- US crude oil inventories posted a decrease of 0.3 MMBbl last week, according to the weekly EIA report. Gasoline inventories increased 2.2 MMBbl, and distillate inventories decreased 1.6 MMBbl. Total petroleum inventories showed a decrease of 1.6 MMBbl. US crude oil production increased 100 MBbl/d last week, per EIA. Crude oil imports were down 81 MBbl/d to an average of 6.9 MMBbl/d versus the week prior.
- Meetings among OPEC and other oil-producing countries a couple of weeks ago gave modest hope for prices, with the possible extension of production cuts, though the official announcement won’t be made until the next OPEC meeting, which is scheduled later in June. This support was extinguished on Friday, as additional tariffs on Mexico were announced by the Trump administration, which sent prices reeling to their lowest levels since February.
- The geopolitical instability in the Gulf region, the declining production from Iran and Venezuela, and Saudi Arabian Energy Minister Khalid al-Falih’s favorable stance on the extension of the production cuts all have been supportive of oil prices in the past month.
- Unfortunately for the bulls, disappointing US and global manufacturing data and the potential expansion of the trade wars with China (China threatening to restrict the export of rare earths to the US) all piled pressure on prices by week’s end. Rare earths are a group of chemicals used in everyday electronics and military equipment, and though the restrictions have not been officially announced by China, this threat brought on additional concerns of a prolonged trade dispute between the world’s two largest economies. These concerns are not limited to the crude oil trade, as the US equities market also declined dramatically last week. This uncertainty about growth had the dollar index maintaining levels, but the 10-year bond market’s strong rise indicates the world markets are not as interested in risk assets as they were just a month ago.
- The CFTC report (positions as of May 28) confirmed the exodus of many of the bulls, as the Managed Money long component sold 20,642 contracts, while the short position added 16,785 contracts. Look for the Managed Money long speculative trade selling substantial positions at the end of the week, as prices broke below key support at $56/Bbl-$57Bbl, which had held the lows the previous week and early last week until the breakdown on Friday.
- Prices have now established a distinctly bearish bias. The bounce from the previous week’s losses rallied to the expected $60/Bbl area before the trade rejected the rally and broke below. Market internals (on preliminary data from the CME) showed a decrease in open interest, with higher volume week on week, even though it was a holiday-shortened week. Momentum indicators are now showing the market starting to reach oversold levels.
- The next area for the declines to test is the lows from February, at $51.23/Bbl. After closing last week just off the lows of the week, prices are poised to extend the declines early this week. The market is entering a very volatile period, as the geopolitical unrest may cause violent snapbacks in prices. Currently, the global economic growth issue is well defined by the market, driving prices downward. The unknown in the WTI market is the unrest in the Middle East and what the OPEC meeting later in June will provide.
- Markets tend to overshoot directionally, and with WTI starting to approach extremely oversold levels, a bounce back should be expected over time. Perhaps traders will continue to liquidate length and force prices down to the February lows at $51.23/Bbl this coming week. The alternative, which may happen after early weakness, would have prices finding a bid and testing the area that prices between $56/Bbl and $57.33/Bbl broke down from last week. An extension of a rally beyond that area up to $63.81/Bbl will require substantive news to offset global economic concerns.
- Natural gas dry production showed an increase of 0.73 Bcf/d, while Canadian imports decreased 0.02 Bcf/d.
- Res/Com demand fell 2.24 Bcf/d, while power demand increased by 2.50 Bcf/d on the week as the market headed into the early summer season. Industrial demand lost 0.21 Bcf/d. LNG exports rose 0.18 Bcf/d, while Mexican exports increased 0.05 Bcf/d. Totals for the week have the market gaining 0.71 Bcf/d in total supply, while total demand increased 0.32 Bcf/d.
- The storage report last week showed the injections for the previous week at 114 Bcf. Total inventories are now 156 Bcf higher than last year and 257 Bcf below the five-year average. With supply outgaining demand last week, expect a larger injection to be reported this week.
- Early weather forecasts had the US below last year’s demand levels and leaning toward a mild summer season for temperatures. Temperatures for the month of May came in slightly below average for the entire US. Many of the forecasts were calling for a weak El Nino pattern to support the forecasts, and the El Nino pattern is developing, according to the latest sea surface temperatures. Milder (compared to last summer) summer temperatures will likely add to the pressures on the natural gas price.
- The CFTC report (as of May 28) showed the Managed Money long sector increasing by 7,942 contracts, while the short position confirmed expectations of additional weakness by adding 23,740 contracts. The July contract traded up to $2.646 during the slight run on the expiration of the June contract before collapsing at the end of the week. Expect additional gains in the speculative short positions in the CFTC report this week.
- With the fundamental data and the breakdown of prices on Friday, the market seems poised to break below the April lows of $2.439. Over the past 10 years, the July contract, during June tenure as prompt, has traded below the April low only once; that was in 2017. In 2017, that occurred after a $0.40 run in prices, which clearly has not occurred in 2019.
- Market internals pointed to a bearish bias as total volume decreased week over week, but total open interest gained (according to preliminary data from the CMS) despite the contract expiration. Momentum indicators turned neutral to slightly bearish with the declines but are not oversold, suggesting further extensions to the downside are possible.
- The current market is driven by the strong production levels and low seasonal demand, which have fueled the speculative short traders to continue adding to positions. As mentioned earlier, the market seems prepared to break below the April low and may extend the declines down to levels not seen since early June ’16 ($2.399). If prices garner some buying interest, last week’s highs at $2.643 will find selling.
- The winter strip had not been caught up in the declines of the prompt month until last week, falling $0.114, and the strip broke below the April and September ’18 lows. Whether this winter strip decline was due to forward hedging from the producing community will be determined by the upcoming CFTC report. Rarely do speculators establish positions that far out on the curves unless they are spread (selling one month, buying another) trades. If this behavior continues, the market is stating lower prices in the front months and significantly more volatility is coming.
NATURAL GAS LIQUIDS
- Last week, the EIA reported record-high NGL production of 4,728 MBbl/d in March, inching by last month’s record of 4,706 MBbl/d. PADD 1, Appalachia specifically, lead the effort by adding another 20 MBbl/d, with PADD 4 not far behind, with an increase of 17 MBbl/d. This was slightly offset by a 21 MBbl/d decline in the Gulf Coast and a 28 MBbl/d decline in Indiana, Illinois, and Kentucky.
- Most of the products showed a decline in prices week over week, except for ethane, which was essentially flat at almost $0.23. Average propane prices fell $0.02 to $0.526, normal butane dropped $0.009 to $0.588, isobutane was down $0.005 to $0.606, and natural gasoline was down $0.079 to $1.135.
- US propane stocks decreased ~0.08 MMBbl the week ending May 17. Stocks now sit at 65.75 MMBbl, roughly 22.6 MMBbl and 18.6 MMBbl higher than the same week for May 2018 and May 2017, respectively.
- US waterborne imports of crude oil rose for the week ending May 31 according to DrillingInfo’s analysis of manifests from US Customs and Border Patrol. This increase was mostly driven by an increase in imports to PADD 3. As of June 3, the data showed that PADD 3 imports stood at nearly 2.2 MMbbls/d for the week, while PADD 1 stood at nearly 530,000 bbls/d and PADD 5 stood at 1.2 MMbbls/d. Increases in imports from Mexico as well as Colombia were the primary drivers of the increase in import to PADD 3. PADD 3 imports from Colombia have increased in recent months, likely as a replacement for heavy Venezuelan barrels lost to sanctions.