The Week Ahead For Crude Oil, Gas and NGLs Markets – Nov. 12, 2018

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CRUDE OIL

  • US crude oil inventories increased by 5.8 MMBbl, according to the weekly EIA report. Gasoline inventories increased 1.9 MMBbl while distillates inventories decreased, falling 3.5 MMBbl/d. Total petroleum inventories showed an increase of 4.8 MMBbl. US crude oil production increased 400 MBbl/d from the previous week (per EIA). Crude oil imports were up 195 MBbl/d to an average of 7.5 MMBbl/d versus the week prior.
  • The highly anticipated Iranian sanctions were formally announced last Monday. However, waivers for China, India, Japan, Italy, Greece, Turkey, South Korea and Taiwan allow these countries to purchase Iranian crude for the next six months. This brought additional declines rather than gains.
  • Price gains of the last few months were facilitated by expectations that sanctions and continuously declining Venezuelan production would reduce supply. However, sentiment has shifted to bearish with sanction waivers and supply data (accelerated growth by Russia and OPEC, especially Saudi Arabia) pointing to a potential surplus.
  • The market continues to digest the tariff issues between China and the US and the effect on global economic and demand growth. Over the weekend, Saudi Arabia was re-evaluating their recent production increases and how to move forward considering the supply surplus possibility.
  • The latest CFTC report (dated Nov 6th) had the Managed Money long positions continuing to liquidate, decreasing 13,332 contracts. The Managed Money short positions increased by 25,009 contracts, as the speculative short trades are expecting the declines to continue.
  • New selling from the speculative shorts and an increase in producer selling has pressured prices into extremely over-sold levels. Additional declines are likely to challenge the lows of 2018 at $58.07. This type of selling usually abates with prices likely to bounce off the lows and retrace some of last week’s declines. The highs of last week at $64.14 are the first target, and may challenge the respected 200-day average of $67.36.
  • Regardless of any bounce, the market has lost a significant amount of its bullish bias. Drillinginfo continues to believe the long-term range will occur between $60 and $65 for an extended period of time, with potential brief extensions under $60.

NATURAL GAS

  • Dry production decreased by 0.53 Bcf/d week-on-week, with most of the losses from the Gulf and Southern regions. Canadian imports increased slightly, increasing 0.01 Bcf/d.
  • Cold weather last week showed demand gains in the Res/Com market, increasing 5.12 Bcf/d. Power demand declined 0.82 Bcf/d, and industrial demand increased 0.37 Bcf/d. LNG and Mexican exports decreased 0.16 Bcf/d and 0.04 Bcf/d, respectively. For the week, supply fell 0.52 Bcf/d and demand increased 4.78 Bcf/d.
  • The storage report last week came in with an injection of 65 Bcf. The bearish release could not brunt the gains established early in the week. The strong Res/Com demand coming in the next two weeks has traders nervous about the storage through the winter.
  • According to the CFTC report (dated Nov 6th), the Managed Money long positions increased 17,273 contracts while the short positions decreased by 22 contracts. The early week price action resembled short covering, but the lack of speculative shorts entering new positions is surprising. Adding to the confusion, the market set an all-time high in total open interest on Oct 4th (prices at $3.129). The market has shed over 178,000 contracts in total open interest while prices have risen over $3.72.
  • The gains made last week left a gap in prices from $3.313 to $3.487 but closed a gap that has remained in natural gas prices between $3.568 and $3.69 since early January 2017. By closing above those levels on Friday, trade is suggesting higher prices are coming. Market internals are signaling extremely over-bought conditions in addition to higher prices, with declining open interest. Look for prices to retrace some, or all, of Friday’s gains and test support around $3.50. Should prices ignore current momentum indicators and rise, last week’s high of $3.824 up to the Dec 2016 high of $3.994 will become the targets.

NGLs

  • Enterprise is increasing its fractionation capabilities at existing plants. The company announced several projects designed to provide an additional 55 MBbl/d of frac capacity at existing facilities in Texas and Louisiana. Projects include construction of 21 miles of new pipeline, conversion of 65 miles of a natural gas pipeline to NGL service, and a recommissioning of its Tebone frac in Ascension Parish. The pipeline work will be completed in Q3’19, and Tebone is expected in Q1’19.
  • EnLink announced an unlocking of 30-35 MBbl/d of fractionation capacity in the Gulf Coast through increasing pipeline capacity, expected Q2’19.
  • Targa reported earnings last week, and management hinted that they may have similar ideas on the drawing board to expand their system as their peers have done. They also announced efforts to expand their LPG export capabilities at Galena Park by about 50%; Galena Park currently is capable of exporting 7 MMBbl/month.
  • The EIA reported a build of 1.5 MMBbl in this past week’s inventories. Propane stocks now sit at 84.5 MMBbl, approximately 6.2 MMBbl higher than this time last year and 0.6 MMBbl lower than the five-year average.
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