The Week Ahead For Crude Oil, Gas and NGLs Markets

March 27, 2017

CRUDE OIL

US crude oil inventories increased by 5.0 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 2.8 MMBbl and 1.9 MMBbl respectively. The most important number to keep an eye on, total petroleum inventories, increased by 1.3 MMBbl. With the builds in total inventories and crude the report was perceived as bearish for the market. US production continued to build with an increase of 20 MBbl/d last week. Imports were up 902 MBbl/d to an average of 8.3 MMBbl/d versus the previous week.

On Sunday, a joint committee from the quota carrying OPEC and non-OPEC countries met to discuss compliance with production cuts. The committee said it recommends for OPEC to review the market and revert in April regarding the extension of the quotas. OPEC and non-OPEC members seem amiable to an extension of the quotas as long as compliance levels remain high. The lack of a solid statement regarding the extension of the cuts, however, was disappointing for the market. Non-OPEC compliance (only 44% in February) may prove to be a roadblock for an extension of the quotas. The most significant non-OPEC quota carrying country, Russia, only cut 118 MBbl/d from an agreed upon level of 300 MBbl/d in February. In order for there to be any chance of normalizing inventories back to pre-price crash levels, OPEC has to extend the quotas beyond the initially agreed upon six months. Without a normalization of inventory levels, there can be no sustainable price recovery.

Liquidation of the speculative trade continued last week with another 22,511 contracts reduced from the managed money sector of the market according to the latest data from the CFTC. Any significant rally in prices should be met with more liquidation as traders unwind the positions built from December through February. WTI price action has consolidated in the last 11 trading days, after the dramatic declines, forming an initial support area at $47.00/Bbl (testing this area twice) and resistance just under $50.00/Bbl at $49.62/Bbl. While this mini-range may hold in the near term, a test of the high side of the range or the 200 day moving average ($48.61/Bbl) should be coming shortly. With the longer term bearish bias to the market, Drillinginfo expects, and market action suggests, a test of the late November lows (just prior to the announcement of the OPEC cuts) at $44.82/Bbl will be coming.

NATURAL GAS

Natural gas production was down 430 MMcf/d last week with a significant portion of the declines coming from Texas as Trunkline and NGPL pipelines commenced pigging and maintenance operations. This type of activity and brief interruptions to production should be expected periodically throughout the spring shoulder season. In addition to production, Canadian imports also decreased 410 MMcf/d week-over-week due to the decline in demand in the Midwest and Northeast. Gas-directed rig activity has increased slightly over the past two months and as almost half of the drilled but uncompleted gas well inventory has been reduced, a significant build in drilling activity is needed to grow current production levels. If production does not grow, there will be a problem this summer with refilling storage.

On the demand side, last week’s temperatures were much warmer than the previous week’s with res/com demand dropping 13.1 Bcf/d on average over the week. Power demand also dropped 2.4 Bcf/d. Power demand should see some gains in the coming weeks as the nuclear facilities enter the re-fueling/maintenance season. LNG exports dropped a slight 100 MMcf/d, but remained above 2 Bcf/d. These levels may fluctuate between 1 and 3 Bcf/d in the coming weeks as Cheniere starts commissioning train 4 at Sabine Pass.

The storage report last week came in a little below expectations with an injection of 150 Bcf. The coming week’s expectation should be around 50 Bcf, which remains well above the seasonal average for late March and projects ending inventories on March 31 around 2.04 Tcf.

Price action continues to maintain a positive bias as a higher high and a higher low printed for the fourth consecutive week. Prices historically show a positive bias during the spring and early summer. This price behavior should continue with the key being the closely watched 50-day moving average (currently at $3.028 and declining) and the 200-day moving average (currently at $2.981 and rising). Expect additional gains to churn out as long as these key averages are not broken with a weekly close below them.

According to the CFTC release (positions as of Mar 21st) the speculative shorts were forced to cover an additional 19,571 contracts as prices traded up above the January lows at $3.098. The report also highlighted the Managed Money sector added to the length by 8,823 contracts. This run saw a decline in total open interest as the shorts covered. For a longer sustained gain in prices, open interest and volume should rise simultaneously as prices rise.

As discussed above, production will need to rise this summer and that investment will only come with higher prices, as Drillinginfo has been calling for since the beginning of the year. An orderly upward bias in prices to facilitate the investment will see gains to be met with incremental contract selling but finding additional buying on the declines. The risk for the trade remains to the upside with a large contingency of speculative shorts left in the market, and the speculative length now adding to their positions as the market heads into its historically strong seasonal period.

NGLs

Ethane

Although natural gas prices increased week-over-week, ethane prices dropped below a two-week low this week due to weak demand as maintenance took place in several steam crackers.

Propane

Inventories decreased 0.135 MMBbl in last week’s EIA report, the smallest withdrawal seen since the last injection observed in November. This week’s weak withdrawal is attributed to exports falling 27% week-over-week and warmer spring weather. Propane stocks now sit at 44.3 MMBbl, roughly 17.9 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 32.6 MMBbl for this time of year prior to 2015 (before the crude price crash). Drillinginfo expects that propane will see its first injection of the season over the next couple of weeks, consistent with historical activity.

Propane prices continue to fall as winter heating demand diminishes, dropping to a low that was last seen in November 2016.