- US crude oil inventories decreased by 1.4 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories increased 2.9 MMBbl and 1.2 MMBbl/d, respectively. Total petroleum inventories showed a build of 3.3 MMBbl. US crude oil production was down 100 MBbl/d on the week, and crude oil imports were up 182 MBbl/d to an average of 7.9 MMBbl/d versus the week prior.
- Prices had softened early Wednesday, and the release of the inventory report brought further downward pressure. The beginning of the week had prices staying in a tight range with news that President Trump had signed the executive order restoring sanctions on Iran. While these sanctions primarily dealt with trading in metals and financial-related products, the US reiterated that additional sanctions will be coming in November targeting the Iranian crude industry. There is little consensus in the market about what impact these sanctions will have on Iranian supply. If China and Europe choose to ignore US requests to restore sanctions, the effects on Iran may be rather slight and additional supply growth from Russia, Saudi Arabia, and the US could put considerable pressure on prices. According to the IEA’s latest monthly report, global supply has risen 300 MBbl/d due to higher output from Russia and OPEC. The other element that trade has to address is the growing dispute between the US and China. Should the trade worries materialize, the IEA’s call for additional demand growth could be in jeopardy.
- Prices remained volatile with an extension to a lower low for the recent range. The latest CFTC report had the Managed Money long positions decreasing 6,387 contracts while the producer merchant short position increased 8,697 contracts. As discussed last week, these are the primary participant groups that will drive price action and volatility soon. Last week basically had the speculators selling length to the producers (hedging).
- For the third consecutive week, prices expanded the range downward with lower lows. Last week’s declines tested the $66/Bbl level before finding a bid. Even with the recent downward push, the market still maintains a bullish bias. However, the speculative length will mean prices will remain susceptible to the managed money impact on price movements. Prices in WTI should continue to find support around $66/Bbl, but should declines continue, the lows from June at $63.59/Bbl could become a target. If the speculators run prices up past the high end of the recent range at $70/Bbl, the target could be as high as $75/Bbl. Eventually, after the volatility recedes and prices develop a consolidation phase, prices will range from $58-$65/Bbl for an extended period of time.
- Natural gas dry production increased 0.26 Bcf/d this week, with most of the gains coming from the Northeast and Southeast production areas. Canadian imports decreased 0.04 Bcf/d.
- US power demand rose 3.33 Bcf/d on the week, while Res/Com decreased by 0.96 Bcf/d and industrial demand decreased 0.09 Bcf/d. LNG exports decreased by 0.27 Bcf/d on average for the week and Mexican Exports were relatively flat, gaining just 0.01 Bcf/d on the week. These events left the totals for the week showing the market gaining 0.22 Bcf/d in total supply while total demand gained 2.26 Bcf/d.
- The storage report last week came in just on expectations, with an injection of 46 Bcf. With prices strong all week, the release brought additional gains to an already well-supported market. The supply/demand balance of last week implies an injection of 2.0 Bcf/d (or 14 Bcf) weaker this week.
- Price action last week started strong and maintained the bid throughout the week, as the battle between the two competitive speculative camps, Managed Money long and shorts, created the action. According to the CFTC report (dated Aug 7), the Managed Money short position decreased by a substantial 47,130 contracts (24% of this sector’s open interest), while the open interest in the Managed Money long positions increased by only 7,946 contracts. The two speculative camps have been at odds with each other for the past few weeks, and the first round of the battle goes to the longs, as the shorts were forced to cover when prices rose above the key area of resistance ($2.80-$2.875). This first skirmish between the camps does not signal an end to the battle, however, as the gains last week were made on declining open interest and declining daily volume as the week progressed.
- With the storage release two weeks ago, prices began to reflect a concern from traders that the potential storage levels would be under 3.5 Tcf at the end of October. These concerns were outweighed by production levels during the early summer, but have re-emerged lately. A potential problem with this concern resurrection is that the gains in price were not met with significant gains in the speculative long group, gains in total open interest on the rally, or expanding volume day to day as prices broke through resistance and held the gains. Rallies in price, driven solely by short covering, are short-lived events. There have been five occasions (since 2000, with the most recent in 2010) when prices in August broke above the July high, only to reverse and trade through the July low. Late August and early September have provided strong seasonal pressure on prices over the years, and while fundamentals may provide another low injection this week, the injection process will change quickly.
- Prices have traded into the key area and are now challenging the June and May 2018 highs of September gas (from $2.998-$3.018). Expect these levels to hold, absent a major storage surprise. Should the seasonal pressure hit the market, the old breakout level of around $2.85 will be key to hold, or additional declines back to the low $2.70s are possible.
2Q2018 Earnings Calls
- Targa Resources reported earnings this past week. The company’s 2018 CAPEX is at historically high levels, and they continue to find the need for increased infrastructure. The company reported an increased need for more projects than announced due to the tightness in fractionation capacity at Mont Belvieu – with their operated facilities near full during the second quarter. Fractionation capacity at Belvieu is expected to remain very tight through 2019, and the company expects capital expenditures to be focused around incremental processing expansions, which will direct NGLs to the company’s Grand Prix pipeline, while driving additional fractionation and LPG export expansion opportunities.
- Targa also reported a lower seasonality in NGL marketing than usual in Q2, and saw NGL exports and LPG exports relatively strong compared to the previous year’s exports.
- During 2Q2018 earnings calls, both operators and midstream providers speak of increased ethane recoveries in their releases, and both types of companies benefit from the higher-priced environment.
- Energy Transfer Partners also reported earnings, stating that NGL production is higher in the Permian and Northeast, partially offset by other regions. The company reported an $11M decrease in EBITDA due to system downtime on Mariner East 1 in the quarter, and did not comment on Mariner East 2.
- Inventories this past week reported a build of 0.1 MMBbl in last week’s EIA report. Propane stocks now sit at 66.4 MMBbl, approximately 1.2 lower than at this time last year and 8.6 MMBbl lower than the 5-year average.