• US crude oil inventories decreased by 1.5 MMBbl according to the weekly EIA report. Inventories of gasoline and distillates decreased by 2.5 MMBbl and 0.2 MMBbl respectively. The total petroleum inventories posted an increase of 1.1 MMBbl. US production increased 20 MBbl/d. Imports increased by 209 MBbl/d to an average of 8.3 MMBbl/d versus the previous week.
• Despite the declines in crude oil, gasoline, and distillate inventories, the overall build in total petroleum inventories had a negative impact on WTI prices initially. However, the high gasoline demand buoyed the market later in the day. Prices thiw week initially declined after a Reuters survey showed OPEC production had risen in July by 90 MBbl/d to 33 MMBbl/d due largely to increases from Libya (which remains exempt from quotas). Two elements may prove a short-term floor for prices: the steadfast eagerness of Saudi Arabia to make the cuts a success and the upcoming meeting between some OPEC and non-OPEC countries (August 7-8th) to discuss how the group can increase compliance to balance global inventories. As stated here for the last few weeks, without continued high compliance with quotas and the projected demand increases by the EIA, the potential for sustained higher prices is remote. With US production continuing its upward trajectory, long-term prices above $50/Bbl will just provide the US producers with the opportunity to hedge production further out, keeping a lid on price runs.
• The bullish price action from a week ago was driven by a substantial increase of the managed money long participants, buying 47,742 contracts or over a 10% gain in open interest. Should prices maintain the $50/Bbl level (one-year strip) watch the commercial shorts start to increase positions.
• The price action last week left prices well bid at the end of the week while the declines during the week took the momentum indicators below the extreme levels of the previous week. Increases in volume and open interest confirms that the recent price run has additional potential to it. Expectations associated with the meeting this week may bring additional gains taking prices to the $51-$52/Bbl area at which point prices will likely see selling by US producers.
• Recent price action has now expanded the range for prices and likely established a mid-term low of $42/Bbl (June and Nov 2016 low). Trade in the coming weeks will likely confirm the top of the new range at $51/Bbl and has redefined the low side of the range at $44/Bbl. Drillinginfo has been expecting this volatile trade and it should continue as the market seeks confirmation of inventory normalization. Drillinginfo expects the primary range around mid- to high-$40/Bbl to hold the near term trade as the market looks for confirmation of the discussed fundamental factors.
• Natural gas dry production increased this week by 50 MMcf/d on average, establishing some of the highest daily output levels in 2017 towards the end of the week at 73 Bcf/d. This trend will have to continue throughout the remaining injection season for to facilitate ending inventories over 3.7 Tcf by October’s end.
• Cooler temperatures last week brought power demand down 1.84 Bcf/d. Res/Com increased 480 MMcf/d on the week, Mexico exports got a boost last week climbing 460 MMcf/d while LNG exports declined 370 MMcf/d. Total supply gained by 320 MMcf/d while total demand declined 1.38 Bcf/d pressuring the cash price market.
• The storage report last week came in above market expectations with an injection of 20 Bcf. This broke the small rally and took prices down. The last two weeks have been the lowest injections of the season and now injections are expected to be higher than last year, but below the 5-year average for the next couple of weeks.
• The price action last week broke below the recent range ($2.90-$3.00) and broke below several support zones from the trend line. The volatility, as measured by the weekly average true range (ATR) rose a little from the previous week’s lows but remains in a very narrow range, continuing to confirm the complacency in the market. According to the CFTC report (August 1st), the price action early in the week (including part the previous week) during the test and failure of support occurred with an over 10% increase of the Managed Money participants short position (28,494 contracts) and an increase in the long positions of 10,277 contracts. The increase in the short position was expected with the price decline, the increase in speculative length is an interest change for price action heading into Q4.
• As discussed previously, rarely does the Q3 low occur in early July so these additional declines were expected. Now that the lows have been extended on short selling additions, there are areas of support that have held the price action for the last couple of declines in 2016 and Feb ’17 down to $2.54-$2.52. Perhaps, prices can reverse, off of the support from last week’s low down $2.77-$2.76, but there are several areas of resistance for any major trend reversal. Price action clearly has a negative bias and would expect continued probes lower. The additional short positions increases by the speculative community, will eventually provide the fuel for prices to rally significantly in the coming months. The key element, though, is how low does the current trend take prices.
• Inventories increased 1.7 MMBbl in last week’s EIA report. Propane stocks now sit at 67.6 MMBbl, roughly 22.3 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 60.1 MMBbl for this time of year prior to 2015 (before the crude price crash).
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