US crude oil inventories increased by 0.9 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 3.7 MMBbl and 2.5 MMBbl respectively. The most important number to keep an eye on, total petroleum inventories, decreased by 3.9 MMBbl. US production continued to build with an increase of 16 MBbl/d last week. Imports were down 83 MBbl/d to an average of 8.2 MMBbl/d versus the previous week.
Longer term, prices will continue to face pressure as US operators increase rig count. According to the latest report from the CFTC, liquidation of the speculative long positions continued last week with another 16,201 reduced in the managed money sector. This selling was aided by 6,953 contracts of new shorts from the managed money sector. The rally off of the EIA inventory data release certainly gave the late coming shorts some pause, and further gains in price may promote additional covering.
Fundamentally, the market remains bearish. The 310 MBbl/d deficit currently implied by IEA data is not enough to normalize inventories back to levels prior to the price crash. Without a normalization of inventories, there can be no sustainable price recovery. To normalize inventories by YE2017, OPEC must extend quotas beyond the originally agreed upon six months and the IEA forecast of an additional 1.34 MMBbl/d of demand growth must materialize. If the US grows more than the expected 659 MBbl/d (December 2016 to December 2017) or if Libya and/or others are able to post meaningful production increases, the normalization of inventories may take longer, leading to bearish fundamentals past YE2017.
Last week Drillinginfo expected a test of the high side, citing the 200-day moving average ($48.61/Bbl) as the initial target, which was pierced just after the data release from the EIA. From there, the run caught support and took prices to key initial resistance at $50.86/Bbl (100-day moving average and the March 9th high). While Drillinginfo continues to expect lower tests with prices (perhaps down to $45.00/Bbl) longer term, the market has now clearly defined the low end of the new range at $47.00/Bbl, having tested that level for three consecutive weeks and failing to break below. Expect price action in the coming week to develop the high end of the new range, and Friday’s close up to the high of March 8th (the day of the initial price collapse) at $52.92/Bbl should control trade.
Dry natural gas production was down 220 MMcf/d last week with the declines primarily in the Gulf and East Texas regions as pipeline and other maintenance operations continued. Expect these types of interruptions to continue through the spring shoulder season. With the decline in demand, Canadian imports also decreased 300 MMcf/d week-over-week. The market continues to wait for a build in drilling, as the current activity will not be sufficient to build inventories during the coming injection season.
On the demand side, last week’s temperatures were much warmer than the recent weeks and Res/com demand dropped 4.48 Bcf/d on average over the week. Power demand increased 120 MMcf/d, likely driven by the nuclear re-fueling / maintenance activity causing lower nuclear power generation.. LNG exports dropped a slight 370 MMcf/d dipping below 2 Bcf/d, but flow data from Friday show these levels back above 2 Bcf/d. LNG exports will continue to be volatile in the coming weeks and may fluctuate 1-3 Bcf/d as Cheniere starts commissioning train 4 at Sabine Pass.
The storage report last week came in a little below expectations with a withdrawal of 43 Bcf, which was likely the last withdrawal for the season. The coming week’s expectation should be an injection with the temperatures returning above seasonal averages.
Price action continues to maintain a positive bias with this week seeing the highest weekly close since last January. The April contract settled at the highs for the trade month of March and as the May contract took over as prompt, it immediately erased the premium to April but closed the week above April expiration. Price action continues to support the historical seasonal tendency of rallies in the second quarter of the year. Last week’s action also had an orderly retracement (down to key support at the 50-day average) before increasing again. As discussed here last week, this type of price action facilitates additional gains.
According to the CFTC release (positions as of Mar 28th) speculative short positions covered an additional 13,828 contracts early in the week. The report also highlighted that the Managed Money sector reduced their long positions slightly by selling 2,431 contracts as the April contract was expiring. Total open interest gained slightly between Friday, March 24, and Friday, March 31 (even with the contract expiration), which is also supportive longer term.
Production will need to rise this summer and that investment will only come with higher prices, as Drillinginfo has been calling for since the beginning of the year. The risk for the trade remains to the upside with a large contingency of speculative shorts (though reduced recently) remaining in the market and the seasonal trends (2Q rally) being confirmed weekly.
Ethane prices increased 10% week over week along with a gain in natural gas prices.
The EIA reported a slight drop in January ethane exports on Friday, but exports remain at near record highs. Exports have been upwards of 130,000 b/d since Reliance began moving ethane from Morgan’s Point in December.
Inventories decreased 1.54 MMBbl in last week’s EIA report, the largest withdrawal in the last three weeks. This week’s late season withdrawal is attributed to exports increasing 17% week-over-week. Propane stocks now sit at 42.8 MMBbl, roughly 20.0 MMBbl lower than this time last year and the lowest we have seen since 2014. However, propane stocks are still well above the five-year average of 32.6 MMBbl for this time of year prior to 2015 (before the crude price crash). Drillinginfo expects that propane will see its first injection of the season over the next couple of weeks, consistent with historical activity.
Propane prices jumped due to a bullish signal from the EIA stocks report, increasing prices 8% week-over-week.
The EIA reported their monthly export data on Friday, showing a minimal drop of 11,000 b/d of propane, down to 1,043 Mbd in January. Propane exports remain at record highs compared to the 866 Mbd observed in January 2016.
Normal butane exports were 46 Mbd in January, reported by the EIA; nearly half of the exports observed in December despite an increase in production.