- US crude oil inventories increased by 6.0 MMBbl, according to the weekly EIA report. Gasoline inventories increased 1.0 MMBbl, while distillates inventories decreased, falling 2.7 MMBbl/d. Total petroleum inventories showed a substantial increase of 11.3 MMBbl. US crude oil production was estimated up 100 MBbl/d, while crude oil imports were down 568 MBbl/d to an average of 7.4 MMBbl/d versus the week prior.
- The bearish inventory data this week on top of the bearish inventory data last week (especially the surprising total petroleum inventory gains) caught up with the bullish run of the last couple of weeks. However, the inventory data is still supported by the bullish factors associated with continuing Venezuelan output declines and the unknown aspect of the impacts of sanctions on Iran. According to a Reuter’s report, Iranian exports fell to 1.1 MMBbl/d in October, versus 1.6 MMBbl/d in September and 2.5 MMBbl/d in April. The market received additional bullish news from China, stimulating economic growth and thereby demand for crude products. Early in the week, the Bureau of Safety and Environmental Enforcement reported that nearly 40% of the oil production in the Gulf was shut in, as numerous platforms were evacuated in anticipation of Hurricane Michael. However, by the end of the week this support was lost, as the storm did not impact production and was developing into a demand-destruction storm as it moved inland.
- All that said, pressure was put on prices by Saudi Arabia and Russia, with the Saudis announcing an increase in production to a record level of 10.7 MMBbl/d next month and Russia reversing its production cuts and producing at record levels as well. Additionally, the market remains cautious of further price runs due to comments from the Trump administration that it may soften the sanctions on Iran by giving waivers for some countries, such as India, which continues to import Iranian production. The tariff dispute between China and the US continues to pressure any gains, adding more uncertainties with the trade. These negative factors offset the bullish factors during the week, which, as expected, provided volatility. Until these factors are resolved, expect more volatility.
- As discussed here over the last couple of weeks, the recent gains were established on lighter volume and flat to declining total open interest. The latest CFTC report (dated Oct. 9) confirms the lack of long-term direction bias as the Managed Money long positions took profits at the highs and showed a decrease of 24,623 contracts, while the Managed Money short positions increased by 8,199 contracts. In growing bull market runs, the speculative length would continue to expand as it did last spring. The recent run in prices has a slight initial gain in positions but has been met with declining positions (overall), a very different profile than last spring’s. The chart below illustrates the aspect of this run compared with last spring’s.
- This recent run to higher prices has maintained neither the speculative expectation nor fervor of the price moves last spring, signaling a lack of commitment and thereby minimizing the positions taken.
- This does not mean that this run is over; it just shows a current lack of commitment for it continuing longer term. There is the potential for more headline risk (i.e., how the Trump administration deals with the findings from the investigation of the Saudis regarding the disappearance of an American journalist), but it is doubtful that the administration will create an environment for price gains due to its public policy and opposing pressure for crude price increases.
- Price declines last week were met with a volume increase and should be expected to continue early this week; prices closed last week just off the lows. Further declines will likely take prices to the first area of support at the commonly traded 20-week moving average ($69.52) with major support at the 200-day moving average, which is now at $67.09. Positive headlines will likely allow for a test of the high end of the range starting at last week’s high ($75.28) all the way to the highs two weeks ago at $76.90. With clouds still hanging over the WTI market, the volatility will likely continue. When all the issues regarding the sanctions and OPEC potentially offsetting lost crude production are resolved, prices are likely to settle out before the end of the year and consolidate into a lower range. The continued US production growth, the expansion of Russia and the Saudis, and the fears of weaker demand growth lead Drillinginfo to believe the long-term range will be between $60 and $65 for an extended period of time.
- Natural gas dry production increased 0.17 Bcf/d last week. The increase was driven by a substantial increase in Northeast production, which rose 0.73 Bcf/d, but those gains were offset by losses of 0.71 Bcf/d in the Gulf due to Hurricane Michael. Expect a significant gain in production in the coming weeks, as Gulf production comes back and NEXUS Pipeline has started accepting nominations effective Oct. 13. Over the weekend, Nexus shipped between 0.2 Bcf/d and 0.25 Bcf/d and is only partially in service. It is expected to be fully in service as of Nov. 1, with additional upstream and downstream facilities to come online. Canadian imports decreased 0.35 Bcf/d.
- The late summer heat abated last week, and power demand declined 1.09 Bcf/d, while Res/Com increased 1.90 Bcf/d and industrial demand increased 0.12 Bcf/d. LNG exports and Mexican exports both decreased on average for the week by 0.19 Bcf/d and 0.16 Bcf/d, respectively. These events contributed to the market losing 0.18 Bcf/d in total supply for the week and total demand gaining 0.66 Bcf/d.
- Last week’s storage report came in with an injection of 90 Bcf, which was slightly below market expectations of 94 Bcf. Prices declined before the EIA release and held those declines after the release. Prices did gain toward the end of the day, only to lose those gains by the close on Friday.
- According to the CFTC report (dated Oct. 9), the Managed Money long positions (speculators) increased by 23,324 contracts while the Managed Money short positions decreased by 14,555 contracts. This has formed a massive shift in the speculative traders’ total positions. As the chart below shows, while the speculators may be wrong, their assumptions clearly indicate higher prices to come, and the expectations are all based on the ending inventory for storage, regardless of production growth.
- The rally last week extended prices higher, bringing the market to overbought levels. The declines around the storage report were expected as the run was too long too quick, hence the oversold status. It will be interesting to see whether the new production growth of late takes prices down to the major support around $3.11 and then at $3.05, despite the storage inventory level. Last week’s internals had record weekly volume on the very small week-over-week gains. While the momentum indicators were overextended early in the week, with the late-week decline to support, those indicators relaxed from being overbought. Should the rally continue with the November prompt contract, the highs from last week are the initial target, with a possible extension up to the May high of $3.431.
- Energy Transfer added another 120 MBbl/d of fractionation capacity to its Mont Belvieu facilities with the completion of its Lone Star Frac V project. Energy Transfer expects to add 140 MBbl/d more space in the second quarter of 2019 with its Lone Star Frac VI project.
- Ethane prices dipped slightly last week to 37.75 cpg, well off the mid-September high of around 61 cpg. Cracker and export demand are still buoying prices relative to past seasons, and the recent incremental fractionation capacity has likely lifted constraints and allowed for that relief. The midpoint on Friday was 42.5 cpg.
- A unit of EPIC Y-Grade Holdings is acquiring the Robstown NGL fractionation facility near Corpus Christi from Southcross Holdings. The deal includes immediate fractionation capacity of 64 MBbl/d for EPIC NGL customers through the Sand Hills pipeline, as well as a 57-mile pipeline that will allow the delivery of fractionated products to several markets in the Corpus Christi area. EPIC is also constructing a 100 MBbl/d fractionation capacity near the Robstown facility, which is anticipated in the first quarter of 2020. This is all in tandem with the company converting its NGL pipeline to a crude pipeline while its original crude pipeline and fractionator are under construction, which we touched on last week.
- The EIA reported a build of 1.5 MMBbl in this past week’s inventories. Propane stocks now sit at 80.3 MMBbl, approximately 2.3 MMBbl higher than at this time last year and 5.1 MMBbl lower than the five-year average.