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Insights across the energy value chain

CRUDE OIL
Inventory levels for crude oil increased 2.3 MMBbl last week as reported by the EIA. The gasoline and distillate inventories decreased by 1.3 MMBbl and 2.4 MMBbl respectively. Total petroleum inventories showed a substantial decline of 11.9 MMBbl. The larger than anticipated crude oil inventory build was mainly due to increased imports (up 1.1 MMBbl/d), which averaged 8.5 MMBbl/d. The higher than anticipated crude oil build was bearish, but those gains were offset by the bullish gasoline and distillate withdrawals, supporting price during the low volume holiday trade.


WTI price action remained in the $50-$55/Bbl range since the OPEC release. With the expiration of the January contract last week and the holidays, crude oil had one of its calmer weeks recently as market participants closed open positions. The commercial short position (producer hedges) is running 53.5% of total open interest currently, according to the CFTC report, signaling that producers are eager to take advantage of the recent uptick in prices.

The market continued to weigh bullish and bearish news last week.

  • Bullish: Saudi Arabia, Kuwait, and UAE notified customers that they will be cutting supply in January to fulfill the quotas.
  • Bullish: Russia said that the country’s oil companies have agreed to reduce output collectively sending a signal that they are working towards a successful reduction of their supply as per the joint OPEC and non-OPEC agreement.
  • Bullish: The IEA revised their demand forecast higher by 200 MBbl/d due to revisions to Chinese and Russian consumption numbers.
  • Bearish: Baker Hughes reported 16 additional rigs were added to the domestic fleet. As long as prices on the 2017 forward curve remain in the $50-$55/Bbl range, expect shale producers to expand production programs.
  • Bearish: Iraq has signed new deals with Asian customers despite their commitment to reduce output.
  • Bearish: Libya, which has been exempted from the OPEC quotas, is close to increasing output by 270 MBbl/d after a pipeline that connects major oilfields was put back in service. Libya, which had recently doubled output to 600 MBbl/d, has previously demonstrated its ability to ramp production up to as high as 1.2 MMBbl/d.
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    Hopes of a successful OPEC and non-OPEC output cut have provided a floor for WTI. Meanwhile, US producers are taking advantage of the higher prices to lock in hedges and ramp up drilling programs in 2017, setting a likely price ceiling on WTI. Until data can confirm or deny the execution and enforcement of the production quotas, Drillinginfo expects prices to remain range bound near current levels.

    NATURAL GAS

  • Natural gas production fell to levels not seen since October, falling over 1 Bcf/d. Some of the declines can be attributed to freeze offs in several of the supply regions as some of the coldest temperatures seen since the middle of last winter hit the market. Canadian supplies offset some of these losses as imports increased 460 MMcf/day with higher cash prices.
  • Despite colder temperatures pushing demand up early in the week, warming temperatures toward the end of the week limited total demand gains to 550 MMcf/d week over week. The warming trend should continue this coming week sending demand to more normal levels but above last year’s levels for the same week.
  • The storage report last week was very near expectations with a rare December withdrawal above 200 (at 207) and market expectations for this week’s report are even a greater withdrawal. This will place inventories below last year’s levels and below the 5-year average.
  • Prices faced downward pressure early in the week, testing major technical support. However, a failure to extend the losses further and a change in the weather forecasts for early January (colder), prices quickly rebounded. This price action set up a bullish outside week reversal (a technical indication of prices trading to a lower low than the previous week only to close the week above the previous week’s high). This type of price action indicates a reassessment of the traders and creates a bullish bias to the upcoming week’s trade. The market continues to trade around the weather reports (as it does in early winter) and any additional colder patterns to the forecasts will add fuel for further gains. The upcoming week’s warmth was a primary reason for early week declines and now the focus is on the longer-term weather patterns.
  • A series of 200+ withdrawals from storage during January, will continue to pressure prices up. Drillinginfo has been calling for a rise in prices to facilitate additional investment in drilling rigs. To date, the price action in the summer and fall 2017 has not responded to incentivize additional gas-directed investment and the probability of depleted storage levels at the end of March has only increased. As the depleted storage issue becomes fully understood, Drillinginfo’s expectation of a price response will become a reality.
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    NATURAL GAS LIQUIDS

  • Propane inventories decreased 3.1 MMBbl last week as reported by the EIA, marking a fourth consecutive withdrawal. Cold temperatures have led to strong storage withdrawals over the past few weeks. Propane stocks now sit at 92.5 MMBbl, roughly 5.1 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 62.3 MMBbl for this time of year prior to 2015 (before the price crash).
  • Ethane: Prices continue to rise along with natural gas prices, due to winter weather. Prices will largely continue to move with natural gas and weather forecasts.
  • Propane: Propane prices continue to rise with winter weather and slightly rising crude prices.
  • Butanes/Natural Gasoline: Normal butane prices have gained 30% over the last week. This is the first time that normal butane prices have been higher than natural gasoline prices since 2011. The extreme jump is mainly driven by market participants covering their shorts before the expiration of January contracts. Given that natural gasoline price is a price ceiling for butane and that this was a temporary uptick to cover shorts, it is expected that normal butane prices will trade below natural gasoline prices moving forward.
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