The Week Ahead For Crude Oil, Gas and NGLs Markets – 05/22/17

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CRUDE OIL

  • US crude oil inventories decreased by 1.8 MMBbl, according to the weekly EIA report. Inventories of gasoline decreased by 0.4 MMBbl and distillates decreased by 1.9 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 4.3 MMBbl. US production declined slightly this week by 9 MBbl/d for the first time in several weeks. However, the decline was from Alaska offsetting continued growth in the Lower 48. Imports increased by 970 MBbl/d to an average of 8.6 MMBbl/d versus the previous week.
  • The inventory release should be considered bearish with the gains in the total petroleum inventories. However, WTI finished the week higher on several announcements that hit the market during the week:
  • 1) A joint press conference on Monday from Saudi Arabia and Russia with their oil ministers agreeing to do “whatever it takes” to stabilize the market and reduce commercial oil inventories to their 5-year average levels.
    2) Other OPEC nations such as Kuwait, Iraq, Oman, and Venezuela supporting an extension of the current output cuts.
    3) IEA’s latest report showing signs of the oil market re-balancing and an implied 1.2 MMBbl/d deficit in the 2Q2017.

  • These press releases were bullish but there are still bearish elements to the trade.
  • 1) Expectations that the North Sea oil production will grow by 0.4 MMbbl/d in the next two years due to improving operational efficiencies.
    2) US production (Lower 48) continues to grow and the rig count continues to rise. US producers are the key swing player in WTI price action.
    Should prices continue to rise, operators will take advantage by hedging future growth, which will allow continued rig count and production growth.

  • The market faces a short-term conundrum. The production cuts must be extended with continued high compliance for there to be a chance of normalizing inventories levels. However, successful normalization will lead to higher prices and hedging by producers, ensuring additional crude supply. The market will have to establish a delicate balance between these two influences (expect a longer term range environment).
  • The CFTC report released last week (May 16th) provided little adjustment by the speculative community as longs and shorts offset each other. Prices performed a solid bullish reversal with gains on Monday, which held all week. With the solid gains, the bias has become positive and an extension of the gains can be expected early this week as the July contract (currently trading $0.34/Bbl over the June contract) takes over as prompt. Longer term, the market should expect prices to hit resistance as they rally to near term resistance at $52/Bbl. The last time prices rallied over these levels, US producers sold extensively, creating major resistance to sustained gains.
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    NATURAL GAS

  • Dry natural gas production increased again last week, showing gains of 180 MMcf/d. While some of the 1 Bcf/d gains from late April are explained by the return of production from maintenance projects, Drillinginfo estimates 500 MMcf/d comes from new production during the last month. Most of the new production comes from the Permian and Haynesville basins and offsets other basins’ declines. Some of this new production was the by-product of hedges when prices rallied in late 2016 and various rallies in 2017 (open interest in the commercial short position has gained from 180,314 contracts in early Oct 2016 to over 343,000 contract currently), however this growth will have to continue throughout the summer months to allow for 3.7 Tcf in storage by the end of Oct.
  • On the demand side, temperatures returned to more seasonal levels pushing res/com demand lower by 3.04 Bcf/d last week, but power demand offset some of this loss by increasing 2.52 Bcf/d. Mexico exports also gained 140 MMcf/d while LNG exports were basically flat at over 2.2 Bcf/d to the previous week.
  • The storage report last week came in above most expectations with an injection of 68 Bcf, which continues the trend of being below last year’s injections and well below the 5 year average. This trend of comparisons (below 2016 and 5-year average) is expected to continue for the next two weeks based upon the current forecasts. The Memorial Day injection in three weeks, may finally eclipse last year’s rate, although only slightly.
  • Rig count growth in certain basins during early 2017 is resulting in some incremental growth in production during May, but it is imperative for this to continue and the current month is currently showing a decline in total rig counts from the highs seen in March. Drillinginfo has been expecting higher prices in order to incentivize additional production growth. Associated gas production, a significant component of recent growth, will not be sufficient to sustain production levels necessary for ending inventories above 3.7 Tcf in October due to weakness in crude oil prices.
  • The trade had weakness in the early portion of last week only to find support and rally back by week’s end. While price action may continue higher off of last week’s close, it is important to remember that June gas historically (the last eight years and eleven of the last twelve years), trades the May high on or before May 19th. With expiration coming this week, expect these two extremes ($3.15 low and $3.431 high on May 12th) to hold the trade.
  • The CFTC data release (May 16th) showed a substantial gain in the speculative Money Manager’s length, as they increased positions by 24,557 contracts. This now represents 21.5% of total open interest and is second only to the Commercial short position (producers hedging) at 22%. While this group expects higher prices, it is important to remember that from a technical perspective if declines break through various key support levels, it will open a “flood gate” of liquidation and substantially lower prices. On the longer term, fundamentals will continue to drive prices.
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    NGLs-Propane

  • Inventories increased 0.6 MMBbl in last week’s EIA report. A propane injection took place due to the highest production seen in history, despite exports increasing 50% week over week and almost hitting the peak seen in history. Propane stocks now sit at 42.2 MMBbl, roughly 32.0 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 40.4 MMBbl for this time of year prior to 2015 (before the crude price crash).
  • Despite a stock build and highest propane production seen in history, prices rose almost 8% week over week. Exports rising by 424 Mbd last week along with lowest levels of inventory seen in May since the polar vertex contributed to the rise in price.
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