- US crude oil inventories decreased by 4.3 MMBbl, according to the weekly EIA report. Gasoline and distillate stocks increased 1.8 MMBbl and 3.1 MMBbl, respectively. Total petroleum inventories showed an increase of 3.6 MMBbl. US crude oil production was estimated to be up 84 MBbl/d. Crude oil imports were up 230 MBbl/d to an average of 7.7 MMBbl/d versus the week prior.
- Prices remained around $70/Bbl early in the week with bullish news about possible offshore outages from Tropical Storm Gordon and upcoming sanctions on Iranian crude supplies. Exports from Iran are starting to decline, but the market is still uncertain about the impact of the sanctions on long-term fundamentals. Prices are buoyed by this uncertainty along with continued declines from Venezuela. Later in the week, the markets got a bearish twist following the inventory report release showing a substantive gain in petroleum inventories and comments from the Trump administration that it was leaning towards an additional $200 billion in tariffs on Chinese goods. The dollar trade stabilized last week, meaning the WTI declines late in the week were more of a reaction to trade issues. The decline in prices also confirms that the speculative trade is very weary of further tariffs and the possible turmoil that these actions will cause for the global economy and global demand.
- Growing US production continues to keep a lid on price gains. Producers are taking advantage of the higher price environment, completing more efficient wells, and developing an inventory of DUCs for additional gains in production when some of the takeaway capacity issues are resolved.
- The rally early last week was generated by the speculative bulls, who, according to the latest CFTC report, increased long positions 18,754 contracts. Meanwhile, the Managed Money short positions decreased a meager 750 contracts. It should also be noted that the Merchant short positions (producers hedging) increased 20,652 contracts as producers locked in future prices.
- The market remains with a bullish bias, but the failure of prices to break above and maintain the $71/Bbl level suggests that the risks associated with possible tariffs may pressure prices back to the key support areas associated with the 200-day moving average at $65.31/Bbl. This commonly watched indicator is rising and is starting to narrow the trade range for WTI. Any breakdown and daily close below this key support will remove the bullish bias from the market and will likely force some liquidation by the speculative longs. However, this notable average has held the bull market for a year now and is expected to continue to hold. Should prices test this level again and it holds, prices will likely head back to the high end of the range at $71/Bbl. At that point, the market will need additional news for an extension beyond that level and onward to the June highs at $75/Bbl. A breakdown below the key average will likely take prices down to the April lows around $62/Bbl. As the market understands the fundamental impacts of sanctions and tariffs later this year, prices will start to consolidate and develop a range between $58-$65/Bbl for an extended period.
- Natural gas production gained 0.16 Bcf/d last week. Expect production to grow later into September as Rover finishes its last phase, adding more supply capabilities to the market. Canadian Imports fell 0.55 Bcf/d as the early September heat moderated in the Northeast, negatively impacting demand requirements.
- US power demand declined 1.35 Bcf/d on the week, while Res/Com fell 0.19 Bcf/d and industrial demand decreased 0.14 Bcf/d. LNG exports declined by 0.05 Bcf/d on average and Mexican Exports were up slightly, rising 0.03 Bcf/d on the week. These events left the totals for the week showing the market losing 0.38 Bcf/d in total supply while total demand lost 1.65 Bcf/d.
- The storage report last week came in slightly below expectations with an injection of 63 Bcf. The market expectation was an injection of 64 Bcf. This week’s injection should be stronger based upon the supply/demand balance from last week.
- According to the CFTC report (dated Sept. 4), the Managed Money long position (speculators) reduced the position by 13,831 contracts, while the Managed Money short position increased by 12,133 contracts. This shift by the speculative crowd confirms that the break below the well established support levels has brought a more nuetral-to-bearish bias to prices. It should also be noted that the Commercial Merchant long and short postitions increased by 24,931 contracts and 25,139 contracts, respectively. This type of hedging from the commercial sector signifies that producers like the winter prices over $3.00, and now the industrial and utility consumers are initiating hedges to protect from any type of run.
- Prices last week finally indicated the preference for near-term trade direction. Since early August when prices broke out above the 200-day moving average, the concept of prices driving over $3.00 was suggested based on power demand and potentially low storage inventories in October. However, the bulls could not garner enough support to attack $3.00, and prices broke below the commonly traded zone last week. As suggested, a breakdown through the commonly traded zone would increase volatility and send prices toward the July low at $2.704. Last week’s price range (volatility) jumped to nearly $0.15 after hovering at $0.09 for the previous three weeks. Now prices have moved into a near-term defining area for trade. The fundamentals in the market continue to lend support for a bearish bias as the market has moderating temperatures, tropical storms that will strip demand, and the potential for additional production entering the market from the conclusion of Rover in the middle of the month. If the weakness that started last week extends prices through the July lows, prices will likely head to strong and multiyear support (dating back to late 2016) between $2.522-$2.568. Rallies in prices will test the broken support at the 200-day moving average ($2.84).
- The peak of hurricane season started with Tropical Storm Gordon. NGL prices increased on the news of production drops resulting from the storm. However, cracker and refinery utilization were not substantially affected from the storm and prices rescinded back to previous levels. Ethane, however, is climbing alongside increased exports, hitting 46 cents per gallon on Sept. 6.
- Enterprise Products Partners initiated construction on their 10th fractionator in Mont Belvieu this past week. The 150 MBbl/d facility is expected to increase EPD’s total Mont Belvieu capacity to 905 MBbl/d once it is in service in Q1 2020. The industry expects increased production to result in continued tightness in Mont Belvieu fractionation over the coming years. Drillinginfo estimates total US NGL production to increase 10% by the end of Q1 2020, or about 430 MBbl/d.
- The EIA reported a build of 2.0 MMBbl in this past week’s inventories. Propane stocks now sit at 73.4 MMBbl, approximately 0.1 MMBbl lower than this time last year and 7.0 MMBbl lower than the 5-year average.