• US crude oil inventories decreased by 4.4 MMBbl, according to the weekly EIA report. Inventories of gasoline decreased by 0.8 MMBbl and distillates decreased by 0.5 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a 3.5 MMBbl decline. US production increased by 15 MBbl/d last week. Imports declined by 296 MBbl/d to an average of 8.3 MMBbl/d versus the previous week.
• The inventory release was bullish given the crude oil and total petroleum inventories drawdown. On May 25th, OPEC’s agreement to extend the production cuts to normalize inventories provided additional bullish sentiment. In order to normalize inventories, full compliance from OPEC members during the extended quota period as well as expected demand growth (1.33 MMBbl/d) must materialize.
• The US is now the swing producer. The market confirmed this as WTI prices declined even after the OPEC quota extension, ending the day of the meeting down $2.46/Bbl. The market is aware that should prices rise too quickly, the US producer will hedge future production. Another risk to rising prices is the potential of growth from Libya and Nigeria, not part of the current production quotas. Due to these bearish elements to the trade, the market is setting a lid on large price gains.
• The most recent CFTC report showed a significant reduction of short positions by the managed money sector (63,125 contracts), since analysts largely expected the extension of the quotas. With prices heading sharply lower on Thursday, expect a significant reduction of the speculative length in the upcoming weekly report.
• WTI performed a weekly bearish reversal after not holding on to the higher high and declining on Thursday. The impact of the reversal was diminished with a solid gain on Friday, closing just above both the 200-day and 50-day moving averages. These two closely watched averages have now converged around the $49.55/Bbl. Should prices hold that support, then the recent range $49.00-$52.00/Bbl, should continue to hold. Should prices break and close below this level (especially fo the week), prices may be headed for additional declines down to $47.00/Bbl. Longer term, the market should confirm support and resistance provided by the outer boundaries of the range established during the spring at $44.00-$53.00/Bbl.
• Natural gas dry production gains observed this month were partially reversed this week with a posted 50 MMcf/d decline. The decline is notable, as the earlier gains had indicated that producers were expanding their rig counts based on earlier hedges from the price highs observed last fall and winter. It also brings into question whether the gains made in May will be extended through the coming months, which will be required for ending inventories in Oct to be above 3.7 Tcf.
• On the demand side, with temperatures returning to more seasonal levels (mild) and below, Res/com demand was lower by 290 MMcf/d, and power demand fell by 1.23 Bcf/d. Mexican exports were flat, while LNG exports were slightly lower by 350MMcf/d to the previous week. LNG exports will continue to be fluctuate between 1.5 Bcf/d and 2.3 Bcf/d as terminal 4 is being commissioned.
• The storage report last week came in above most expectations with an injection of 75 Bcf. While it was above last year’s injection, the build was below the 5-year average. Expectations for the upcoming week are around 72 Bcf, which is also lower than the 5-year average. Since 2011, the injections of May represent just under 20% of the total injections of the injection season. Using the 20% calculation, May’s injection of approximately 331 Bcf infers total injection this season of 1,655 Bcf. This would leave ending inventories at 3.7 Tcf. Since 2011, there has only been one year with ending inventories that low and it was 2014, when the ending inventory was 3.611 Tcf. The average ending inventory since 2011 is 3.875 Tcf.
• Prices during the expiration of the June contract showed weakness until the last day when price reversed higher and expired at $3.236. There is clearly a struggle in the price action with some traders working around the weather forecast (demand expectations) and others working from a supply perspective. As mentioned in last week’s Weekly Update the recent spring range for prices has maintained support around $3.15-$3.17 and trade last month had a higher high at $3.431, which confirms it as the high side of the range for now.
• The CFTC data release (May 23 rd) showed a small increase in the speculative Money Manager’s short position as they increased positions by 7,498 contracts. What was more interesting is the increase of hedging by the Producer Shorts of 35,472 contracts which explains some of the dramatic declines between May 17th and the 23rd.
• Targa Resources announced a pipeline to carry NGLs from the Permian Basin and Targa’s North Texas Pipeline to Mont Belvieu. The new pipeline, Grand Prix, will have an initial capacity of 300 Mbd, expandable to 550 Mbd. Grand Prix is backed by Targa’s and other third party commitments and is due to come online the second quarter of 2019.
• Inventories increased 1.5 MMBbl in last week’s EIA report. A 33% drop in exports, along with the highest production seen in history contributed to this week’s propane injection. Propane stocks now sit at 43.7 MMBbl, roughly 30.4 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 41.8 MMBbl for this time of year prior to 2015 (before the crude price crash).
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