• US crude oil inventories decreased by 1.7 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates offset the declines by showing a build of 2.1 MMBbl and 0.3 MMBbl, respectively. Total petroleum inventories increased by 6.8 MMBbl. US production increased by 12 MBbl/d last week. Imports decreased by 316 MBbl/d to an average of 8.0 MMBbl/d versus the previous week.
• News supported prices early in the week as Saudi Arabia announced it was reducing exports to Asia by 300 MBbl/d in July. However, bearish sentiment set in as:
1. Worries regarding rising US production’s effects on the global balance set back in.
2. OPEC’s monthly report showed output rising 336 MBbl/d in May on the back of Iraqi, Libyan, and Nigerian growth.
3. Libya reasserted plans that it is targeting a further 170 MBbl/d of growth by the end of July.
4. IEA’s monthly report showed the implied deficit for 2Q2017 to be 670 MBbl/d (half of the implied deficit from last month’s report).
5. IEA counseled that “patience is required” for the inventories to normalize and pointed at the fact that the quotas are not having the immediate impact that the market was hopeful for.
6. Despite the draw in crude oil inventories, the rising total petroleum inventories number once more disappointed the market looking for signs of rebalancing.
• As discussed here previously, the market must have 1) continued compliance with the production quotas and 2) confirmation of the demand growth projected by IEA. Without these two elements occurring, there is little chance for the global market to normalize inventories and provide an environment for higher prices. Last week’s inventory gains continue to fall contrary to the expectations for seasonally declining inventories.
• The price action in WTI last week extended the bearish trade of the last three weeks by trading to another lower low with a lower high than the previous week. The market should find some support around $44/Bbl (the lows from last May at $43.76/Bbl and the May low of the July contract at $44.13/Bbl) and did so during Friday’s trade. This may be a brief test of the support as the CFTC data effective June 13th, showed an increase of 41,998 contracts by the speculative sector. These additions, as well as the late coming shorts from Wednesday through Friday and the soon-to-expire July contract, set up the potential for a short covering rally in the future, likely taking prices back to $47/Bbl. Drillinginfo continues to expect the price range of $45-$47/Bbl for the near term. Until world inventories start to decline, longer term price advances will be limited.
• Natural gas dry production declined slightly by 40 MMcf/d. Some of the declines were in the Northeast due to maintenance and recovered by the end of the week. To date, the production levels in June have not gained significantly, as they did in May, which begs the question of enough gains during the summer months to take inventories over 3.7 Tcf by October’s end.
• Heading into the first significant summer demand, power demand increased by 4.27 Bcf/d which was offset by a decline of 1.32 Bcf/d in Res/Com. Mexico exports were up 140 MMcf/d and the LNG exports declined slightly by 50 MMcf/d to the previous week.
• The storage report last week came in well below market expectations with an injection of 78 Bcf. Thursday’s storage report is expected in the low 60s, which is in-line with the 63 Bcf reported last year, but below the 5-year average of 82 Bcf.
• Price action reversed the early week declines on the surprising storage release, but could not garner enough buying to break the significant resistance from the 200-day and 20-week moving averages. The market seems undecided on summer demand expectations and not concerned on the lack of production growth needed to assure adequate supplies into the winter. The CFTC data release (June 13th) indicated another increase in selling from the speculative Money Manager’s short position adding 10,488 contracts and some additional liquidation of long positions, which decreased by 5,332 contracts. The speculative group has hit this market hard during the recent declines, yet the support just below $3.00 has been resilient. This price action clearly is consolidation as folks are waiting for indications of the next directional move. The new shorts are expecting price action to continue to break down (signaling that the summer demand cycle will not have an impact on ending inventories) and should test lower levels at $2.88 down to $2.70. Buyers are waiting for conclusive evidence that these declines (lower prices) will impact coal-to-gas switching and provide fodder for gains. Expect the range to continue near term, but forecast adjustments will have short term impacts on price moves like today’s decline as the market opened down 13 cents on cooler weather forecast.
• Inventories increased 2.4 MMBbl in last week’s EIA report. The two main drivers for another strong build are high production and low exports. Production has been in the 1.8 MMBbl/d range over the last 5 weeks, something never before seen in history. On the export side, we are currently hovering slightly lower than recent weeks (in the same range seen prior to Freeport LPG Export Facility coming online). Propane stocks now sit at 52.8 MMBbl, roughly 25.6 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 47.6 MMBbl for this time of year prior to 2015 (before the crude price crash).
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