- US crude oil inventories decreased by 2.6 MMBbl, according to the weekly EIA report. Both gasoline and distillate inventories decreased, by 1.6 MMBbl and 0.8 MMBbl respectively. Total petroleum inventories declined 1.7 MMBbl. US crude oil production was estimated to be down 67 MBbl/d. Crude oil imports were down 33 MBbl/d to an average of 7.5 MMBbl/d versus the week prior.
- The declining dollar since the middle of August has provided some cover for the recent rally, but the headline risk continues to drive sentiment. Last week was no different with supportive news from the IEA. They warned that further production declines from Venezuela should be expected. Additionally, the IEA qualified the production capabilities from Libya and Nigeria as fragile. This buoyed prices, which were already supported by the upcoming sanctions on Iranian production. Though it is too early to gauge the full impact of the sanctions on global supply levels, some market participants anticipate supply to decrease as much as 1.5 MMBbl/d.
- While these bullish headlines provide support to short-term movements higher, continuously growing US production provides a ceiling. US producers show little signs of slowing down with the higher prices and healthier balance sheets. Some companies are allocating CAPEX away from the Permian Basin, given issues with infrastructure. As new pipeline capacity begins to relieve these constraints in late 2019, expect significant growth to return to the Permian. Also, OPEC and Russia have already shown they can bring additional supplies online quickly with their gains in June and July. Continued trade disputes between key countries will impact global demand. While the US and Mexico have come to an agreement, the key for global demand will depend on the future of disputes with the EU and China.
- The latest CFTC report showed that Managed Money long positions increased 13,334 contracts and short positions decreased 13,243 contracts. The buying by this sector had the most impact of any sector last week and explains the support for prices.
- The market still has a bullish bias, as the test of the 200-day moving average failed and, as expected, the rebound has now taken prices to the high end of the recent range ($64.43-$71.10/Bbl). This notable moving average (now trading at $65.06/Bbl) has held the bull market for a year now. This average will hold near-term declines. However, should this average break down, a significant amount of selling will damage the long-term bias and declines can take prices down to the April lows around $62/Bbl. Last week’s continued rebound off of the test of the average took prices over $70/Bbl briefly only to retrace at the end of the week. Expect the high end of the recent range to be tested early this week. However, until the supply and demand fundamentals are well understood, there will be hesitation to take prices too high. One element to the trade that will continue is the volatility and daily headline risk. As the market resolves this uncertainty later in the year, prices will start to consolidate and develop a range between $58-$65/Bbl for an extended period of time.
- Natural gas dry production was down slightly this week, dropping 0.02 Bcf/d. However, last week did have a day where production eclipsed 83 Bcf, establishing a new daily record. Expect production to continue to grow into September as the Rover Pipeline project finishes its last phase and brings additional gas to market. Canadian Imports rose 0.52 Bcf/d as temperatures in the Northeast rose, bringing back power demand.
- US power demand rose 2.35 Bcf/d on the week, while Res/Com fell 0.60 Bcf/d and industrial demand increased 0.04 Bcf/d. LNG exports rose 0.23 Bcf/d on average and Mexican Exports were down slightly, falling 0.07 Bcf/d for the week. These events left the totals for the week showing the market dropping 0.51 Bcf/d in total supply while total demand gained 2.04 Bcf/d.
- The storage report last week came in slightly above expectations with an injection of 70 Bcf. The release took prices down, testing support around $2.85, before rebounding throughout the rest of the week. The supply-demand balance from last week implies a lower injection in the coming week.
- With the September contract expiration last week, it is difficult to come to any shifts in the market participants’ expectations. That said, according to the CFTC report (dated Aug. 28), the Managed Money long positions (speculators) reduced the position by 29,167 contracts during the last week of the September contract trading period. This sector was a likely source of the strength during August and was liquidated in the last week. The Managed Money short positions increased slightly, gaining 2,966 contracts, but both camps of speculators don’t seem to be convinced of near-term bias.
- The price movement confirms a lack of commitment, as prices for the third consecutive week traded within a $0.09 range. Prices bounced off a test of the 200-day moving average, only to rally back at the end of the week. That commonly watched level has held the market since the “breakout” on Aug. 7. However, prices could not garner the strength to climb back to $3.00, which sets up a test of the moving average in the near future. A daily close below that key area will signal additional declines to the July low at $2.704. The fundamental data points in the market lend support for additional declines as the market develops moderating temperatures and the potential for additional production from the conclusion of the Rover project in the middle of the month. If the market focuses on longer-term fundamentals, with inventory going into the winter season well below recent history for storage levels, prices may find the support to hold that key moving average and send prices back into the high $2.99 area, possibly testing the $3.00 level from last June. That type of positive move would likely send the price action back to a narrow trade range environment and less volatility. If the 200-day average breaks down, expect an increase in volatility short term as prices extend the declines.
- As ethane demand growth continues in 2018, the spread between Mont Belvieu and Henry Hub has almost tripled on an MMBtu basis. Current ethane prices make it economic for producers to recover more ethane from the gas stream and optimize netbacks. That increased recovery has also caused some infrastructure constraints, as fractionation and pipeline capacity limit the amount many producers can recover. See the below graphic for the historical relationship between ethane and natural gas prices.
- The chairman of China Energy Investment Corp. mentioned the company is still committed to developing more than $83 billion in energy projects in West Virginia, despite the growing trade tensions with the US. Included on the projects will be chemical manufacturing, which will greatly increase NGL demand in the area. The memorandum of understanding was signed in November of 2017, and this past week, the chairman said that the project will still be aggressively pursued.
- The Pennsylvania Supreme Court has denied the hearing of two cases seeking to prevent Mariner East 2 construction in Chester County, a win for Sunoco and the pipeline.
- The EIA reported a build of 2.6 MMBbl in this past week’s inventories. Propane stocks now sit at 71.4 MMBbl, approximately 0.8 lower than with this time last year and 7.5 MMBbl lower than the 5-year average.