- US crude oil inventories decreased by 4.6 MMBbl, according to the weekly EIA report. Gasoline inventories decreased 1.1 MMBbl, while distillates inventories gained 0.5 MMBbl. Total petroleum inventories declined 3.9 MMBbl. US production was estimated to be up 27 MBbl/d, with the lower 48 showing a gain of 25 MBbl/d. Imports decreased by 250 MMBbl/d to an average of 7.9 MMBbl/d versus the week prior.
- Events continued to provide strength for prices during the week. Tensions between Saudi Arabia and Iran continued as the Iran-aligned Houthi militia targeted a Saudi tanker early in the week. Indications that the US will be pulling out of the nuclear deal with Iran and reimposing sanctions against the Iranian regime as well as the declining Venezuelan production have provided strength to the market in recent weeks. Even these events could not counteract the reason for last week’s price action, which revolved around the potential tariff war between the US and China. Perceived as bearish for economic growth (most equity markets were down during the week), the potential tariff war will dampen petroleum product demand. Worldwide petroleum product demand growth is critical for inventory normalization in the coming year, especially with the growing US production (expecting to surpass 11 MMBbl/d by the end of 2018).
- Prices started the week with a very brief run, only to see significant selling during the week as the tariff fears took over the market. The fears even affected the solid speculative long traders. The latest CFTC report (dated April 3) had the Managed Money long positions decreasing 38,640 contracts during the week, while the Commercial sector (both long and short) was largely offsetting as the longs increased 23,147 contracts and the shorts (producer hedging) increased 23,004 contracts.
- WTI prices also changed the recent trend, with a decline on Friday. As discussed over the past several weeks, trade had been expecting bullish news over the weekend and had been very comfortable with length going into weekends. Last week’s action broke this recent trend, with prices closing the week at $62.06, just off the lows reached on Friday ($61.81).
- The bearish weekly reversal last week has set up the potential for extending the declines to the early March low of $59.00. Should the speculative trade continue to liquidate, then the lows from February ($58.00) will likely be tested. If the tariff war concerns lessen, expect the speculators to come back in, thereby ignoring the continuing growth from the US. This will eventually take prices back up to the $65.00 area (highs from last week) or even to test the recent highs of $66.66. However, the tariff issues will leave a cloud over WTI prices for the near future, and eventually may lead the market out of the speculative bubble that has developed since last fall. It has been Drillinginfo’s theory, based on the fundamental data, that prices will eventually head back to what they were in a less conflicted environment, settling in around $55.00.
- Natural gas dry production increased last week, rising 0.1 Bcf/d. The Northeast region continues to average around 27 Bcf/d despite some week-over-week declines. Canadian imports increased by 0.37 Bcf/d.
- The cooler temperatures, as compared with the week before, had demand levels rising in some of the sectors as Res/Com rose by 0.5 Bcf/d and industrial demand rose by 0.23 Bcf/d. Power demand decreased by 0.13 Bcf/d on average for the week. Mexico exports were up 0.2 Bcf/d, while LNG exports also were slightly up, by 0.05 Bcf/d. This left the market’s total demand higher by 1.85 Bcf/d, while total supply was up 0.25 Bcf/d.
- The storage report last week came in with a reclassification of 9 Bcf and an implied flow of 20 Bcf, which reduced working storage inventories by 29 Bcf total. The implied flow was on the low side of expectations, and prices broke down to test the lows from earlier in the week at $2.65 before rebounding. Expect a withdrawal this week that will be similar to last week’s levels. The current forecasts show a potential withdrawal for the following week as well.
- After a reversal two weeks ago, last week’s price movement stayed inside the range established during that previous week ($2.759-$2.65). This narrow range was the lowest range traded in a full week of trading since September 2015. This market is in the process of consolidation or, more likely, building a base from which prices can rally during the annual Q2 rally. A consolidation phase can represent a market lacking direction and is confirmed with the limited changes in the traders’ positions. According to the latest CFTC report (dated April 3), the Managed Money short position decreased by 3,884 contracts while the Managed Money long sector reduced positions by 10,362 contracts.
- While the quiet and directionless trade may continue in the coming week, recent history suggests that the consolidation or base-building action will come to an upside resolution of the recent range. Since May became the prompt contract, it has breached the March contract high in 14 of the past 20 years during April. It has also done so during the four of the past five years. Prices during calendar May have traded above the April high in 10 of the past 11 years with the June contract as prompt. These rallies have formed the annual Q2 price strength, and there does not seem to be any indication that this year will be different. In fact, with prices holding between $2.52 and $2.568 over the past couple of months, the market has clearly defined the support zone from which prices will rally.
- Mariner East remains down, which is preventing exports from Marcus Hook and maxing out ATEX’s 165 Mb/d capacity via the ethane pipe that runs from the Northeast to Mont Belvieu. This increases export demand in Texas, which, combined with a new cracker at Cedar Bayou, helps explain the 10% increase in ethane prices at Mont Belvieu over the past ~3 weeks
- EPIC Y-Grade Pipeline’s NGL pipeline, running from the Permian to Corpus Christi, completed construction Phase 1 of 3 this week. The 40-mile phase is only the beginning of the 700-mile, 350 Mb/d pipe that ends in Corpus Christi at a fractionator. Phases 2 and 3 are expected to be completed in July 2018 and mid-2019, adding another 250 and 400 miles to the pipe, respectively.
- China, the third-largest export market for U.S. chemicals, may land extra tariffs on propane and other plastic products amid all the trade ruckus with the U.S. This comes at a time when the industry is investing billions of dollars in facilities and expansions to reach that market. For example, the recently announced joint venture between ETP and Satellite Petrochemical USA, for the construction of a $630 million ethane export terminal on the Gulf Coast for cracker consumption in China, is subject to Chinese government approval and under higher risk with the potential trade war.
- Shell’s 97-mile Falcon pipeline, which will feed the widely anticipated ethane cracker in Monaca, Pennsylvania, battled some opposition from local Northeast residents this past week, as the DEP holds hearings before its decision to approve permits for the project.
- Inventories had their first build of the season and increased 646 MMBbl in last week’s EIA report. Propane stock now sits at 36.2 MMBbl, roughly 6.5 MMBbl lower than this time last year and 9.0 MMBbl lower than the five-year average.
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