The Week Ahead For Crude Oil, Gas and NGLs Markets

April 10, 2017

CRUDE OIL

US crude oil inventories increased by 1.6 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 0.6 MMBbl and 0.5 MMBbl respectively. The most important number to keep an eye on, total petroleum inventories, increased 1.0 MMBbl. US production continued to build with an increase of 52 MBbl/d last week. Imports were down 374 MBbl/d to an average of 7.9 MMBbl/d versus the previous week.

Earlier in the week, WTI found some support as an unexpected outage in the North Sea (Buzzard oil field) took 180 MBbl/d offline as repair work is being completed. In Libya, however, the El Sharara field has restarted and is back to producing 200 MBbl/d.

Several OPEC and non-OPEC members have expressed interest in extending the quotas beyond the previously agreed upon six months. Reuters data last week showed higher levels of compliance in March than in February. With reports from OPEC and IEA coming later in the month (April 12th and 13th respectively) the market will get an update on current fundamental balance and compliance levels. In the longer term, for sustained higher prices, the OPEC cuts will need to be extended with continued compliance, and demand growth will need to reach the IEA’s 1.34 MMBbl/d expectation. Without these events occurring concurrently, there is little chance of the high inventories normalizing to pre-price crash levels.

According to the latest report from the CFTC, the speculative short trade was caught short and forced to cover 19,069 contracts, which likely added to the gains in the market price. Price action last week had WTI testing the highs ($52.92/Bbl) on March 8th (the day the recent price collapse commenced). The gains on Friday were largely influenced by the events in the Middle East and the strikes on Syria. The trade has now effectively defined the new range for prices at $47-$53/Bbl. Should prices continue to advance early next week, expect additional selling from hedging activities by producers. The gains late last week have left prices approaching over bought levels, so slight corrections should be expected.

NATURAL GAS

Natural gas dry production and Canadian imports were unchanged week-on-week. Production continues to run just below 70 Bcf/d and the market is having to digest the pipeline and maintenance issues of the shoulder season. While there have been slight increases in the rig count, gas production has not increased or has only offset the declines of existing production.

On the demand side, last week’s temperatures were very similar to the seasonal pattern of the week before with Res/com demand dropping 2.21 Bcf/d on average over the week. Power demand increased 800 MMcf/d with demand from the nuclear re-fueling/maintenance likely supporting some of the gains. LNG exports climbed 510 MMcf/d rising back above 2 Bcf/d. Drillinginfo continues to expect the LNG exports to remain volatile in the coming weeks and may fluctuate between 1 and 3 Bcf/d as Cheniere starts commissioning train 4 at Sabine Pass.

The storage report last week came in a little below expectations with an injection of 2 Bcf. This week’s expectation should be a slightly higher with a build expected between 10-15 Bcf.

Looking ahead to the summer and the ending inventories next fall, Drillinginfo modeled various scenarios addressing 1) the currently weak dry gas production (2 Bcf/d below last year’s levels), 2) lower power burn demand than last year due to less fuel switching and more normal temperatures and 3) substantial growth in LNG and Mexico exports (already in the current market). Our base case scenario forecasts 3.5 Tcf for October ending inventories assuming prices rise over $3.50 MMBtu this summer. For months now, Drillinginfo has been calling for prices to rise in order to facilitate production increasing above 72 Bcf/d, which is necessary to start next winter with inventories at or above 3.5 Tcf.

Price action continues to maintain a positive bias with another weekly gain on the close and a higher high during the week. Last week started with an orderly retracement down to well defined support around $3.10 before reversing higher during the remainder of the week. Since March 30th through last Thursday (Friday’s data not available yet) open interest gained just over 4%, or nearly 60,000 contracts, as volume and prices rose. These three elements (higher price, increased volume and open interest) are the cornerstones for further advances. According to the CFTC release (positions as of Apr 4th) a portion of the gains came from speculators (Managed Money) increasing their long positions by 21,992 contracts (nearly 8%). While the May prompt contract has now tested the near term resistance at $3.34-$3.36 it may need some time to consolidate gains of the last four weeks trading in a range environment between $3.15-$3.35.

NGLs

Propane

Inventories decreased 1.21 MMBbl in last week’s EIA report, the largest withdrawal for this time of year seen in history. This week’s late season withdrawal is attributed to exports remaining at high levels. Propane stocks now sit at 41.6 MMBbl, roughly 23.3 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 33.0 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 increased week-over-week due to a bullish signal from the EIA propane stock report, hitting a high last seen mid-March. Drillinginfo expects to see an injection over the next few weeks, which will send a bearish signal to the market, putting downward pressure on prices.

Butanes/Natural Gasoline

Natural gasoline is the only NGL that experienced a price decline this week. The spread between natural gasoline and LPG was so wide that some market participants switched to LPG as cheaper feedstock. Conversely, LPG experienced a price gain.