• US crude oil inventories decreased 1.4 MMBbl, according to the weekly EIA report. Both gasoline and distillates inventories decreased, with gasoline falling 3.8 and distillates declining 0.1 MMBbl. Total petroleum inventories showed a decline of 0.7 MMBbl. US production was estimated to be up 20 MBbl/d. Crude oil imports increased 278 MBbl/d to an average of 7.6 MMBbl/d versus the week prior.
• The WTI trade has been focused on the return of Iranian sanctions, Venezuelan production declines, and the geopolitical unrest in the Middle East. The market is now aware that the sanctions won’t be well defined and the impact will not be felt in the market for up to six months. The market is skeptical about sanctions having a drastic impact on global supply. That said, the market is aware that the Saudis have a vested interest in keeping prices high as we approach the Saudi Aramco IPO (due late this year or early 2019). Traders are also cognizant of the effects of the higher prices on demand. The IEA was forced to reduce the demand growth forecast to 1.4 MMBbl/d from 1.5 MMBbl/d. The current price levels lock in continued US growth. Additionally, OPEC and Russia’s continued participation in quotas is highly unlikely with the declines in Venezuela, sanctions against Iran, and normalizing inventories.
• The market may be beginning to comprehend the risks that would come with additional price gains. The chart below shows the decline in speculative positions over the last few weeks. This reflects the latest CFTC release, which showed managed money long positions declined by 22,419 contracts. The producer/merchant short sector (producers buying back previously shorted positions) reduced its position by buying back 31,212 contracts
- The producer/merchant short positions had been rising significantly over the last few weeks as prices increased. The chart below exemplifies that. As the speculative sector has been taking profits by gradually liquidating positions, producers have been responsive by increasing their short positions, hedging future production. Last week’s aberration to the trend from the producer sector (reducing the number of previously sold positions) may be explained by a combination of the upcoming expiration of the June contract and producers expecting the gains in prices to continue and gambling on higher levels.
- No matter the reason, two theories are confirmed by the recent action:
– Investors in the speculative sector, who have been key to the price advances since last summer, are starting to adjust their expectations and take profits.
– Any further gains in prices will lead to additional hedging by US operators.
- Prices may continue to increase on the expectation that sanctions and Venezuelan production declines will take 1 MMBbl/d out of the market, thereby accelerating the normalization of global inventories. However, there is significant risk to those gains as US operators continue to take advantage of higher prices and quotas come under scrutiny by abiding members.
- Prices last week traded to a higher high in a relatively smaller range for the week. The gains left the market nearly two standard deviations above the 20-week moving average. This is the sixth continuous week that prices have remained this far extended to the upside. In other such occurrences since last summer, the gains have been met with a significant decline or a decline to set up a consolidation trade (from which the next ascent can be launched). Market internals (both volume and open interest) continue to support a positive bias; however, momentum indicators are beginning to approach an over-bought level.
- The recent record levels of total open interest and active position management by the market’s sectors strongly suggest significant volatility in the weeks to come. When this volatility subsides, the market will inevitably settle on a longer-term equilibrium for WTI prices. Drillinginfo believes that equilibrium will center around $65/Bbl. This reflects the fundamentals of the market, taking into consideration growing US production, the strain on demand (due to higher prices), the impact of Iranian sanctions, continued Venezuelan declines, and the possible abandonment of OPEC quotas.
- Natural gas dry production declined last week, losing 0.71 Bcf/d. The recent declines can be explained primarily by maintenance schedules on a couple of the interstate pipelines. Canadian imports offset some of the production declines by rising 0.26 Bcf/d.
- US power demand increased by 1.97 Bcf/d, Res/Com decreased by 0.61 Bcf/d, and industrial demand declined slightly by 0.03 Bcf/d week on week. LNG exports fell 0.14 Bcf/d on average for the week, and Mexican exports also declined slightly, losing 0.07 Bcf/d. Totals for the week showed the market losing 0.45 Bcf/d in total supply while total demand was up 1.27 Bcf/d compared with the previous week.
- The storage report last week came in very close to expectations with an injection of 106 Bcf, as the market and private forecast groups all centered on an injection of 105. While the injection was above the required average (90 Bcf) that needs to be injected every week between now and October to meet last year’s levels, the next two reports are likely to be smaller than last week’s and reflect injections just above the required average.
- For the second consecutive week, prices reversed off the lows (Thursday) only to rally, with the rally falling just shy of the 200-day moving average ($2.875 and declining). It was suggested last week here that a portion of the rally off the previous week’s storage release was likely due to short covering, and the chart below confirms that action. The latest CFTC report (dated May 15) confirmed the short covering as the managed money short positions decreased by a sizable 49,231 contracts.
- The market is starting to understand and confirm the storage analysis, which requires significant injections throughout the summer period for inventories to end at the previous year’s levels. Early in the spring and into April, traders expected the record production and growth to continue through the summer and took positions expecting a retest of the multiyear lows around $2.56-$2.52. The speculative shorts added to positions, peaking two weeks ago for the year. Since then, the cold April and meek storage injections have not confirmed the ability of the market to replenish levels by October. This is forcing a reassessment by the market that has continued selling at resistance areas, with the expectation of supply overwhelming the inventories; meanwhile, a contingent of the market is concerned about replenishing inventories and supporting the declines. An adjustment in expectations has been occurring over the past two weeks. With the short covering, the market has lost open interest, but the average daily volume for the last couple of weeks has been above the volume levels seen at the February lows. Last week’s volume on rising prices was also well below the previous week’s volume.
- Prices will likely range-trade this week as expiration is coming Tuesday after the holiday. The trend for the last 18 months has been for prices to decline going into the three-day expiration only to rally sometime toward the end of expiration (17 months). The low of $2.78 will likely be the first attempt at a price decline. Should prices continue the monthly historical trend at expiration, the commonly watched 200-day average will be key for June prices. For prices to extend the rally significantly higher in the long term, the market will have to confirm a breakout above the 200-day average on high volume with accompanying open interest gains.
- Apache Midstream and Salt Creek Midstream announced last week they are developing a header system to transport NGLs from their processing facilities in Reeves County to the Waha Texas Hub. The project consists two pipes transporting 445 MBbl/d, and will interconnect with pipes that provide access to Gulf Coast fractionation facilities, while also providing their customers with more market optionality.
- According to EIA, the U.S. exported a total of 905 MBbl/d of propane in 2017, 452 MBbl/d of that total were exported to Asian countries including Japan, China, South Korea, and Singapore. Exports to these countries doubled between 2015 and 2017.
- Inventories this past week reported a build of 1.7 MMBbl in last week’s EIA report. Propane stocks now sit at 40.4 MMBbl, roughly 1.3 MMBbl lower than this time last year and 10.9 MMBbl lower than the 5-year average.
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