The Week Ahead For Crude Oil, Gas and NGLs Markets

April 17, 2017

CRUDE OIL

US crude oil inventories decreased by 2.2 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 3.0 MMBbl and 2.2 MMBbl respectively. The most important number to keep an eye on, total petroleum inventories, decreased by 4.7 MMBbl. US production continued to build with an increase of 36 MBbl/d last week. Imports were higher by 28 MBbl/d to an average of 7.9 MMBbl/d versus the previous week.
WTI continued to find support from Libya and North Sea outages as well as Saudi Arabia’s reported willingness to extend quotas for another six months. WTI also found some support from Middle East geopolitics. Though not directly affecting output, these regional uncertainties lead to additional short covering by some participants. The CFTC report confirmed short covering by the managed money sector, which were forced to cover 38,647 contracts as prices rose. Markets rising on short covering are not destined for longer term gains. Sustainable gains for prices need to be met with open interest gains as the price rise.

In OPEC’s monthly report, according to the OPEC Secretariat’s secondary sources, although compliance was lower in March than in February, compliance still met 100% of quota. The lower compliance levels were largely due to higher production by Saudi Arabia, who had previously been subsidizing other quota carrying members’ overproduction. The IEA’s monthly report revised down demand expectations slightly, leading to bearish sentiment on the demand front.

The IEA also revised up US production growth expectations to 680 MBbl/d by YE2017 over YE2016, falling in line with Drillinginfo’s expectations from the guidance-based forecast. For longer term sustained prices, OPEC cuts will need to be extended with continued high compliance levels and demand will need to reach the IEA’s latest demand growth of 1.3 MMBbl/d. Without these events occurring concurrently, there is little chance of inventories normalizing in the balance of the year.

Price action last week had WTI breaking above the resistance from the highs ($52.92/Bbl) from March and established additional highs up to $53.76/Bbl before finding sellers. The new range for prices has been defined as $47.00-$53.76/Bbl but have now over-extended the gains causing the market to be over bought from a momentum indicator perspective. Drillinginfo believes that when the short covering action concludes, prices will need to retrace and consolidate back within the range, short of any additional disruptive geopolitical activity. Additional gains from short covering will provide the producing community an opportunity to resume hedging activities.

NATURAL GAS

Natural gas dry production was up slightly last week, 210 MMcf/d, as maintenance and pipeline issues started to get resolved. At 70.08 Bcf/d these levels are well below last year’s levels at the same time heading into the injection months. While the rig counts have been rising, there has been no gains on dry gas production volumes to date.

On the demand side, seasonal warming caused the Res/com demand to drop by 4.55 Bcf/d and power demand decreased by 990 MMcf/d on average versus the week prior. LNG exports dropped 220 MMcf/d staying just above 2 Bcf/d. Drillinginfo continues to expect the LNG exports to remain very volatile in the coming weeks and may fluctuate between 1 and 3 Bcf/d as Cheniere starts commissioning train 4 at Sabine Pass. Mexico exports dropped 380 MMcf/d as pipeline maintenance started and is expected to continue through the coming week.
The storage report last week came in a little above expectations with an injection of 10 Bcf. With the declines in Mexico exports, this week’s injection should be a healthy 50+Bcf.

Price action continues to maintain a positive bias with a higher weekly low, however, some bearish elements entered the market as prices failed to reach a higher weekly close for the second time in seven weeks. Few changes in positions were reported in the latest CFTC release (positions as of Apr 11th) as the market confirms this consolidation phase. For the past two weeks there is a pattern of early weakness in prices, testing the low end of the consolidation range, followed by a brief rally later in the trade week as support holds. Barring any significant changes in demand, this trend may continue this week.

NGLs

Ethane

Prices remained relatively flat week over week despite Ineos’ Chocolate Bayou restarting operations on April 12th after a month-long, unplanned outage.

Propane

Inventories decreased 1.22 MMBbl in last week’s EIA report, the first time a withdrawal has been seen in April since 2013 and 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 40.4 MMBbl, roughly 27.3 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 33.7 MMBbl for this time of year prior to 2015 (before the crude price crash). The high level of exports has pushed the first injection out further this year.

Propane prices made gains after the EIA released the propane stock report on Wednesday. The market has been anticipating its first injection over the last few weeks but the highest levels of exports seen in history has offset normal trends. If an injection materializes, then prices will weaken.

Butanes

Normal butane and isobutane rose 10% and 7% respectively week over week. Both products have been making gains over the past two weeks, reaching highs that were last seen in late February. The consistent gains are likely due to high exports.