- US crude oil inventories decreased by 6.9 MMBbl, according to the weekly EIA report. Gasoline inventories increased 3.9 MMBbl, while distillates decreased 3.9 MMBbl. Total petroleum inventories posted a sizable withdrawal of 13.8 MMBbl. US production was estimated to be up 258 MBbl/d, recovering from the previous week’s losses from the cold weather freeze-offs. Imports decreased 292 MBbl/d from the week prior to an average of 8.0 MMBbl/d.
- Prices came out of the long weekend and immediately established a higher high than the previous week, increasing $0.12/Bbl. This extension was primarily driven by the same positive bias that has carried the market since the OPEC meeting last November: the OPEC-led production cut extension, the geopolitical unrest in the Middle East, anti-government protests in Iran, and the Venezuelan production declines. Additionally, last week the Niger Delta Avengers threatened the deadliest round of attacks targeting Nigeria’s deep-sea operations. However, the price run has allowed US crude production to expand, and the latest EIA and IEA reports have the US surpassing 10 MMBbl/d in early 2018.
- The speculative element of the trade continued last week, as the latest CFTC report showed the managed money long positions increasing 51,380 contracts (a 11% gain from the previous week). The managed money long positions now represent 19.7% of total open interest. This speculation was nearly offset by the commercial sector increasing their short position by 46,212 contracts (hedging). Longer term,the commercial sector has deeper pockets and longer time horizons than the speculator. Expect US producers to continue to take advantage of the price run by expanding hedging programs.
- Last week’s early price gains were offset by declines as the week progressed. This was despite a bullish inventory report. Perhaps the trade is taking a breather, as it has added nearly $7.00/Bbl since February took over as the prompt month contract. Even with the declines toward the end of the week, prices closed the week at a $5.91/Bbl premium to the January expiration. That said, the resistance is now at the $60.00/Bbl level. As discussed last week, history warns the trade that prices do not stay this extended for long periods of time. The fundamentals in the crude market require a lower price level. Drillinginfo expects prices to return to a less speculatively induced price level, settling in a range around $55/Bbl for an extended period of time.
- Natural gas dry production once again ran into some weather-related declines in the Southeast, Mid-Continent, and Texas supply regions, declining 460 MMcf/d on average compared to the week before. Canadian imports provided the swing supplies and increased 1.1 Bcf/d.
- On the demand side, temperatures returned to winter trends last week, pushing demand higher. Res/Com demand increased by 10.4 Bcf/d. Industrial demand went up 1.4 Bcf/d, and power demand also increased 4.1 Bcf/d on average for the week. LNG exports returned to average levels, increasing 640 MMcf/d, while Mexico exports were basically flat, leaving total demand up 17.9 Bcf/d, while total supply was up 0.8 Bcf/d.
- The storage report last week came in a little below expectations with a withdrawal of 183 Bcf. The initial move on this bearish report was a decline, but by the end of the day, prices returned to levels before the inventory release occurred. This week’s release should be well above the five-year average and also above last year’s withdrawal. However, the following two releases will likely be very weak withdrawals, according to the weather forecasts.
- Price action last week rebounded from the previous week’s weak close and gained every day during the week, reaching 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. 16) showed a decline of 43,500 contracts as prices rose from $2.90 to $3.129. Additional buying came from the managed money long (speculative length) sector, which added 22,675 contracts. The commercial sector (swap dealer sector) provided the selling for this buying, as it reduced hedges by 43,942 contracts, believing that the recent run in prices was a good time to exit remaining winter positions.
- Prices challenged the highs from November before succumbing to selling pressure and closing just above the November high. While that close above the previous high is bullish in nature, the failure at the commonly watched 200-day moving average (for the February contract) had a more significant impact on prices. That failure sent prices down to test support. While prices created a roller-coaster ride for the traders, the game was primarily traded around the February contract and did not roll into the March contract, which fell to get within a dime of its 200-day moving average.Trade is driven by current weather forecasts, which will likely create substantial volatility in the February contract up to its expiration in six days. Beyond that time frame, the fundamentals (especially production rising back towards 77 Bcf/d) will start to focus again on the storage inventories at the end of March. It is this perspective that has limited the volatility to the rising February contract without spilling over to the March or the summer months.
- Inventories decreased 3.7 MMBbl in last week’s EIA report. Propane stocks now sit at 58.0 MMBbl, roughly 14.2 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 55.2 MMBbl for this time of year prior to 2015 (before the crude price crash)
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