- US crude oil inventories declined 1.7 MMBbl last week, according to the weekly EIA report. Both the gasoline and distillate inventories showed significant increases for the week, gaining 8.1 MMBbl and 10.6 MMBbl, respectively. With these significant gains, total petroleum inventories showed an increase of 13.3 MMBbl. US crude oil production was flat on the week. Crude oil imports were down 454 MBbl/d to an average of 7.8 MMBbl/d versus the week prior.
- Optimism returned to the WTI trade last week with expectations of a possible resolution to the US-China trade dispute and output declines among the major producers. Saudi Arabia’s energy minister, Khalid Al-Falih, announced on Wednesday that producers reduced output by 600 MBbl/d in December. While some skepticism remains regarding Russia’s commitment to the production cuts, traders looked to the robust numbers on the US economy from the jobs report and the extension of negotiations between the US and China as driving forces behind the bullish bias.
- Should the perception of strength in equities and the general economy continue, it is likely that the WTI market will find support. As discussed a few weeks ago, the inverse relationship between crude and the US dollar had disappeared during the collapse of crude last fall. However, since the recent lows in crude were established, the inverse relationship to the dollar has re-emerged. As seen in the chart below, WTI has maintained a slow but solid gain, while the dollar index has declined with crude strength. Should the dollar continue to decline, expect additional support for WTI.
- The inventory release last week highlighted trends that may continue for the coming weeks, with declines in crude supplies being offset by gains in gasoline and distillate inventories. Historically, demand for products is weakest during the first quarter. Therefore, the impact of production cuts may not be recognized in the inventory numbers immediately. An element of the bearish trade that is not likely to vacate the market immediately is the continued US growth, which will continue to hang over the market.
- Prices in WTI settled the week up $3.63/Bbl after testing the highs from early December at $53.27/Bbl. Market internals had volume increasing during the rally. However, open interest declined during the week. If crude is to return to its aggressive price structure, there will need to be gains in open interest during the rallies. Unfortunately, the CFTC report is still not available, due to the government shutdown, leaving the market blind as to position structure among the sectors.
- Prices are now challenging an area of consolidation from last November and December between $49.00/Bbl and $54.55/Bbl. The rally off the lows has established a wider range of between $42/Bbl and $53/Bbl, which will likely hold the trade in the near term. After the market fully assesses the fundamentals, longer-term prices will stabilize near the top end of the range.
- Natural gas dry production gained 0.29 Bcf/d, while Canadian imports increased 0.60 Bcf/d.
- Mild temperatures caused Res/Com demand to drop 1.29 Bcf/d, while Power demand jumped 0.86 Bcf/d and Industrial demand decreased 0.12 Bcf/d. LNG exports declined 0.13 Bcf/d on the week, while Mexican exports gained 0.60 Bcf/d. Total supply gained 0.88 Bcf/d, while total demand fell 0.09 Bcf/d.
- Last week’s storage report came in with a withdrawal of 91 Bcf, with a reclassification of 4 Bcf from working gas to base gas in the mountain region. This implies a flow of 87 Bcf, which is well below historical averages for the same week.
- Prices started the week within the recent range as traders waited for the next change to the weather forecast. Prices tested support at $2.91 and showed gains through the week. On Friday, prices closed the open session at the highs and continued higher in the late market. Last week showed supportive internals as volume and open interest gained as prices rose. Expect continued strength as the market opens this week. With the CFTC not reporting the positions of trade sectors (due to the government shutdown), it is impossible to identify shifts within traders’ expectations and positions.
- The market continues to struggle with the current storage scenario. One side remains concerned about ending storage inventories in March; the other side is convinced inventories are not an issue with current production. With this struggle in place, there is potential for significant volatility associated with forecast changes. That volatility became evident this morning, with a large price jump in response to a forecast of colder weather in the coming three weeks. Should the forecast change or the cold temperatures last longer or be lower than expected, prices may be more volatile and retrace a significant portion of the losses from December.
- Prices opened at the same general level at which they closed on December 28, before falling lower on New Year’s Eve. This has developed an “island” where there is no trade between $3.166 and $3.278. This area should be considered support this week, and prices may try to close this gap depending on the duration and severity of the forecast modifications. Rallies will have numerous targets from $3.57 up to $3.86.
- Last week, ethane prices were down $0.01 from the week prior to $0.29. Propane, normal butane, and natural gasoline were up $0.02, $0.02, and $0.11, respectively, to $0.65, $0.78, and $1.05. Isobutane was flat at $0.80.
- The Conway to Mont Belvieu ethane/propane mix spread has widened to $0.16, a level not seen since early November 2018. The largest differential in 2018 was $0.35. The region’s large discount to Mont Belvieu is due to maxed-out pipeline capacity to the coast.
- US propane stocks decreased about 2 MMBbl in this past week’s inventories. Stocks now sit at 68.7 MMBbl, about 7 MMBbl higher than in the first week of 2018, but 11 MMBbl lower than in the first week of 2017.