- US crude oil inventories decreased by 3.4 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories increased with gasoline rising 3.6 MMBbl and distillates increasing 2.7 MMBbl. Total petroleum inventories showed a large withdrawal of 7.6 MMBbl. US production was estimated to be up 24 MBbl/d with the lower 48 production rising 20 MBbl/d. Imports decreased 544 MBbl/d to an average of 7.3 MMBbl/d versus the week prior.
- Prices had started last week soft as traders grew concerned over the growing U.S. rig count and Keystone pipeline announcing resumption of operations (though it will be operating under reduced pressure) and uncertainty of Russia’s potential impact on the OPEC meeting held on Nov 30th.
- The results of the meeting was as expected, OPEC announced that they extended the production cuts throughout 2018, and stated they would meet in June to review the deal as well as start discussing 2019 plans. The agreement also left Nigeria and Libya (exempt from previous output caps) with a combined 2.8 MMBbl/d output cap. These countries are expected to keep production within their highest 2017 levels until the end of 2018. Most importantly, the agreement keeps Russia “on board” with the production quotas as Alexander Novak (Russia’s energy minister) was quoted that crude output would remain flat year on year in 2018. He and Saudi energy minister, Khalid al-Falih, announced that they will assume the co-chairmanship of the monitoring committee overseeing the deal.
- Completing the nine hour negotiation, OPEC news was supportive for prices, as WTI rose off of the weeks lows to close the week at $58.36. According to the last two CFTC reports (both released last week due to the Holiday) the Managed Money long positions only increased net 9,629 contracts but remains at 17.8% of total open interest. Discussed over the last month, most of this open interest is due to the geopolitical risk in the Middle East and the OPEC meeting. The OPEC meeting is now in the rear view mirror leaving a significant amount of traders exposed to potential downward corrections. Prices also have been approaching “backwardation” where the future prices are lower than prompt (near term) prices. While prompt months are well above the outer curve, most speculators work in the nearby (three month range) and these prices are basically flat. If backwardation continues toward the front months, the speculative trade will be able to roll positions forward at lower prices but loosing price momentum. One effect of backwardation on the outer curve is that producers will be more hesitant to forward sell significant volumes at reduced prices versus the premium the producers received when the market was in contango (prompt price is discounted to future prices).
- In spite of the bullish bias centered on the geopolitical unrest and positive results from the OPEC meeting, prices have not been able to pierce the $60 level. Now the price action will need additional bullish news to overcome the increasing US production and fundamentals in the market. Long speculative excess now leaves the price action subject to profit taking and a correction. Drillinginfo expects the trade to return to the established range $52-$56 for the near term.
- Natural gas dry production gained 580 MMcf/d as compared to the week before on average, with the gains almost entirely sourced in the Northeast region. These gains pushed production well above 76 Bcf/d, challenging 77 Bcf/d on a couple of the days. Canadian imports were down, falling 200 MMcf/d.
- On the demand side, very mild temperatures took Res/Com demand down 3.21 Bcf/d and impacted the recent gains in Industrial demand as it declined 420 MMcf/d. Power demand rose 510 MMcf/d on average for the week. LNG exports were nearly flat rising 40 MMcf/d. Mexico exports were nearly flat as well declining just 90 MMcf/d leaving total demand down 3.53 Bcf/d while total supply was up 390 MMcf/d.
- The storage report last week came with a slightly lower withdrawal than expected at a withdrawal of 33 Bcf. Prices had started to decline prior to the announcement on Thursday and the release accelerated the declines late in the day. Due to warm weather, the next two reports release should be well below last year’s withdrawals and the 5-year average withdrawal.
- Prices started the week strong, coming off the Thanksgiving holiday weakness that had prices testing $2.80. The expiring December contract found support and was well bid into expiration and trading above $3.10 before expiring at $3.074. This left a small gap in prices as the January contract was afforded a $0.056 premium to the expired Dec when Jan opened as prompt. That premium was eliminated prior to the storage release.
- The declines during the Holiday week on gains in open interest (speculative shorts adding to positions) was confirmed by the latest CFTC reports released last week. The short interest by the Managed Money sector increased by 66,012 contracts between the release on Nov14th through Nov 28thwith the majority of the gains between Nov14th and Nov 21st. Per the latest release (Nov 28th) the combined short interest from the Managed Money sector and the Other Reportable sector now represents 486,163 contracts or 34.2% of the total open interest. These traders are expecting the gains in production to offset any weather that effects the market in coming weeks, as the forecasts are calling for well below average in the coming two weeks. While the bets may become accurate, this market has not experienced the demand that can occur with extreme weather in Dec and early Jan, much less the potential for freeze offs in the Northeast to affect production levels. This level of short interest leaves the market exposed for violent trade in the coming weeks because if prices advance beyond price levels, the shorts may be forced to cover.
- The longer-term forecasts will continue to direct price action and the effects from the first major cold spell of the season. Digesting this event may have an impact on prices that have been range bound since June between $2.75 and $3.20. Should the speculative shorts be correct, and the weather has a muted effect on the supply /demand balance, then a test of the Feb lows at $2.52 should be expected. If, on the other hand, the cold has a detrimental effect on the recent production gains and the market is forced to draw heavily on storage, the shorts may be forced to cover and prices could easily challenge the May highs at $3.43 or above.
- Inventories decreased almost 0.56 MMBbl in last week’s EIA report. Propane stocks now sit at 73.2 MMBbl, roughly 28 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 66.8 MMBbl for this time of year prior to 2015 (before the crude price crash).
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