US crude oil inventories increased by 8.2 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 6.6 MMBbl and 2.7 MMBbl respectively. The most important number to keep an eye on, total petroleum inventories, decreased by 2.4 MMBbl. While the total petroleum inventories withdrawal data was supportive to prices, the much higher than expected increase in crude oil inventories weighed more on traders’ minds. US production increased 56 MBbl/d and imports were up 561 MBbl/d to an average of 8.2 MMBbl/d versus the previous week.
Saudi Arabia’s oil minister spoke about the success of OPEC and non-OPEC production cuts last week. However, the tone was perceived to be bearish, as Saudi Arabia has been subsidizing overproduction from other countries carrying quotas. Additionally, OPEC members reiterated that no extension to the quotas past the originally agreed upon six-months would be discussed until the May meeting. The current supply deficit is around 650 MBbl/d which will not normalize inventories by the end of the year. This condition is exacerbated by the continued growth in US production and rig counts. Fundamental data is set to be released this week with OPEC’s Monthly Oil Market Report on Tuesday March 14th and the EIA’s Monthly Oil Data Service on Wednesday March 15th. These reports will shed more light on the current supply & demand situation.
As discussed numerous times recently in the Market Bulletin, the market’s consolidation of WTI prices in the $50-$55/Bbl range since Thanksgiving had to be resolved by breaking out of the range in either direction. Speculators were increasing length to record levels and with each gain in prices producers were increasing their hedges and selling the price runs. While the consolidation continued there were several commonly watched averages creeping into the range, which affects the speculative trade. This resolution came to fruition on Wednesday as prices closed just above $50/Bbl and then fell below the commonly watched 200-day simple moving average ($48.68/Bbl) on Friday’s close.
The move below the 200-day average will force the market to reassess WTI price expectations in the next few weeks (short of any fundamental or big headline disruption). The declines have left the market challenging extreme over sold levels from the momentum indicators, which could allow for a brief rally this coming week. In the coming weeks, prices will form a new range with the high side of the range around $51/Bbl and the low end of the range yet to be established. Initial targets for the low end of the new range come from the lows of November 2016 before the OPEC announcement ($44.82-$44.20/Bbl). For the near term, Drillinginfo expects price rallies to be sold, unlike the mantra since December 2016 of buying all dips near $50/Bbl. It is prudent to note, however, that a seasonal uptick in demand is around the corner, which could lead to better fundamental indicators in the coming months.
Natural gas production was down (250 MMcf/d) with every region sharing the declines except the Northeast. However, this decline was offset by an increase on Canadian imports of 380 MMcf/d last week. Despite the recent gains in rig count, dry gas production remains in the 70-71 Bcf/d level, which is not only below 2016, but also below 2015 when production was over 72 Bcf/d.
On the demand side, last week’s warmer temperatures in the Midwest and Northeast sent Res/com levels down 1.25 Bcf/d on average over the week. Power demand also declined, down 0.99 MMcf/d week-on-week. LNG exports were down (130 MMcf/d) over the week but started to increase late in the week reaching a new high over the weekend at 2.29 Bcf/d. Expect additional gains in the coming week as full service on Cheniere’s Train 3 commences.
The storage report last week came in close to expectations with some additional reclassifications at 68 Bcf. The coming week’s expectation is a seasonal withdrawal around 60 Bcf. With unseasonably cold temperatures commencing in the Northeast and Midcontinent this weekend and early next week, expect a rare triple digit withdrawal (for March) coming for the week ending March 17th. Longer-term forecasts continue to be adjusted colder as the models have delayed a warmup until later in the month. The change in the forecast will leave inventories under 2.1 Tcf at the end of March.
Prices ended above $3.00 per MMBtu, closing the week over the 200 day Simple Moving Average (SMA) on increasing volume. Since the CFTC release, open interest has declined, suggesting short covering played a role in the gains. Closing the gap left from the middle of Feb just before the capitulation washout, leaves the price bias to expect higher prices and a test of the Jan low at $3.098 before April expires. The break above the 200-day average leaves the market to redefine the low side of the new trading range for prices, with that commonly watched average playing a significant role in the confirmation process.
Drillinginfo has been calling for a rise in prices to facilitate additional investment in drilling rigs. With last week’s price action confirming the annual Q2 rally in place, expect additional gains longer term. Do not expect a direct movement up, however, but instead a series of higher highs met with slight corrections defining the low end of a new range. A caveat to that observation is the lingering short position from the speculative community. While the break above the average brought some short covering out, the market may be susceptible to more volatile covering should prices advance significantly. Last fall, producers took advantage of price gains (some from the short covering trade) to initiate hedging for existing production.
Dow’s Freeport ethane steam cracker is nearing completion and expected to come online in the next few months. It will be the first of three new steam crackers to come online during the year. The anticipated demand will help facilitate strength in prices and allow for more ethane recovery.
As Drillinginfo anticipated, there was a slight rise in ethane prices week-over-week due to increasing natural gas prices. If the upward pressure on natural gas prices continues, it is likely that this trend will continue in the coming weeks.
Inventories decreased 4.1 MMBbl in last week’s EIA report, the largest decline seen in four weeks, following a relatively small withdrawal the prior week. This week’s strong withdrawal is attributed to a 35% increase in propane exports week-over-week. Propane stocks now sit at 45.2 MMBbl, roughly 17.1 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 33.7 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 were up this week following the bullish withdrawal reported by the EIA. However, gains were tempered by the drop in crude oil prices.
Natural gasoline was affected the most by the sharp drop in crude oil prices, falling 8% since Wednesday, while normal butane and isobutane fell 2% and 4% respectively. If crude oil prices continue to fall, expect C3+ to follow suit.