The Week Ahead For Crude Oil, Gas and NGLs Markets

May 8, 2017

CRUDE OIL

US crude oil inventories decreased by 0.9 MMBbl, according to the weekly EIA report. Inventories of gasoline increased by 0.2 MMBbl and distillates decreased by 0.6 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 1.3 MMBbl. US production continued to build with an increase of 28 MBbl/d last week. Imports declined by 648 MBbl/d to an average of 8.3 MMBbl/d versus the previous week.

WTI received additional negative news as Reuters survey showed lower compliance with quotas in April primarily due to higher Angolan and UAE production. Libya also looks to increase production as the rival factions in the conflict are nearing a political solution. The only positive news during the week was the announcement that Russia had met its 300 MBbl/d production quota a month ahead of schedule. OPEC’s decision regarding the quota extension will not be finalized until May 25th. The market will find any news of an extension supportive to prices. Without an extension of the quotas with continued high compliance, there is no chance of normalizing inventories, especially with the continued growth in US production.

The latest CFTC report showed some key changes in the WTI market sectors. The speculative length from the managed money sector continued the declines, losing an additional 19,179 contracts (6.8%) as prices declined early in the week. Concurrent with this selling was the increase of short positions by the managed money sector of 38,766 contracts (a 38% increase). That is the second consecutive report detailing the same behavior, confirming that traders are flipping books to a more bearish position. It is also important to remember that this report reflects trade action prior to the EIA inventory release and the significant declines of Thursday’s trade action. Expect additional large declines in the speculative length and increases in the speculative shorts in next week’s CFTC release.

Highlighted here last week was the expectation that prices would likely test support from March’s lows. The market “flip” in positions clearly provided the power of the declines to blow through those lows and extend all the way (during early morning Asian trade) to the late November lows established just prior to the OPEC quota announcement. These declines left the market extremely over sold and provided the source for Friday’s bounce back up, falling just short of the $47.00/Bbl level which had been support (and now is short term resistance). WTI price action has now expanded the range lower and brought the high end of the near term range down. Look for some consolidation in price action over the coming week with prices trading between the lows of November 2016 at $42.20/Bbl (which will find buyers) and the highs of last week ($50.22/Bbl), which should attract sellers.

NATURAL GAS

Natural gas dry production showed an increase last week of 170 MMcf/d, taking it back above the 70 Bcf/d level but remaining 2.2 Bcf/d below last year’s levels.

On the demand side, some late season cooling had res/com demand slightly higher by 290 MMcf/d and power demand rose 1.4 Bcf/d. LNG exports rose 560 MMcf/d and are now back to the record high levels seen in early April. Exports to Mexico gained 180 MMcf/d and now stand at levels not seen since early February.

The storage report last week came in above expectations with an injection of 67 Bcf. With current weather forecasts, the next two reports are likely to be below last year’s injection and the 5-year average.

Even though there has been rig count growth in certain basins during early 2017, the market has not seen an associated growth in dry gas production levels. Rig activity directed from the winter and spring crude price run, will not provide enough associated gas to take dry gas production above 72 Bcf/d. Drillinginfo has been expecting a run in gas prices to provide the additional incentive for this growth. If this past week’s significant decline in crude prices continues, it will exacerbate the issue for associated gas. Should gas prices reverse and decline to $3.00, this will drive power demand growth from coal-to-gas switching, which will also erode the likelihood of ending the injection season at a reasonable level. The only avenue for significant dry gas production growth is for continued gas price gains.

Price action last week provided another test of support around the 50 and 200-day moving averages in the June prompt contract; however the tests of support failed and brought a reversal with prices closing just below last week. The last five Monday’s have brought price declines, however, with the reversal on Friday and the neutral/positive bias to price action; expect the highs from April of $3.347 to be tested this week. The CFTC data release (May 2nd) showed a gain in the speculative Money Manager’s length as they increased positions by 17,389 contracts. While this number is a significant amount of length proportional to total open interest, it remains offset by a significant short position by the “Other Reportables”. It also indicates the groups’ aggregate activity of buying support on any declines.

NGLs

Propane

Inventories increased 16 MBbl in last week’s EIA report. Despite a 21% drop in exports week over week, the injection was relatively small. Propane stocks now sit at 39.7 MMBbl, roughly 32.2 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 36.9 MMBbl for this time of year prior to 2015 (before the crude price crash). Not only did exports push the first injection date out, injections have also been relatively small compared to those in previous years.

The small stock change signals that supply and demand are fairly balanced, which kept stock prices fairly flat this week despite the fall in crude oil prices.

Butanes

Normal butane and isobutane have fallen 6% and 5% respectively. Some of this is attributed to the drop in crude oil prices, but also due to the fact that as we approach summer, the demand for butane in gasoline blending subsides.