The Week Ahead For Crude Oil, Gas and NGLs Markets

June 5, 2017

CRUDE OIL

US crude oil inventories decreased by 6.4 MMBbl, according to the weekly EIA report. Inventories of gasoline decreased by 2.9 MMBbl and distillates increased by 0.4 MMBbl. Total petroleum inventories continued their recent trend and decreased by 5.2 MMBbl. US production increased by 22 MBbl/d last week continuing the recent trend for the Lower 48. Imports declined by 309 MBbl/d to an average of 8.0 MMBbl/d versus the previous week.

The inventory release was interpreted as bullish for a short period of time after its release. Prices gave up the early gains Thursday and finished down on the day. While inventory reports may provide daily volatility, the longer-term trend of these reports and press releases from the IEA and OPEC must continue to confirm compliance with production quotas and the demand growth projected by the IEA. These two elements must occur simultaneously, otherwise there is little chance for the global market to normalize inventories and lead to sustained higher prices. Inventories in the US may provide some near-term relief as we head in to the summer driving season, but the continued growth in US production looms heavily over the inventory discussion.

WTI price action last week confirmed the lack of certainty for price direction in the near term. Early gains to start the short holiday week took prices over $50/Bbl. However, the rest of the week was met with daily pressure taking prices below $47/Bbl briefly, finishing the week well below the commonly watched 200-day and 50-day simple moving averages. Expect the range of last week’s action ($47-$50/Bbl) to continue in the coming week as it struggles for the next directional indicator. Beyond that near-term range, the full range for prices lays between $44-$53/Bbl. While volatility from press or inventory releases may provide the fodder for testing the full range, the high side will be met with US producer hedging and the low side will be met with support from refiners and speculators.

The range bound and indecisive crude market was confirmed by the latest CFTC report released last week, which showed a reduction of shorts by 10,144 contracts in the managed money sector and a slight increase (2,308) in contracts from the managed money bulls. What is more indicative for near-term prices from the release is the decline in total open interest. The decline in open interest for the WTI contract during May fell from the 2017 high of 2,337,124 contracts on May 16th to the May 30th level of 2,198,081 or 6%. It was even lower at the close on Friday and it would seem that the industry is confirming the consolidation phase for prices with a lack of “interest” carrying prices in either direction.

NATURAL GAS

Natural gas dry production gained 200 MMcf/d last week. The gains were led by two days of the week (over the Holiday) and since that time production has come down during the week to levels seen the week prior. Production in May did increase but the gains made in the early part of the month have now remained flat since. Production will have to expand greater than May’s gains over the coming summer months for ending inventories in October to be above 3.7 Tcf.

On the demand side, temperatures below normal last week (seasonally) caused demand from res/com to drop by 2.01 Bcf/d week-on-week. However, the market is now focused on heat and power demand as the summer took over and demand from power increased by 580 MMcf/d last week. Prices have lost nearly $0.40 per MMBtu in the last couple of weeks, which will now drive power demand growth as the competition with coal increases in certain markets. Mexico exports were down 280 MMcf/d while LNG exports were flat from the prior week. Cheniere’s Sabine Pass received authorization from FERC to allow Train 4 to commence so the market will see a gradual increase in LNG exports of about 600 MMcf/d over the coming months.

The storage report last week came in well above most expectations with an injection of 85 Bcf. This report, while very bearish, came with filings around the Holiday weekend and a revision usually follows the following week. On Thursday’s EIA release, a storage build in the high 90s Bcf is expected.

Prices during the week were decidedly bearish with the open below the 50-day moving average and then the close on Friday below the commonly watched 200-day moving average. Normally, this type of action is the hallmark of a change in perceptions by market participants, inferring that rallies will be sold versus the trend since March which have found buyers supporting any declines. The CFTC data release (May 30th) gave a detailed reason for the sudden downfall for prices as the speculative Money Manager’s short position increased by 28,255 contracts and the dangerously long position was liquidated with a decrease of 33,918 contracts (that equates to over 62,000 contracts selling or 4% of open interest). Considering the report only showed action through Tuesday, it is expected that actual volumes for the week, may have doubled as prices broke down further on Wednesday and Thursday with higher volume. Regardless, that clearly indicates a liquidation of speculative length and new shorts entering the market. The price action has now indicated that many participants are expecting prices to extend down to $2.70 and possibly $2.52 indicating that the summer is over and any power demand coming from the summer months will not offset the near term trend. Bullish participants should take comfort with the shorts coming in as these positions (especially the late comers) will become fodder for rallies when and if they are forced to cover.

NGLs

Ethane

Ethane exports reached a historical high in March, as reported by the EIA on Wednesday. Exports have been on the rise since Marcus Hook and Morgan’s Point came online in 2016. Despite the bearish export report, prices dropped 6% week over week due to falling gas prices.

Propane

Inventories increased 3.4 MMBbl in last week’s EIA report, the largest injection since May 2015. The reason for the strong build is due to exports being the lowest seen since September 2016 along with high production. Propane stocks now sit at 47.1 MMBbl, roughly 28.2 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 43.4 MMBbl for this time of year prior to 2015 (before the crude price crash).

Propane prices are down 8% week over week following the bearish stock report.

Normal Butane

The EIA reported that normal butane nearly doubled from February to March, marking the highest exports seen in history. However, normal butane prices still fell 6% week over week, following a similar trend to crude oil prices.