- US crude oil inventories increased 6.3 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories decreased 4.8 MMBbl and 2.3 MMBbl, respectively. Total petroleum inventories declined 8.0 MMBbl. US crude oil production was unchanged from the previous week due to shut-ins in the Gulf associated with Hurricane Michael. Crude oil imports were up 63 MBbl/d to an average of 7.7 MMBbl/d versus the week prior.
- The supply shortage argument has been losing wind as the market has a clearer understanding that OPEC (led by Saudi Arabia) and Russia will continue to ramp up production. Contributing to this was Monday’s announcement from oil minister Khalid al-Falih that Saudi Arabia has no intention of cutting back oil supply and plans to increase production to 11 MMBbl/d.
- Equities markets are also on the decline as earnings reports offer a softer outlook for demand growth in the coming quarter. As such, positions are shifting more bearish. The latest CFTC report confirms the position changes, as the managed-money long positions showed a decrease of 37,758 contracts while the short positions increased by 12,345 contracts.
- The chart below represents the price movements in the US Dollar Index (blue line, closing last week at $96.13) and the price of WTI (red line, closing last week at $67.39/Bbl). Late September showed rallies in both, with crude setting a new high. However, they have been trading in opposite directions for the past month.
- Activity in the dollar trade can also provide negative pressure on crude. In times of sentiment for a rising dollar, hedge funds often carry the opposite position in crude. The chart below shows the WTI Managed Money short positions rising sharply in the last month (red line) along with the US Dollar Index Leveraged Money long positions (blue line).
- Last week’s declines took prices below the commonly watched 200-day simple moving average for the first time since September 2017. Once this key area of support was broken on Tuesday, it was then tested as resistance ($67.44/Bbl) on Wednesday through Friday. The longer this level holds, the more significant the resistance becomes. Should prices get above this level, look for the high of last week ($69.66/Bbl) as the top of the gains near term. Further declines will target the August low of $64.33/Bbl.
- Continued US, Russia, & Saudi Arabia production growth coupled with fears of weaker demand growth lead Drillinginfo to believe the long-term range will occur between $60-$65/Bbl for an extended period of time.
- Natural gas dry production increased by 0.80 Bcf/d. Production increases were mainly from the Northeast (+0.43 Bcf/d) and the GoM (+0.31 Bcf/d). Canadian imports decreased 0.38 Bcf/d for the week.
- Late fall shifts demand to Res/Com from the power sector. Res/Com gained 1.72 Bcf/d, while power demand fell 0.91 Bcf/d. Industrial demand increased 0.09 Bcf/d. LNG and Mexican exports increased 0.31 Bcf/d and 0.03 Bcf/d, respectively. For the week, the market gained 0.42 Bcf/d in supply and 1.31 Bcf/d in demand.
- The storage report last week was an injection of 58 Bcf. That included a reclassification of 5 Bcf, implying a flow of 63 Bcf. Price action was weak before the release and continued throughout the day.
- According to the CFTC report (dated October 23), managed-money long positions increased 9,797 contracts, while the short positions increased 7,002 contracts. This reflects conflicting sentiments regarding low inventories versus production gains. Even with the production growth, the market is keenly aware of the delicate supply-and-demand balance. Even an average winter will likely provide upside risk to prices.
- Prices retested what is becoming well defined support around $3.11. That level was met with forecasts showing warming temperatures in early November, but those bearish elements were nearly eliminated by the end of trade Friday. Market internals showed that volumes were down as compared to the week before, indicating a consolidation phase since the early October run.
- Expiration of the November contract occurs on Monday. Over the last 2 years, expiration has been met with stronger prices 22 of the 24 months. The ability of prices to bounce off support ($3.11) last week and recover the losses on Friday suggests that a test of resistance may occur after or during the expiration. Expect tests of the break out area around $3.11 (prompt Dec), and potentially down to $3.05. Should the market extend the rally with the Dec prompt contract, the highs from previous weeks at $3.431 should be considered the initial target.
- Phillips 66 Partners reported earnings this past week. The company expects the expansion of the Sand Hills NGL Pipeline, of which PSXP owns 1/3 interest, to be completed in the fourth quarter. The pipeline reached 440 MBbl/d at the end of the third quarter, and will be expanded to 485 MBbl/d. PSX also noted, along with increased EBITDA from NGLs, that there are opportunities for further midstream build out across the board. The company continues to see rejection maintained at high levels as space is being shifted to fractionate the heavier liquids. They expect the fractionation tightness to continue as DUC inventory will fill most incremental capacity.
- Range Resources reported 47% revenue from NGLs in Q3’18 and recovered 15% more ethane than in the first half of 2018. Southwestern Energy also reported NGL realizations were 34% higher QoQ, with liquids production volumes up 38% YoY. The market in the Northeast is unique where in-basin fractionation allows for marketing and optimization of liquids production. Other regions send Y-grade solely to the Gulf Coast and have limited control on where it is marketed. We anticipate continued efforts to tap liquids production in the Appalachia in this higher priced environment.
- The EIA reported a build of 1.7 MMBbl in this past week’s inventories. Propane stocks now sit at 82.0 MMBbl.