The Week Ahead For Crude Oil, Gas and NGLs Markets

April 24, 2017

CRUDE OIL

US crude oil inventories decreased by 1.0 MMBbl, according to the weekly EIA report. Inventories of gasoline increased by 1.5 MMBbl, while distillates decreased by 2.0 MMBbl. The most important number to keep an eye on, total petroleum inventories, decreased by 1.7 MMBbl. US production continued to build with an increase of 17 MBbl/d last week. Imports declined by 68 MBbl/d to an average of 7.8 MMBbl/d versus the previous week.

WTI is struggling to find near term direction given conflicting influences. While the outages from Libya and North Sea have provided support, uncertainty around the extension of quotas by OPEC and non-OPEC producers continues to linger. In addition, stubbornly high inventories and growing US rig count contributed bearish bias to the market late in the week. In further bearish indicators, the EIA’s latest productivity report showed shale output in May is likely to post the largest monthly increase in more than two years. Without an extension of the quotas with continued high compliance, there is little or no chance to bring the inventories back to normal levels, especially with the IEA’s recent downward revision of demand expectations. There can be no sustainable rise in crude oil prices without a correction of inventories back to normal levels from prior to the price crash.

The CFTC report released last week showed that short covering slowed significantly as the managed money sector reduced short positions by only 3,518 contracts. It also showed the speculative length from the sector increased 12,566 contracts. As discussed last week, when the shorts finished covering their positions, price gains were mitigated. While some speculation for higher prices came into the market early in the week, the declines late in the week were from a combination of the bearish news and a market that needs to retrace and consolidate the recent gains. The expiration of the May contract was quiet but the June contract took over as prompt and extended the declines, closing the week under $50/Bbl and leaving a price negative bias. Expect additional declines early this week as the market will need to test intermediate support provided by the 200-day moving average, currently at $48.87/Bbl.

NATURAL GAS

Natural gas dry production declined last week by 390 MMcf/d and it’s now below last 2016 April levels by 2.76 Bcf/d. These declines have occurred regardless of the gains in the rig count during the first weeks of 2017.

On the demand side, shoulder season temperatures caused Res/Com demand to drop 2.85 Bcf/d week-on-week, while power demand offset those losses with a gain of 2.06 Bcf/d. LNG exports increased by 210 MMcf/d recovering the previous week’s loss. Expect LNG exports to average around the 2 Bcf/d as Cheniere continues the process of commissioning Train 4. Mexico exports dropped 830 MMcf/d as pipeline maintenance continues. The Mexico exports are now down over 1 Bcf/d from the averages prior to the maintenance, which is approximately 7 Bcf/week in additional injections. This maintenance will end in the coming weeks.

The storage report last week came in a little above expectations with an injection of 54 Bcf.

For months now, Drillinginfo has been calling for prices to rise in order to facilitate production to climb back above 72 Bcf/d. This level of production is necessary for storage to start next winter at or above 3.6 Tcf.
Price action on Friday turned to a more negative bias as prices closed below the lows of the last two weeks on a sudden burst of selling (13.6% of the day’s volume in the May contract) in ten minutes. While still considered a consolidation phase (prices remain within the expiration range of the April contract) expect additional weakness as trade opens this week. Little change in positions was reported in the latest CFTC release (positions as of April 18th) as the speculative Managed Money sector remains long but is offset by the short position of the “Other Reportables” sector, which also contains a speculative component.

NGLs

Propane

Inventories decreased 0.72 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 39.6 MMBbl, roughly 29.3 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 34.2 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.

Despite the late season withdrawal, propane prices dropped 8% week over week. The fall in price is due to crude oil prices dropping about $3.50/bbl week over week. 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 further.

Butanes

Normal butane and isobutane prices dropped 9% and 5%, respectively, week over week, placing normal butane below isobutane. This is the first time since January that prices have fallen in line with the normal stack.