- US crude oil inventories increased by 6.8 MMBbl, according to the weekly EIA report. Gasoline inventories declined by 0.7 MMBbl, while distillates inventories increased 3.6 MMBbl/d. Total petroleum inventories showed a substantial build of 17.4 MMBbl. US crude oil production was up 100 MBbl/d. Crude oil imports were up 1.08 MMBbl/d, to an average of 9 MMBbl/d versus the week prior.
- A significant amount of the bullish run in WTI over the last year was based on OPEC quotas and expected demand growth. Both of those factors have come into question lately. World demand and global economic growth are at risk due to the increasing rhetoric about trade wars between China, the EU, and the US. Financial crises in Turkey and Iran have sent their currencies spiraling downward against the dollar. In addition to this uncertainty, the market had to deal with an abundance of unsold crude cargoes in the Atlantic Basin. Additionally, the uncertainty around the impact of the upcoming sanctions against Iran may lead to more downward pressure. With all this global uncertainty, prices were bound to drop off a little, but the trade got some supportive news with lower month-to-month production from Saudi Arabia. A secondary source showed Saudi production declining about 53 MBbl/d in July, while Saudi Arabia’s self-reported numbers showed a drop of 200 MBbl/d.
- Prices broke below key support levels following the inventory release. Much of the declines early in the week were directly related to the continuing liquidation of speculative interest long positions that have been driving prices higher for the last year. The latest CFTC report showed managed money long positions decreasing 42,413 contracts (over 10% of position). The report also showed the managed money short positions showing a slight increase, rising 4,324 contracts. With the prompt contract expiring, both sides of the producer merchant positions declined. If the managed money short sector becomes relevant again, this will likely increase the volatility even more. Prices dropped on Wednesday after the CFTC report on higher daily volume, which likely means the upcoming report will show further liquidation by the longs.
- The price decline last week took prices down to the commonly watched 200-day moving average. This notable moving average has held the bull market since September 2017, and it was only challenged once in early October 2017. This average (currently $64.45/Bbl) will likely find buyers near term. However, should this resistance break, a significant amount of selling from both the speculators liquidating long positions and establishing new short positions will take prices down to the April lows of around $62/Bbl. The bounce off of the 200-day average may provide enough support to take prices back up to last week’s high around $68/Bbl. Due to the uncertainty surrounding the WTI market currently, the volatility driven by the unknown will be rampant. As the market fundamentals start to play out more clearly through data later in the year, prices will start to consolidate and develop a range between $58-$65/Bbl for an extended period of time.
- Natural gas dry production increased this week by 0.55 Bcf/d. The primary regions for the gains were the Northeast and Texas production areas. Canadian imports decreased 0.07 Bcf/d.
- US power demand declined 2.25 Bcf/d on the week, while Res/Com decreased by 0.10 Bcf/d and industrial demand decreased by 0.13 Bcf/d. LNG exports increased by 0.32 Bcf/d and Mexican exports were down slightly, falling 0.13 Bcf/d on the week. These events left totals for the week with supply gaining 0.49 Bcf/d while demand lost 2.56 Bcf/d.
- The storage report last week came in slightly above expectations with an injection of 33 Bcf. With prices trading in a fairly tight range during the week, the report provided a slight test of support and expanded the lows for the week, only to rebound on Friday. The supply/demand balance last week implies an injection of 3 Bcf/d (or 21 Bcf) stronger in the coming week.
- Over the last two weeks, prices have jumped over $0.25, and the chart below signals the primary source for the jump. According to the CFTC report (dated Aug. 14), the managed money short position decreased positions by a substantial 47,653, while the open interest in the managed money long positions increased 17,651 contracts. The chart reflects that the speculative short position has been cut in half over the last two weeks, but the gains in price have not brought significant buying into the market by the speculative long sector.
- This type of role reversal happened last spring. Notice the speculative shorts reduced positions as prices rallied to $3, only to have the shorts re-enter the market when prices could not hold those gains. Perhaps the market is biding its time and consolidating while looking for the next directional push. Total open interest set a new record last week, but the volume declined week over week. The recent short covering started on a surprising storage report, so perhaps the market is starting to assess the ending inventories in October and project the levels into the upcoming winter. Historically, the market is entering one of the more bearish periods of the summer, as late August and early September (without the effects of tropical disturbances) have provided strong seasonal pressure on prices over the years. With temperatures declining, the fundamentals (continuous record production levels) look to drive the injections higher, quickly adding to the seasonal negative bias.
- The rally stalled last week and left prices nearly where they ended the previous week at $2.946. While last week found a higher high, the upward bias could not hold through the week. With a significant amount of the shorts having left the market, expect the June and May 2018 highs for September gas between $2.998-$3.018 to hold, especially with the upcoming seasonal history. Should the seasonal pressure return to the market, the old breakout level around $2.85 will be key to hold, or additional declines back to the low $2.70s are a possibility.
- Ethane reached 39.75 cents per gallon this past week at Mont Belvieu, its highest since 2014. Producers are increasingly exercising their options to recover more ethane as it becomes more economic than rejecting it into the gas stream. Ethane demand is at its highest, and as of May, steam crackers are consuming 80% of cracker feed slate, 10% above 2017’s consumption. In addition to the 8 new petrochemical plants under construction, modifications to existing facilities are allowing the additional acceptance of NGL feedstock.
- The PA DEP announced the approval of Sunoco’s modification request for Mariner East 2, which involves a change in HDD activity. Advancements like this are offset by more complaints from homeowners along the path. Energy Transfer mentioned on their call that they are confident that they will bring the first tranche of capacity online late this quarter. While 99% of the construction is complete, 1% remains on mainline construction of the 16 HDDs remaining.
- The EIA reported a build of 3.4 MMBbl in this past week’s inventories. Propane stocks now sit at 69.8 MMBbl, approximately 2.2 higher than this time last year and 5.9 MMBbl lower than the 5-year average.
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