• US crude oil inventories increased by 4.6 MMBbl, according to the weekly EIA report. Inventories of both gasoline and distillates were both down 2.1 MMBbl and 5.7 MMBbl, respectively. The total petroleum inventories posted a large decrease of 6.6 MMBbl. US production continued to recover from the impact of Hurricane Harvey and increased 157 MBbl/d. Imports were up 888 MBbl/d to an average of 7.4 MMBbl/d versus the previous week.
• The IEA monthly report showed that OPEC supply declined 210 MBbl/d in August. Additionally, the IEA revised demand growth to 1.6 MMBbl/d from 1.5 MMBbl/d. The market was closely watching the September 22nd OPEC committee meeting in Vienna for any indication that OPEC could extend production cuts beyond the current March 2018 expiration, but no decision was made and the effort continues. It is being spearheaded by Saudi Arabia and quota carrying member like Venezuela and Iraq have remained open to the extension. Quota carrying members are now looking at bringing about potential quotas on Nigeria and Libya. Since March, Nigeria and Libya have increased production by 605 MBbl/d. These gains have offset more than half of the 1.2 MMBbl/d that the 11 quota carrying members pledged. This has mitigated the ability of the market to normalize inventories in a timely manner.
• Price action reflected the optimism surrounding the OPEC meeting and supportive fundamental news, closing the week at the highest level since May. While the action was positive during the week, prices could not garner the additional strength to extend the rally as the November contract took over as prompt. Prices have been in a mini-range between $48-$51/Bbl for the last couple of weeks. Market participants are expecting higher prices in the near-term, however, as the latest CFTC release showed a bullish shift in managed money with long participants adding 27,204 contracts while the short positions covered 27,177 contracts.
• Longer term, the market is looking for signs of inventory normalization before it can sustainably support higher prices. With the recent run in prices, the extension of the cuts beyond March 2018 is largely priced in, leaving any long term upside gains limited. Currently, the high end of the range is the April and May highs of $52-$53.76/Bbl. However, any negative news regarding compliance or an extension of the cuts will lead to declines, especially given the substantive length being held by the speculative long component. The near-term downside potential is at the level established this summer around $46/Bbl.
• Should prices maintain strength in the near term, US producers will likely add more hedges (as they did last winter) limiting extensive price runs. This will also offset a portion of the supply impact desired by OPEC. Drillinginfo expects volatile trade to continue within the recent range between $45-$53/Bbl in the coming weeks, as the market looks for long-term signs of inventory normalization.
• Natural gas dry production increased this week by 660 MMcf/d on average, setting another record this week at 74.5 Bcf/d. Most of the gains came from the Gulf of Mexico and Texas as production returned from the storm outages and new production continues to come online (Permian). With demand coming back, Canadian imports showed an increase of 550 MMcf/d. During the upcoming shoulder season, gains in Northeast production are expected to push back Canadian imports until higher levels of demand start to show in November.
• On the demand side, power demand was significantly higher (returning demand after Irma) rising 6.45 Bcf/d on average for the week. With hotter temperatures coming this week in the Northeast, expect some gains in demand again. LNG exports rebounded strong with an increase of 280 MMcf/d on average and are now at a record weekly average of 2.8 Bcf/d. Mexico exports rebounded, increasing 120 MMcf/d to 4.1 Bcf/d. Total supply rose 1.20 Bcf/d, while total demand increased 7.82 Bcf/d, which contributed to the strength in prices early last week.
• The storage report last week came in well above market expectations with an injection of 97 Bcf. Price action had started to correct downward before the release only to accelerate after the number was released. Look for this week’s injections to be well below the 5-year average but above 2016. The next two weeks, based on current weather forecasts, are expected to be below both the 5-year and in-line with 2016 injections.
• The price action last week had a distinctly bullish bias as the run broke well-defined resistance at the 200-day moving average ($3.102) and then the highs from June and July at $3.122 and $3.114, respectively. From those highs, prices reversed sharply after the release of the storage data on Thursday. According to the CFTC report (September 19th), there was significant buying during the period between Sept 13-19 as Managed Money long trade positions increased by 18,642 contracts and the Managed Money participants short position decreased 32,306 contracts. Due to the declines on Thursday, expect the long position to be reduced in the upcoming report.
• Natural gas prices are entering expiration period and with the close on Friday, expect additional probes lower. These declines will strengthen the probability of a re-occurring theme of expirations during 2017. In eight of the last nine expirations, prices set a low between the 20th and 25th of the month (Sept was the exception on the 28th) only to be followed with a rally, culminating with a high on the day of expiration or the day before.
• Inventories decreased 1.4 MMBbl in last week’s EIA report, the first withdrawal of the season. The withdrawal is premature compared to what has been observed in the past, where withdrawals are typically seen in late October or early November. The reason for the withdrawal is due to exports increasing 5-fold with the attempt to regain normalcy after Hurricane Harvey. Propane stocks now sit at 80.8 MMBbl, roughly 20.9 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 67.0 MMBbl for this time of year prior to 2015 (before the crude price crash).
• Propane-plus prices all saw price gains with the increase in crude prices. Propane saw the largest gain at over 6% due to an increase in demand from exports increasing to the highest levels seen since May. Ethane also saw price gains despite a drop in natural gas prices, widening the frac spread even further. Mont Belvieu ethane to Henry Hub moved about $0.05 ($1.03 to $1.08) week over week, but is up from -$0.003 observed a year ago.