• US crude oil inventories decreased by 2.5 MMBbl, according to the weekly EIA report. Inventories of gasoline were also down by .6 MMBbl while distillates showed a build of 1.1MMBbl. Total petroleum inventories, decreased by 1.9 MMBbl. US production was estimated to be up 20 MBbl/d last week. Imports decreased by 149 MBbl/d to an average of 7.9 MMBbl/d versus the previous week.
• The inventory report brought temporary strength to prices that had responded bearishly to news of rising Libyan and Nigeria production (50 MBbl/d and 62 MBb/d, respectively), and recent data from the IEA showing an implied deficit for 2Q2017 of 670 MBbl/d (half of the implied deficit from last month’s report).
• As discussed here previously, for sustained higher prices the market must have 1) compliance to the production quotas (especially Russia, Saudi Arabia) and 2) confirmation of the demand growth projected by IEA.
• The price action in WTI last week can only be described as distinctly bearish. While the inventory data gave some stability to the market, prices finished the week at the lowest weekly close since the week of Sept 12, 2016 ($43.03). The declines during the week tested the lows from trade action in Nov and Sept ’16. For now, those lows have held ($42.20) but price action has left the market momentum, bearish, and entering the oversold level status. Much of the selling was explained by the Commitment of Traders data (dated June 20th) which had the Managed Money short position (speculative in nature) increasing 40,668 contracts and further liquidation of length from the Managed Money long position of 17,210 contracts. Considering that announced selling was before Wednesday, it should be expected to have additional liquidation and shorts expansion in next week’s data. While the declines may continue early in the week, the amount of selling has increased the likelihood of a short covering rally. Crude is currently trading 2 standard deviations below the 20-week simple moving average at $43.31. History of crude tells us that prices won’t stay that extended for long, before a brief rally to punish the late shorts or a brief period of upward consolidation to relax the momentum indicators. A rally to $45 would be likely with the possible extension to $47. With the recent declines, Drillinginfo, is expecting WTI to enter a more volatile period (3-4 months) for trade with the potential test of Aug ’16 lows ($39) and violent short covering rallies. The primary range for WTI remains between $43-$47 for the near term.
• Natural gas dry production declined by 270 MMcf/d, primarily the result of declines associated from Tropical Storm Cindy. Even without this short term drop from the storm, production data is not showing the same growth this month that was witnessed in May. The market will need additional production (especially in the Gulf region) in order for storage inventories to reach 3.7 Tcf by October’s end.
• On the demand side, power demand was nearly flat to the previous week increasing a modest 40 MMcf/d, but remained strong at 30 Bcf/d levels. Res/Com surprisingly rose 340 MMcf/d with the seasonal temperatures. Mexico exports were flat on the week, but LNG exports declined 610 MMcf/d week-on-week.
• The storage report last week came in just above market expectations with an injection of 61 Bcf. Weather forecasts have cooler temperatures compared to last year so injections should be above 2016 but still lagging the 5 year average.
• The liquidation of long positions continued this week as the CFTC report (June 20) confirmed that the Managed Money long position was reduced by 25,541 contracts and the speculative short position increased 1,116 contracts. The market is likely ending the liquidation process as the speculative long position is now at only 18.3% of total open interest, below the percentage levels recorded and the lows in February. The market now has a distinct short position and while the bias is clearly neutral/negative, there is now potential for a series of short covering rallies. Should prices garner enough buying to break the significant resistance from the 200-day ($3.112 and rising slowly) and/or the 20-week moving average ($3.08 and declining) the late coming shorts may provide fodder for additional gains. Should the declines continue, signaling that the summer demand cycle will not have an impact on ending inventories, last week’s low down to $2.70 should contain the near-term range. With liquidation less of an impact now, expect prices to follow upcoming weather forecasts for the near future.
• Inventories increased 1.8 MMBbl in last week’s EIA report. Following 3 consecutive weeks of strong builds, the build seen last week is more in-line with the five-year average. Propane stocks now sit at 54.5 MMBbl, roughly 25.0 MMBbl lower than this time last year but still slightly above the five-year average of 49.5 MMBbl prior to 2015 (before the crude price crash).
• All NGLs saw price drops week-over-week. The largest drop being ethane at 6%, due to a drop seen in natural gas prices. All prices are lower than what was observed last year except for propane, which has increased 7% year-on-year on higher overall demand driven by exports. Natural gasoline has dropped the most year over year at 8% due to its strong link to crude oil prices.
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