DI Blog

Insights across the energy value chain

CRUDE OIL

  • US crude oil inventories posted a large decrease of 9.5 MMBbl last week, according to the weekly EIA report. Gasoline inventories decreased 1.5 MMBbl, while distillate inventories increased 3.7 MMBbl. The total petroleum inventories showed a decrease of 3.8 MMBbl. US crude oil production increased 100 MBbl/d last week per EIA. Crude oil imports were down 0.3 MMBbl/d to an average of 7.3 MMBbl/d versus the week prior.
  • Prices regained their bullish momentum primarily on the effects from Hurricane Barry in the Gulf of Mexico, which forced US Gulf operators to shut in nearly 1.0 MMBbl/d. The bullish reduction of crude oil inventories in the EIA’s data release on Wednesday also contributed to the gain.
  • These bullish elements brought further support to prices beyond the existing factors provided by the geopolitical unrest in the Mideast, which escalated after Iran’s threats to restart its deactivated centrifuges and increase uranium enrichment. The deployment of a British frigate to escort a BP tanker through the Strait of Hormuz, which was challenged by Iran boats, brought further concerns about this critical shipping lane for crude oil supplies.
  • Despite these elements and the continuation of the OPEC+ supply cuts through Q1 2020, the IEA noted some bearish implications for the market in the longer term. In its report released on Friday, the IEA cited that in the first half of 2019, demand grew at the slowest pace since 2011, due primarily to the contraction in manufacturing. Meanwhile, global oil stockpiles grew in the first half of 2019, with world supply exceeding demand by 0.9 MMBbl/d in spite of the OPEC+ reductions. Though the agency forecast for 2019 is steady, it will require a massive rebound in consumption, three times the level of the first half of the year. With demand continuing to deteriorate, OPEC may be forced to reduce output further in order to attain market balance.
  • This report exemplifies the primary reason the market has not had a more prominent rally given the tensions in the Mideast. Global economic concerns regarding the lack of growth and the ongoing unresolved tariff negotiations between the US and China (the world’s two largest economies) place a dark cloud over any longer-term gains in price.
  • The CFTC report was issued on Monday and Friday last week for the reporting periods of July 2 and July 9. The combined reports showed a reduction in the Managed Money short positions by 6,943 contracts, while the long sector increased by 8,883 contracts. The speculative long position is gaining, but the hesitancy in adding to positions at a significant level shows the market is not convinced that prices will remain strong over an extended period of time.
  • The market internals represent a more neutral to slightly bullish bias with the gains from Hurricane Barry. Volume was higher, while open interest was flat on the week. Prices this week will focus on results of any damage to the Gulf region oil assets and the geopolitical issues lingering in the Mideast.
  • Prices may expand the bid up to the highs of last week at $60.94/Bbl up to $63.81/Bbl, but these areas will find sellers. The highest weekly close since the middle of May should bring a brief expansion early this week. The concerns over the IEA report may bring some selling into the price action, but prices will likely find support in the $56.00/Bbl area. As discussed last week, this market may need time to consolidate the gains as it waits for any additional Iran drama to further support price movements. That said, as the Iran issues become more muted, expect declines based on weak global economic demand to have a greater impact on prices longer term.

NATURAL GAS

  • Natural gas dry production showed a decrease of 1.13 Bcf/d. These declines come from the impact of Hurricane Barry, which took Gulf production down 0.78 Bcf/d, split between the Gulf and Louisiana. The remaining declines were seen in the Northeast. Canadian imports increased by 0.03 Bcf/d.
  • Res/Com demand increased 0.08 Bcf/d, while power demand increased 1.182 Bcf/d (a result of excessive heat in the South and Central regions of the CONUS). Industrial demand decreased 0.03 Bcf/d. LNG exports declined 0.12 Bcf/d, likely due to Hurricane Barry, while Mexican exports gained 0.18 Bcf/d. These events left the totals for the week showing the market dropping 1.10 Bcf/d in total supply and total demand increasing by 1.90 Bcf/d.
  • The storage report last week showed the injections for the previous week at 81 Bcf. Total inventories are now 275 Bcf higher than at the same time last year and 142 Bcf below the five-year average. With demand increasing and supply decreasing, expect the EIA to report a weaker injection this week.
  • Weather forecasts continue to show above-average temperatures in the coming 10 days throughout the Central and Eastern regions of the US. The longer-term forecast maintains heat in the South and Central regions, with some moderating temperatures in the Northern Plains, Great Lakes and Northeast.
  • Hurricane Barry will impact the market this week, and while the initial response was a reduction in production from the Gulf operators evacuating rigs, the longer-term impact will be on the reduced temperatures associated from the storm’s rains. The market will start to get insight as to the effect on power demand early this week as the flow data becomes transparent.
  • The CFTC report was released twice last week; the report on Monday reflected position changes as of July 2, and the report last Friday reflected position changes effective July 9. Combining those reports had the Managed Money short position reducing positions by 18,753 contracts, while the long position reduced positions by 3,431 contracts. It would seem that the speculative trade may be loosening some of their conviction of $2.00 gas.
  • Prices held firm last week, staying above $2.40 for most of the week. Prices closed the week above the 50-day moving average (a closely monitored indicator of intermediate-term trend) for only the third time in 2019 (the other two occurring on either side of the Memorial Day holiday). Market internals changed to a more neutral bias as volume was significantly higher week over week. Total open interest remained nearly flat according to preliminary data from the CME.
  • The fundamentals-based trade will have to assess the impact from Hurricane Barry. Weather forecasts are always subject to change but currently show a declining demand picture two weeks out. Any further extension of the rally will have to overcome the selling at $2.49 as witnessed last week with the failure to push through. This area ($2.49) up to $2.522, and then $2.56, will continue to find significant selling in the coming weeks. On the other side, declines during the coming heat will find buyers down between $2.30 and $2.263.

NATURAL GAS LIQUIDS

  • Prices strengthened across the board week over week. Ethane gained $0.013 to $0.151, propane gained $0.013 to $0.458, normal butane gained $0.036 to $0.532, isobutane gained $0.090 to $0.682, and natural gasoline gained $0.042 to $1.155.
  • US propane stocks decreased ~241 MBbl the week ending July 5. Stocks now sit at 76.9 MMBbl, roughly 13.3 MMBbl and 14.7 MMBbl higher than the same weeks in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil fell for the week ending July 12, according to Drillinginfo’s analysis of manifests from US Customs and Border Protection. As of July 15, the data showed that PADD 3 imports increased to nearly 1.8 MMBbl/d, while PADD 5 imports fell to slightly more than 910 MBbl/d. PADD 1 imports rose to 492 MBbl/d.

  • Imports from Mexico were the driver of the PADD 3 increase, reaching more than 900 MBbl/d with an additional 50 MBbl/d imported to PADD 5, the highest level since August 2018.

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