• US crude oil inventories decreased 2.2 MMBbl, according to the weekly EIA report. Both gasoline and distillates inventories declined, 2.2 MMBbl and 3.8 MMBbl, respectively. Total petroleum inventories posted a withdrawal of 1.5 MMBbl. US production was estimated to be up 84 MBbl/d. Crude oil imports decreased by 1.2 MMBbl/d to an average of 7.3 MMBbl/d versus the week prior.
• The WTI trade, for the past several weeks, has focused on the Iran nuclear deal. Last week the market received confirmation of what most traders were expecting, with the US scrapping the agreement and re-imposing sanctions on Iran. These sanctions will likely take months to come into effect, as the Treasury must define the sanctions and provide a period of adjustment, which it defined as six months for the oil and gas industry. That will put the impact of the sanctions off until early 2019. The other element of the sanctions that has yet to be defined is the role of other export participants (China, India, South Korea and Europe) in the sanctions, as President Trump indicated further sanctions against any nation that helps Iran.
• The next element that the trade will need to digest is the net effect of the sanctions (as they become defined) and how it fits into the overall fundamental picture. Primary among them is the continuing production declines from Venezuela and ongoing geopolitical unrest in the Middle East. The OPEC cuts, along with the Venezuela production declines, provide the market the opportunity to normalize global petroleum product inventories to five-year averages in late 2018. Some analysts estimate that the sanctions and Venezuelan declines will take 1 MMBbl/d out of the market, speeding up the normalization. What is unknown currently is what the quota-carrying nations will do. They could choose to maintain the current cuts or to abandon quotas and start to fill the gap left by Iran and Venezuela. However, it must be noted that Saudi Arabia is still pursuing higher prices in the near term as it heads into the Saudi Aramco IPO.
• These moving parts in the market will lead to price volatility. Meanwhile, US producers have continued to utilize higher prices to accelerate growth in domestic production. Recent estimates from the EIA increased the 2019 outlook to 11.86 MMBbl/d, as higher prices will likely lead to CAPEX expansion, and some of the growth from the US will also work to fill the supply gap.
• Prices last week followed the tenets of most rumor-filled commodity markets, with traders buying the rumor (expectation) and then selling the fact (announcement). Traders took profits leading into the Trump announcement on Tuesday as prices briefly fell below $68. Then the market received a bullish inventory report and prices ran to the highs of the week, only to decline slightly on Friday. The participants reacted to the news appropriately, as the latest CFTC report showed the managed money long positions decreasing by 11,618 contracts and the selling from the commercial sector increasing by 11,728 contracts. As expected in a busy news week, volume was higher than normal and initial estimates indicate open interest was lower. The speculative element to the trade continues to exist, and due to the length in the market, it will likely lead to potential volatility over the coming weeks. In the near future, look for more consolidation to the trade with slight extensions pushing the range up, with profit-taking leading to the failure of these gains to hold. The market will now start the process of interpreting the sanctions and the participants’ new roles from the standpoint of supply and demand. This re-evaluation will need to address the potential impact of the higher prices on demand, as the IEA has current growth for crude and petroleum products rising at 2% this year and in 2019.
• With last week’s orderly liquidation of a portion of the length held by speculators, the chance of a blow off top (discussed last week) has decreased. Rather, it looks as if prices are going to stay in the $66-$73/Bbl range for a period of time. This type of range environment will provide the time for the market to assess a more thorough understanding of supply and demand without the speculative noise that has carried prices for the past few months.
• Longer term, the market will inevitably come to an equilibrium for WTI prices, and Drillinginfo has that equilibrium for prices around $65/Bbl. This reflects the fundamentals of the market, US production growth potential, growing global demand and the impact of the sanctions commencing later in the year.
• Natural gas dry production declined last week, losing 0.54 Bcf/d. The primary production losses were from the West, Mid-Continent and Texas. Canadian imports also declined 0.07 Bcf/d.
• US power demand increased by 2.1 Bcf/d, while Res/Com declined by 2.44 Bcf/d, and industrial declined by 0.26 Bcf/d week-over-week. Mexican exports rose 0.12 Bcf/d and LNG exports fell 0.36 Bcf/d on average. This left the market with 0.50 Bcf/d less in total supply and 0.65 Bcf/d less in total demand.
• The storage report last week came in much weaker than expected, with an 89 Bcf injection. Before the number was released, trades on ICE were in the mid-90s to over 100 Bcf. While the injection was just below the average (90 Bcf) needed to inject every week between now and October to meet last year’s levels, injections will have to surpass 90 Bcf in May, as that average will be nearly impossible during July without significant production growth or very mild temperatures. The coming two weeks’ injections are expected to exceed last week’s injection.
• As discussed previously, last week and the next few weeks should provide key indications of the market’s supply and demand balance, because the month of May and early June should provide ample opportunity for the larger injections. Every week that does not significantly eclipse that average level will likely have a positive bias on the price action and may provide issues for any type of extended decline.
• Last Thursday’s reversal confirmed the market’s concern with the injections this spring. Trade remained in the high end of the recent range, and closed the week at the highest level since Feb 2. Interestingly, this past week’s range was nearly exactly the previous week’s range, and took prices up to some key resistance areas. The latest CFTC report (dated May 8) showed the Managed Money short positions increasing a sizeable 33,754 contracts while the Managed Money long positions decreased 7,907 contracts, as prices range traded during the earlier week and through Tuesday the 8th.
• While some of the reversal last Thursday may have been generated by short covering from the speculative short positions, this sector may be the catalyst for a larger rally should resistance around $2.83-$2.88 break with a daily close above that level. Market internals were supportive of higher prices, with gains in volume and open interest. Expect prices this week to test the high end of the recent range, and should it fall there, the lows of the past two weeks ($2.70s) will likely be challenged.
• DCP Midstream reported earnings and operational announcements this past week. The company is expanding their Sand Hills Permian NGL pipeline faster than they originally anticipated to 485 MBbl/d. Management states that their DJ growth projects is a “massive game changer”. The company announced a planned extension of the Southern Hills NGL pipeline, adding 1.5 Bcf of gathering and processing capacity, announced “Plant 12” in the DJ will have 1 Bcf/d in processing capacity, and several accelerations of projects to account for production growth in the DJ.
• Energy Transfer reported earnings and reiterated that they expect to complete Mariner East II by end of Q2’18, and construction is 98% complete. The company also reported a $6 million QoQ decrease to transportation margin due to Mariner East I downtime in March.
• Inventories this past week reported a build of 2.3 MMBbl in last week’s EIA report. Propane stocks now sit at 38.7 MMBbl, roughly 1.0 MMBbl lower than this time last year and 10.8 MMBbl lower than the 5-year average.
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