- US crude oil inventories increased by 3.8 MMBbl, according to the weekly EIA report. Gasoline inventories decreased by 2.5 MMBbl, and distillates inventories increased 3.0 MMBbl/d. Total petroleum inventories showed a significant build of 10.6 MMBbl. US crude oil production was down 100 MBbl/d on the week, and crude oil imports were up 21 MBbl/d to an average of 7.7 MMBbl/d versus the week prior.
- The ebbs and flows of the WTI market continued last week with the announcement that Saudi Arabia would suspend shipments of oil through the Bab el-Mandeb Strait after the Houthi rebels in Yemen carried out attacks on oil tankers in the Red Sea. This bullish event was then immediately offset when a Reuters survey showed OPEC output in July increased 70 MBbl/d to 32.64 MMBbl/d, the highest level year-to-date. While news will continue to cause volatility, the underlying basis will continue to be slightly positive for prices with Venezuelan production issues and continued tensions between Iran and the US. Those elements can be offset over time with continued growth in US production and the potential for an expanding trade dispute between China and the US.
- The latest CFTC report had the managed money long positions increasing just 2,962 contracts and the short positions increasing only 2,162 contracts. The two charts below tell the story:
- The only sector that is currently playing in the crude market is the speculative long participant sector. With the speculative short sector at roughly 18,000 contracts versus the speculative long sector at over 400,000 contracts, there is little wonder that the market is so volatile to any form of news.
- Since the bull run started last fall and the speculative short sector left the market, the only participant to offset this buying (from the speculative long sector) has been the commercial (merchant) short sector, which represents the producers. Actively selling last winter as prices eclipsed $60/Bbl, this market sector sold the contracts to the speculative long sector. The chart below shows this increase early in 2018. It was only when prices were consistently over $60/Bbl and the premium that prompt prices received over the differed months got larger (diminishing reasons to hedge) that this action slowed down during the summer.
- The current market set up by its participants indicates long-term volatility around any kind of headline news. The market still has a distinct bullish bias, and will be susceptible to any moves by the managed money speculators. WTI continues to trade in a narrow range between $67/Bbl and $70/Bbl, waiting for the next headline. The greater range from the April lows ($62/Bbl) and the recent high ($75/Bbl) will likely hold the market for the coming few weeks until traders start to accurately assess longer-term supply-and-demand fundamentals. Eventually, after the volatility recedes and consolidation commences, prices will range between $58 and $65/Bbl during the year.
- Natural gas dry production is relatively flat week-on-week, up 0.04 Bcf/d, remaining above 81 Bcf/d. On a regional level, declines in Texas and the Northeast were offset by gains in the Mid-Con, Southeast and Gulf. Canadian imports decreased 0.23 Bcf/d.
- On the demand side, the US power demand declined 1.86 Bcf/d on the week, while Res/Com increased by 0.21 Bcf/d and industrial demand increased by 0.01 Bcf/d. LNG exports increased by 0.23 Bcf/d on average for the week, and Mexican exports gained 0.15 Bcf/d on the week. These events left the totals for the week showing the market losing 0.19 Bcf/d in total supply, while total demand was down 1.45 Bcf/d.
- The storage report last week came in below expectations again, with an injection of only 35 Bcf. With prices down in early trade, the release brought a definitive bid to the market and supported the gains testing the commonly watched 200-day average at $2.853 on Friday. The supply/demand balance last week implies an injection 1.5 Bcf/d (or 10 Bcf) stronger this week.
- Price action last week showed an expected test of the July lows going into the storage release, only to find the sellers scrambling when the storage number was released. The market is struggling between two speculative camps, as the CFTC report (dated July 31) had the Managed Money short position decreasing by 10,812 contracts between the 24th and 31st of July implying profit-taking when major support was challenged. While that was happening, the Managed Money long positions increased 8,253 contracts. The two speculative camps are at odds with each other, though unlike the WTI action discussed in Crude Oil, this type of battle is common in natural gas. Looking at the chart below, one can see a position on the Managed Money long sector. Though it may go up or down, for the past year it has remained close on either side of 275,000 contracts in open interest.
- The Managed Money short sector, however, is subject to swings seemingly around the trend action in the price movement. When prices break below certain key levels, there will be additions to the short positions; when prices claw back above certain areas, the short covering commences. Looking at current price action, nearing record total open interest, it would not be surprising to see both the long and short sectors battling for dominance, with an eventual single winner, likely forcing significant volatility. This market decision may take weeks to finalize.
- Fundamentals during this struggle lean to the short side as summer winds down, bringing with it lower demand and stronger injections. History shows a negative seasonal bias, as the September contract has traded below the July low during August for 10 of the past 11 years. Prices are extended to well-defined areas of resistance ($2.85-$2.91) and will need to garner additional strength to force the aforementioned Managed Money shorts to cover. Look for the range between the July low ($2.704) and the high of last week ($2.862) to contain prices in the coming week.
- The largest producer of natural gas liquids in the US, Antero Resources, reported second quarter results last week. Along with other producers, the company is emphasizing operations in their liquids-rich acreage. NGL production increased 10% sequentially to a record of 113,600 Bbl/d. The company also decreased their full year guidance for prices as a percentage of WTI by 5% to a range of 57.5%-62.5% due to the delayed in-service date of Mariner East 2. If the pipeline had been online during the second quarter, the company would have received a $4/Bbl uplift for C3+ pricing.
- Antero also reported that the recent increase in ethane pricing at Mont Belvieu has allowed them to recover more ethane from their gas stream. The company said that when ethane is between $0.31 and $0.36 per gallon, it allows them to optimize ethane production to receive higher netbacks across their portfolio.
- The PA Public Utilities Commission voted to allow the resumption of eight Mariner East 2 and 2x locations on August 2. Mariner East 2 is currently anticipated to be in service in October, based on communication with shippers on the pipeline.
- The JV between Exxon and SABIC (Saudi Basic Industries Corporation), the 1.8-million-ton ethane cracker proposed in San Patricio County, TX, reached its first state permit approval in late July.
- ONEOK also reported earnings this past week. The company noted increased earnings in their liquids segment, up 29% year-over-year due to higher ethane recovery out of the Mid-Continent region and increased volumes in the Williston and Permian.
- Inventories this past week reported a build of 1.8 MMBbl in last week’s EIA report. Propane stocks now sit at 66.3 MMBbl, approximately 0.3 higher than this time last year and 6.9 MMBbl lower than the 5-year average.