish. Prices started high on Monday/Tuesday at $2.826 MMBtu, but the March contract closed just off the lows at $2.564. This can only be described as a capitulation by traders (long the March contract), who were continuing to hold out hope of winter showing up at some stage. The volume was staggering and posted the 2nd highest volume day in history at 818,960 contracts (second only to 1/23/2012). It is interesting to note that open interest gained, which is not usually the sign from traders selling out their speculative length (causing open interest to decline). According to the CFTC data (as of Feb 21st, which included the Mon/Tue drama), the Managed Money length was reduced by 16,219 contracts (liquidation) and the Managed Money short positions increased by 11,683 which may well become fodder (short covering) for volatile rallies as prices start the annual Q2 rally in coming weeks.

Drillinginfo has been calling for a rise in prices to facilitate additional investment in drilling rigs. At these prices, the market is creating its own conundrum. If prices stay low (~$50/Bbl WTI and below $3.00/MMBtu HH) then additional drilling will not occur while demand from the power sector from switching will increase during the spring. This will exacerbate the problem with the supply/demand imbalance and potentially lead to a very volatile price rally into late spring or early summer as production won’t be enough for injections this summer to replenish stocks for winter 2017/2018.

NGLS

Ethane

For the second week in a row, there has been a slight drop in ethane prices. Ethane will continue to track closely with natural gas prices and with warmer-than-normal weather expected in the 0-15 day forecast, it is likely prices will continue to decline.

Braskem sent a cargo of 78,000 barrels of ethane from Enterprise’s Morgan Point terminal to Rio de Janeiro, Brazil, which was expected to arrive on Wednesday. This marks the first shipment of ethane from the US to South America, as US shipments to-date have sent to Europe and India.

Propane

Inventories decreased 3.3 MMBbl in last week’s EIA report, marking a 13th consecutive withdrawal and placing stocks under 50 MMBbl. This week’s weak withdrawal is attributed to warmer-than-normal winter temperatures and decreasing exports. Propane stocks now sit at 49.8 MMBbl, roughly 16.9 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 35.9 MMBbl for this time of year prior to 2015 (before the crude price crash).

Propane prices are off 15% week-over-week, as a result of weak weather and the quickly approaching end of winter heating season. Additional price declines are likely this week as the weather forecast indicates warmer-than-normal temperatures.

Butanes/Natural Gasoline

As Drillinginfo expected, the butanes both saw price drops for the third week in a row. Both remain below natural gasoline, but isobutane is still below normal butane, throwing the stack slightly off. Drillinginfo expects that the butanes will continue to weaken as the demand for gasoline blending declines into the spring season.