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The Week Ahead For Crude Oil, Gas and NGLs Markets – 11/20/2017



• US crude oil inventories increased by 1.9 MMBbl, according to the weekly EIA report. Inventories of gasoline showed a build of 0.9 MMBbl while distillates declined 0.8 MMBbl. For the first time in over a month, total petroleum inventories posted an increase, rising 2.8 MMBbl/d. US production was estimated to be up 25 MBbl/d with the lower 48 production rising 20 MBbl/d. Imports increased 524 MBbl/d versus the week prior to an average of 7.9 MMBbl/d.
• Prices softened at the beginning of last week after establishing a new recent high the week prior. This profit-taking action was expected as the prompt month contract starts to head into expiration. Bullish sentiment triggered by the geopolitical instability in the Middle-East was offset with IEA’s latest report, as they lowered their oil demand forecast by 100 MBbl/d for 2017 and 2018. The group stated that warmer temperatures could reduce consumption while increasing output from some countries may cause the crude market to be oversupplied in the first half of 2018.
• The recent rally in WTI prices has been fueled by speculation by traders and not the fundamental aspects of the market. This speculative positioning is confirmed with the latest two CFTC reports (one last Monday and another last Friday) which showed the speculative Managed Money long position gaining 36,684 contracts since October 31st. These gains have taken the speculative position to 16.5% of total open interest. As long positions have been increasing, additional gains have been met by the speculative (Managed Money) short positions, which has covered an additional 40,323 contracts and now represents only 2.3% of total open interest. To put the speculative length in perspective, as a percentage of open interest, the speculative length position lags the largest sector (producer short – hedging) by only 3.4% or 91,049 contracts. This is a long term unsustainable position as this group is subject to adjustments in position on price action causing the potential for serious volatility.
• As discussed prices declined during the week, falling to near term support at $55 and trading down to $54.81 before catching a bid and ended the week on strength, closing at $56.55. Prices started the week weaker as the market is being cautious ahead of the OPEC meeting next week. Russia indicated they may not be interested in joining another deal extension as current prices support the country’s plans making the market skeptical for the OPEC meeting.
• With the level of open interest being held by speculators and the market clearly leaning to one side of the ship, the WTI market is setting itself up for a potential violent period of volatility. Should any event in the Middle East or the upcoming OPEC meeting compromise the expectations of the bullish trade, prices will face downward pressure moving forward. If the market continues its ascent to the expected $60, it is unlikely to stay there long as IEA’s latest report and increasing US production also signals that the fundamentals are not fully supporting the price level.
• Over the last two and a half months the bias for crude prices has clearly entered and maintained a bullish stature. However, along with IEA’s latest report, and US production not showing signs of slowing down, market is beginning to pay attention to fundamentals again. Drillinginfo expects the trade to return to the established range $50-$55 for the near term.

• Natural gas dry production was largely flat to the previous week gaining 70 MMcf/d on average. The profile for dry production last week settled into a tight range on either side of 76 Bcf/d suggesting that the growth from the expansion pipelines has largely been accounted and registered. Canadian imports were down slightly, losing 130 MMcf/d.
• On the demand side, Res/Com demand continued the gains of the week before as temperatures declined, rising 2.01 Bcf/d. Power demand backed off the previous week’s gains, declining 1.25 Bcf/d on average for the week. Industrial demand continued its recent gains rising 150 MMcf/d. LNG exports were down 270 MMcf/d, but started to climb back up to recent normal levels around 3 Bcf/d at the end of the week. Mexico exports rose 60 MMcf/d leaving total demand up 770 MMcf/d while total supply was down 60 MMcf/d.
• The storage report last week came with a slightly higher withdrawal than expected with a draw of 18 Bcf. Prices declined, after a small rally on the release, trading down to test the support from two weeks ago. The upcoming release should be another withdrawal well above last year (an injection) and the 5-year average withdrawal.
• Prices started the week rising very briefly before correcting downward and testing the gap from the previous week. The rally in the previous week was a forced short covering rally as discussed last week. Looking at the chart below, notice that the short open interest from the Nov expiration had extended well above its recent levels. When prices started to rally, the speculative short position was forced to cover some of their positions which led to the gains to $3.23. That rally was not combined with additional length from the speculative long sector. Rallies based solely on short covering are not long for duration and for additional gains in prices, open interest needs to gain along with prices and volume. Last week’s decline in prices may have provided additional speculative shorts which, as shown two weeks ago, can lead to volatile trade in the future.

• Last week’s declines were likely the result of moderating forecast changes by some of the models during the week. Expecting a consolidation type of range trade likely last week, the market decided to test the gap left from the previous week ($3.051-$2.998) and traded down to $3.046 before additional buying came in and carried the prices higher to the weekly close. Price action is expected to continue be driven by the changes in forecasts near term. A problem with this is the models seem to change over-night and have little or no confidence for the trade to take longer term positions either up or down.

• The volatility may increase this week with the shortened holiday week. As long as the gap remains from earlier November it should be considered major support. Driven by forecasts, the weather will have to shift much warmer into December with higher confidence levels to break below the $3.00 area. Should the market continue last week’s range trade, expect the highs of $3.23 to hold prompt near term.

• Construction on the EPIC NGL pipeline began last week. The pipeline will span 650 miles from Southeast New Mexico to Corpus Christi and carry 375 MBbl/d of y-grade from the Permian and Eagle Ford basins to petrochemical companies and export markets.

• Inventories decreased 2.5 MMBbl in last week’s EIA report. Propane stocks now sit at 74.7 MMBbl, roughly 26.1 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 67.9 MMBbl for this time of year prior to 2015 (before the crude price crash).
• Propane prices have been trending upward since June, mostly supported by export demand. With the winter months approaching we expect prices to continue posting gains on higher demand.

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