• US crude oil inventories decreased by 8.9 MMBbl, according to the weekly EIA report. Inventories of gasoline were unchanged while distillates increased by 0.7 MMBbl. Total petroleum inventories posted a sizeable decline of 7.3 MMBbl. US production increased 79 MBbl/d. Imports increased by 364 MBbl/d to an average of 8.1 MMBbl/d versus the previous week.
• The positive price movement generated by declines in oil inventories and the decline in total petroleum inventories could not offset the declines WTI experienced early in the week. The negative price bias early in the week was partially driven by the news that China’s refineries operated at the lowest daily levels since September. Given that it is China’s peak driving season, low refinery run levels brought about concerns about Chinese demand. Adding to the negative bias was the news that Royal Dutch Shell had lifted the force majeure on Bonny Light crude exports that had been in place since the middle of July. Nigeria agreed to limit output to 1.8 MMBbl/day and are rapidly reaching that level. The only bullish news in the market was Libya’s announcement that the Zueitina terminal had ceased loading cargos due to worker protests. While the market may hope that this announcement will have a significant impact on OPEC production, the disruption will likely be temporary and have a minimal impact on longer term prices. Libya has been ramping up production and has reiterated their plans to increase production further.
• The negative news weighed on prices during the week, as prices fell from the high of $49.16/Bbl on Monday and tested the 50-day moving average at $46.51/Bbl on Thursday. From that test of a widely watched average, prices increased $1.42/Bbl on Friday, to close the week at $48.51/Bbl.
• The rally on Friday may have been largely influenced by the upcoming September contract expiration on Monday (with traders squaring positions in advance), but the geopolitical tensions surrounding Venezuelan crude shipments and the status of the Iranian stance on the nuclear agreements may have played a role. The trade has now confirmed the well-defined resistance above $50/Bbl and the bounce off of the 50-day average implies an area for near-term support in the coming week at $46.51/Bbl. Drillinginfo has been expecting volatile trade as the market waits for data regarding the pace of inventory normalization. A lack of positive news will likely send prices lower in the coming week, following contract expiration. Expect the declines to retest the 50-day average, which will put prices back into Drillinginfo’s primary range near $45/Bbl.
• Natural gas dry production fell this week by 280 MMcf/d on average, falling back below 73 Bcf/d at 72.88 Bcf/d. Drillinginfo continues to expect significant gains in production during the fourth quarter as pipeline takeaway capacity becomes available out of the Northeast.
• On the demand side, temperatures rebounded last week and power demand returned, gaining 1.25 Bcf/d. Res/Com demand also increase 40 MMcf/d on the week. Mexico exports decreased 150 MMcf/d and LNG exports declined 30 MMcf/d. Total supply lost 370 MMcf/d while total demand increased 1.04 Bcf/d.
• The storage report last week came in above expectations but the EIA made some adjustments to previous weeks. The reported EIA injection was 53 Bcf, but without the reclassifications from working gas to base gas inventories, the build was 43 Bcf over the week before. Next week’s injection is expected to be higher than last year and below the 5-year average, but the week after is currently expected to be below last year and the 5-year average.
• The price action last week reversed off the high on Monday and closed the week near the lows of the week. While the storage release initially took prices down to the week’s low, traders realized the adjustment in total inventories and prices rallied back only to give up the gains on Friday.
• As discussed previously, the early month declines in August, may have possibly established the annual Q3 lows, but not being able to extend prices significantly higher last week opens the slight possibility of a test of the early August lows ($2.753) this week prior to expiration. The trend, since last December, has shown a rally during the expiration process (primarily on options expiration or contract expiration) so the low test will likely occur this week.
• Inventories increased 1.6 MMBbl in last week’s EIA report. Propane stocks now sit at 69.3 MMBbl, roughly 24.5 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 62.3 MMBbl for this time of year prior to 2015 (before the crude price crash).
• Normal butane and isobutane prices increased the most this week with 7% and 6% gains, respectively. Butane prices are now at the highest level seen since February, a time when prices were high due to winter gasoline blending demand. Drillinginfo expects propane prices to continue the upward trend as the shoulder season rolls into winter, as long as crude prices are flat to increasing.
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