• US crude oil inventories decreased by 7.2 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates decreased by 1.0 MMBbl and 1.9 MMBbl respectively. Total petroleum inventories posted a significant decrease of 9.5 MMBbl. Lower 48 production increased 35 MBbl/d, although total US production (including Alaska) was down 19 MBbl/d. Imports increased by 48 MBbl/d to an average of 8.0 MMBbl/d versus the previous week.
• The inventory release was bullish as the large withdrawal of crude and total petroleum inventories provided additional strength to prices that had started increasing earlier in the week. Earlier in the week, prices were buoyed by news from the OPEC meeting on July 24th. At the meeting, Nigeria agreed to cap output at 1.8 MMBbl/d even though they were originally exempt from cuts. Additionally, OPEC called on several members to increase compliance levels and Saudi Arabia said they plan to further decrease exports by ~1 MMBbl/d. These bullish elements are starting to provide the market a degree of comfort with quota compliance. Although, some remain dubious regarding OPEC production levels because Libya is still exempt from quotas and Iran and Iraq have a spotty track record with compliance. Meanwhile, US production continues its increasing trajectory. Prices at or above $50/Bbl will just provide the opportunity for US producers to hedge additional production further out. This hedging activity should keep sustained price runs capped. The other key element that Drillinginfo and the market are watching is confirmation of global demand growth (per the IEA projections).
• The early bullish price action last week was driven by a substantive reduction of the managed money shorts, covering 28,854 contracts by Tuesday. Interestingly though, the speculative long money managers reduced their position by 1,335 contracts. With the supportive inventory data release, expect the money managers’ long position to increase in this week’s release.
• The bullish run last week left prices at their highest weekly close since last May when prices broke below $51/Bbl. The one week gain was the highest of this year. It has also left momentum indicators approaching extreme over bought levels. Much of the gains in the last two weeks have occurred due to short covering, which is not a good sign for a healthy extension of the gains over time. However, last week’s gains also came with an increase in volume, which could be supportive to additional gains. This rising volume pattern must be confirmed over the coming weeks. While last week’s gains may continue early this week, selling around $50/Bbl will place a near term cap to this price run.
• Recent price action has now expanded the range for WTI prices. The midterm low will likely be $42/Bbl (June and November 2016 low). Trade in the coming weeks will likely confirm the top of the new range ($50-$51/Bbl) and has redefined the low side of the range to $44/Bbl. As previously written, Drillinginfo has been expecting volatile trade and this will continue as the market gains confidence with regards to the pace of inventory normalization. The potential for tests of $39/Bbl has become remote and Drillinginfo expects the primary range in the mid- to high-$40/Bbl to hold the near-term trade.
• Natural gas dry production increased this week by 140 MMcf/d on average, bringing the average to 72.4 Bcf/d, the highest weekly average of 2017. It will be important for production to continue increasing through the remaining summer months (assuming average power demand) for storage to reach and end-of-season inventory level over 3.7 Tcf.
• On the demand side, temperatures declined last week which brought power demand down 1.02 Bcf/d, while Res/Com increased 340 MMcf/d on the week. Mexico and LNG exports both gained last week, rising 170 MMcf/d and 120 MMcf/d, respectively. Total supply fell by 480 MMcf/d while total demand declined 480 MMcf/d.
• The storage report last week came in below market expectations with an injection of 17 Bcf. This had an immediate upward lift to prices during the expiration process. Look for this week’s injections to be very close to last week’s injections, however, with some of the changes in the forecast for the upcoming week to cooler temperatures, the storage report in the following week will likely eclipse the 2016 injection levels, more towards the 5-year average.
• The price action last week was contained within the recent range ($2.90-$3.00) and the volatility, as measured by the weekly average true range (ATR) is falling to levels not seen since Aug ’15, confirming the complacency in the market. According to the CFTC report (July 25th), the price action early in the week (including the previous week) during a test of support occurred with an increase of the Managed Money participants short position (11,164 contracts) and a reduction in the long positions of 5,721 contracts. Expect the short positions to increase in the coming week as prices edge downward expanding the range in small steps.
• Price history shows us that rarely does the weakness associated with Q3 low occur in early July so additional declines may break below the July low ($2.832). That said, there are several areas of support, from last week’s low down to around $2.80-$2.77 that should provide support opportunities. The additional short positions by the speculative community, will eventually provide the fuel for prices to rally significantly in the coming months. The key is how low does the upcoming decline take prices.
• Inventories increased 0.2 MMBbl in last week’s EIA report. The relatively small injection was a result of relatively flat exports (only increasing 4% compared to a decrease of 19% seen the week before). Propane stocks now sit at 65.9 MMBbl, roughly 23.7 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 58.4 MMBbl for this time of year prior to 2015 (before the crude price crash).
• Propane, butanes, and natural gasoline prices made significant gains due to crude oil price gains. Propane and the butanes all saw gains of 11% while natural gasoline saw an increase of 8% week-on-week. Crude prices increasing by 9% week-on-week was the main driver for these gains and will continue to drive C3+ prices.
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