- US crude oil inventories decreased by 5.8 MMBbl, according to the weekly EIA report. Both the gasoline and distillates increased with gasoline rising 1.2 MMBbl and distillates rising 1.8 MMBbl/d. Total petroleum inventories showed a decline of 2.5 MMBbl. US crude oil production was estimated to be up 100 MBbl/d. Crude oil imports were down 1.5 MBbl/d to an average of 7.5 MMBbl/d versus the week prior.
- The volatile struggle between the bulls, supported by the upcoming sanctions against Iran (due in November) and the bears, declines focused on the impact of the continuing trade issues between the US, China and the EU, continued last week. The potential for the sanctions to affect Iranian production (some estimates are between 1 and 1.5 MMBbl/d) will continue to hold a floor to prices until the actual effects and definition of the supply cut is determined. However, the continued escalation of trade issues will keep the ceiling firm until some resolution of the issues allows the market to assess the impact on global demand. Though the recent decline of the Turkish Lira (currency) shows the potential impact on the emerging markets for global demand, the trade issues need to come into a clearer focus for traders longer term. The announcement that the US government was releasing 11 MMBbl from the Strategic Petroleum Reserve clearly sent a signal that the administration would be aggressive in offsetting the effects of the sanctions and brought about a further pause to the bullish component. The inability of the market to clarify the effects of the two potential outcomes will continue to lead to more volatility.
- This tug-of-war between the two positions was exemplified by the latest CFTC report (dated Aug. 21), which showed the Managed Money long positions increasing 11,199 contracts (as prices tested the commonly traded 200-day moving average). The report also showed the Managed Money short position increasing by its largest amount of recent trade, rising 12,047 contracts. As expected, the prompt contract expired and both of the Merchant hedging positions declined during the period as the sector took hedging positions to delivery.
- As explained in last week’s “Outlook,” the price decline from the previous week took prices down to the 200-day moving average and a rebound from that level was to be expected. This notable moving average has held the bull market since September ’17 with it being challenged only once in early October ’17. This average (currently $64.74) will likely hold near-term declines, however, should this area break down, a significant amount of selling, from both the speculators liquidating and new short positions coming in will take prices down to the April lows of around $62/Bbl. The rebound off the test of the average took prices over $69/Bbl briefly, only to retrace at the end of the week. Expect the high end of the recent range (either side of $70/Bbl) to find sellers until the market defines the fundamental implications described above. One element to trade will be the continued volatility and any bullish or bearish headlines on the day trade. As the market loses its uncertainty later in the year, prices will start to consolidate and develop a range between $58-$65 for an extended period.
- Natural gas dry production increased by 0.43 Bcf/d to a record average production level of 82.6 Bcf/d. Most of the gains came from the Rocky Mountain and TX production zones. Canadian imports fell 0.47 Bcf/d, as demand in the Northeast declined from moderating temperatures.
- US power demand declined 2.67 Bcf/d on the week, while Res/Com increased by 0.85 Bcf/d and industrial demand increased by 0.14 Bcf/d. It is likely as the temperatures moderate going into the fall season Res/Com will start rising at a slow pace. LNG exports decreased by 0.48 Bcf/d on average for the week and Mexican Exports were down slightly, falling 0.02 Bcf/d on the week. These events left the totals for the week showing the market dropping 0.04 Bcf/d in total supply, while total demand was down 2.37 Bcf/d.
- The storage report last week came in slightly below expectations with an injection of 48 Bcf. With prices trading in a fairly tight range for the third consecutive week, the report provided a slight rally but gave up those gains and more by the end of the week. The upcoming week should provide gains in the injections over last week.
- According to the CFTC report (dated Aug. 21), the Managed Money short position (speculators) continued to cover positions by reducing exposure by 15,101 contracts, while the open interest in the Managed Money long positions increased a slight 6,708 contracts. While the short covering comes to an end, it is evident that the speculative long positions are not convinced of long-term gains and have been very tepid in adding to positions. Further evidence of this lack of commitment is the fact that the strips further out on the curve did not keep pace with the prompt on rallies leading to unsustainable compression. These issues are likely a key reason why prices have not seriously challenged the $3+ level that held prices earlier in the summer.
- The market is going to need a fundamental basis for confirmation for a continuation of the breakout or a potential breakdown in the near future. The daily range (Average True Range) has now compressed to levels not seen since 1997 and the weekly range in prices has fallen to a multi-decade low. History confirms that prices will not stay this compressed for an extended period of time. Eventually the market will expand out of this environment, especially with total open interest near or at record levels. Other market internals had volume rising last week (compared to the previous week) as prices closed the week down from the previous week.
- As discussed last week, the market is entering one of the more bearish periods of the summer. Late August and early September (without the effects of tropical disturbances) may provide seasonal pressure on prices in the coming weeks. With climatology bringing lower temperatures and production levels continuing to climb to record levels, the fundamentals indicate significant injections in the coming weeks, adding to the seasonal negative bias.
- The declines on Friday (especially late in the day) may be indicating some profit taking from the positive trade commencing since Aug. 2. A similar action happened in June with the rally that had taken prices over $3 briefly but could not garner the additional support to hold that level and quickly corrected down. Additional rallies should find ample sellers from $2.953 up to $3. Declines should find buyers at $2.875 down to $2.853 (200-day moving average) should the compressed (low volatility) ranges continue.
- Propane recorded another draw this past week despite the market expecting to see a build. Propane production is up about 20 MBbl/d in the past two weeks, and crop drying has not fully started yet. Therefore, the drawdown is likely related to exports, as August normally yields stock builds for propane.
- Sasol updated progress on its Lake Charles Chemical Plant, an $11 billion investment, saying the project is 88% complete and the first three manufacturing units should start up by year-end.
- Cogent Midstream is expanding its gas processing capacity in the lower Midland Basin. The company is constructing a new refrigerated cryo plant in the same location as its Big Lake Plant in Reagan County. The plant, along with the additional 200 MMcf/d of capacity, is expected to be in service in the fourth quarter of 2019.
- The EIA reported a draw of 0.9 MMBbl in this past week’s inventories. Propane stocks now sit at 68.8 MMBbl, approximately 0.4 lower than with this time last year and 8.4 MMBbl lower than the 5-year average.