- US crude oil inventories decreased by 4.9 MMBbl, according to the weekly Energy Information Administration report. Gasoline and distillate inventories increased 4.1 and 4.3 MMBbl respectively. Total petroleum inventories posted a decrease of 5.5 MMBbl, with a significant amount of the decline generated by the draw in propane inventories due to cold weather. US production was also affected by the cold weather, with the report estimating declines to be 293 MMBbl/d. Imports decreased 308 MMBbl/d from the week prior to an average of 7.7 MMBbl/d.
- Prices established a new high at levels not seen since the price collapse in winter 2014. Much of the price strength can be associated with the OPEC-led production cut extension, the geopolitical unrest in the Middle East, anti-government protests in Iran, and Venezuelan production declines. In additional bullish news, the EIA raised its global demand growth estimate for 2018 by 100 MMBbl/d. However, in the same report, the EIA stated that US production could average 10.3 MMBbl/d in 2018, which would be the highest annual average production in US history. The current price run will support additional production and may facilitate faster growth than currently expected.
- Another element of the price run that has carried prices for the past two months has come from the speculative trade. The speculative trade continued last week, as the latest CFTC report showed the managed money long positions increased by 36,580 contracts and now represent 18.2% of total open interest. This type of behavior leaves the market extending into an over-bought situation. One of the analytical tools the market uses to help define this status is the Bollinger Study, as shown below. This chart measures continuous price action in WTI, and depicts two standard deviation bands (upper and lower in green) around the 20-week moving average. Since April 2015, there have been five periods when price runs have extended to the upper band (extreme). When prices get to this level of extension, one of two events will eventually occur: 1) price action consolidates, defining a new range with brief extensions lower testing new support (Periods 1, 2, 4, and 5) or 2) prices correct downward quickly (Period 3). While the market never knows how long the positive extended price action will last, a consistent theme among all the periods is that a significant correction to the run occurs eventually. The market has been trading closely around the upper second standard deviation level since September 2017, and is likely nearing a breaking point.
- Another analytic tool that the market follows is the weekly price action, with a momentum indicator called the Relative Strength Index (RSI). The chart below is the Weekly Continuation WTI with the RSI. Notice the peaks of the RSI at similar times to the periods discussed previously. None of the previous four periods had the elevated RSI level that occurred at the close of last week. It is also important to realize that prices do not stay elevated for very long when the momentum indicator is this overbought.
- Last week’s price gains were achieved with gains in volume and open interest, which is supportive of more gains as trade opens this week. Eventually, this run will succumb to selling pressure, but it may be headed to a blow-off topping process. Short of that event, expect a more consolidative trading pattern with a slightly negative bias in the coming weeks, as speculative traders start to re-evaluate the fundamental supply-and-demand balance. Drillinginfo continues to expect the trade to eventually return to the established mid-$50/Bbl level in the near term.
- Natural gas dry production regained most of the losses from the previous week’s freeze-offs, increasing 2.1 Bcf/d week-on-week. Dry production is not quite back to the record highs established in late December, but is regaining from the storm-induced losses. Canadian imports declined 1.8 Bcf/d as temperatures moderated last week, and Canadian supplies continue to be the swing source of US supply.
- On the demand side, temperatures moderated significantly last week, and demand reflected such with Res/Com demand down 22.26 Bcf/d (offsetting a portion of the previous two weeks’ gains, which totaled 31 Bcf/d). Industrial demand decreased 2.6 Bcf/d, and Power demand also decreased 5.74 Bcf/d on average for the week. LNG exports decreased 890 MMcf/d, while Mexico exports were up 210 MMcf/d, leaving total demand down 33.94 Bcf/d and total supply down 170 Bcf/d.
- The storage report last week came in well above expectations, with a record withdrawal of 359 Bcf. This record release provided the additional momentum for prices to rally as the week closed. into the close for the week. This week’s release should follow more seasonal averages, being close to the 5-year average but below the withdrawals of 2017 for the same week.
- Price action last week rebounded from the previous week’s weak close and gained every day during the week, with higher highs each day. Some of the strength was from some short covering by the speculative sector, as the latest CFTC release (dated Tuesday, Jan 9) showed a decline of 28,683 contracts. Additional buying came from the Managed Money long (speculative length) sector, which added 11,186 contracts. Interpreting the price action on Wednesday through Friday (especially after the storage release), it should be expected that additional short covering led to the gains at the end of the week.
- Prices are now challenging the highs from November when the market was looking into the beginning of the current winter. Now traders are looking at the remaining winter months with only a portion of the winter (2 months) remaining to cause hesitation. It is that apprehension (the longer-term effects of the weather remaining and the short covering) that forced the large run in prompt gas but a more muted run in the summer contracts (the February contract rallied from the weekly low of $2.784 to the high of $3.224, while the April contract rallied from only $2.624 to the high $2.802). As long as the production growth maintains the focus of the market, prices are likely headed down over the coming months.
- Ethane prices hit a 5-month high on Friday, at $0.28/gallon, increasing 15% week-over-week. The high prices are attributed to higher gas prices along the anticipation of new ethane demand from crackers expected to come online in the coming months. Chevron Phillips and Indorama both expect to bring crackers online before the middle of the year, bringing on about 120 Mb/d of ethane demand.
- Inventories decreased 6.3 MMBbl in last week’s EIA report. Propane stocks now sit at 61.7 MMBbl, roughly 18.0 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 57.7 MMBbl for this time of year prior to 2015 (before the crude price crash).
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