- US crude oil inventories decreased by 1.1 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories increased 3.1 MMBbl and 0.6 MMBbl, respectively. Total petroleum inventories posted a withdrawal of 2.9 MMBbl. US production was estimated to be up 128 MBbl/d, continuing to recover from the losses associated with the cold weather of previous weeks. Imports increased 91 MBbl/d to an average of 8.0 MMBbl/d versus the week prior.
- Prices opened the week higher and continued higher during the week. The bullish sentiment in the market continues around the same expectations cited in the previous week’s report. Additional positive news came from the IMF as it raised its global economic forecast by 0.2% to 3.9% for 2018 and 2019, which the market interpreted as possible additional demand for petroleum products. Additionally, the Saudi oil minister Khalid al-Falih reassured the media that the supply cuts coordination will continue despite the higher price environment.
- One of the possible issues facing the crude rally is the likelihood of OPEC and/or Russia not complying with quotas as prices continue to head upward. Also, producer hedging activity has led to some selling in the market. While some selling may be muted due to the backwardation of the curve, there have been selling positions initiated during the last couple of weeks. The other issue facing the run is the fall in the value of the dollar. The relationship of the two was sympathetic during the fall, with crude rising steadily and the dollar trading in a range. However, since the end of December, the two have returned to their historical counter positioning, with crude up 10% and the dollar falling 4%.
- The speculative element to the trade died down last week, with the latest CFTC report showing the managed money long positions increasing only 245 contracts. Still, the price run continued for the sixth consecutive week, taking prices higher to levels not seen since December 2014. With these gains, prices are entering extremely overbought levels, challenging two standard deviations over the 20-week moving average. Prices were at similar levels two weeks ago, followed by a brief correction until last week’s continuation of the run. The next correction, whenever it occurs, is likely to be longer and deeper. Eventually, prices should test major support around the $60/Bbl level. The supply and demand elements of the crude market represent a lower equilibrium. Thus, Drillinginfo expects prices to return to a less speculatively induced price level of around $55/Bbl.
- Natural gas dry production came back above 77 Bcf/d last week (a level not seen since late December), increasing 1.73 Bcf/d as compared to the week before on average. With temperatures moderating last week, Canadian imports, the swing supplier, decreased 0.96 Bcf/d.
- On the demand side, temperatures moderated last week and demand reflected such. Res/Com demand decreased by 18.42 Bcf/d, industrial demand was down by 2.24 Bcf/d and power demand declined by 7.36 Bcf/d on average for the week. LNG exports declined 270 MMcf/d, while Mexico exports were up slightly at 150 MMcf/d, leaving total demand down 30.34 Bcf/d. Total supply was up 350 MMcf/d.
- Last week’s storage report came in a little above expectation with a withdrawal of 288 Bcf. The initial move on prices following the bullish report was an increase, but prices returned to the levels at which they had been before the inventory release occurred. This week’s EIA report is expected to show a withdrawal well below the five-year average and very near last year’s withdrawal.
- Price action last week showed the effects of a serious short covering rally buoyed by changes in weather forecasts and the magnitude of the storage withdrawal. On Tuesday, after the outcry, the market closed above the highs from May 2017 ($3.431); some shorts covered positions and sent prices up to the weekly high of $3.628 in less than 15 minutes. This level was tested on each following day of the week, but the subsequent tests ran out of buyers below that level. The speculative sector as of the latest CFTC release (dated Tuesday, January 23) showed a decline of 37,461 contracts as prices spiked higher. Additional buying came from the managed money long (speculative length) sector, which added 17,921 contracts on expectations of the forecasts calling for continued cold in the coming weeks. The commercial sector (swap dealer sector) provided some of the selling for this buying as it increased its short hedges by 32,204 contracts, believing that the recent run in prices was a good time to place hedges for the upcoming months.
- The rally in prices last week can only be characterized as bullish for future price action, with one exception. While each of the summer months had a daily close above its 200-day moving average, the March contract did not close the week above the commonly watched average. March traded above the key level for a while on Friday but could not muster enough buying at the close to stay above the key level ($3.182). The soon-to-expire February contract may provide volatility on Monday but this coming week’s prices will have more to do with the weather forecasts for February. With the significant short covering last week, don’t expect the expiration process to challenge the previous month’s trend of substantive rallies on expiration day. Depending on the duration and scope of the upcoming cold spell, trade should continue to focus on longer-range forecasts, and price movements will follow these constantly changing outlooks well into early February. Once the market becomes more defined as to ending inventories (around the middle of February), the fundamentals (especially production rising back above 77 Bcf/d) will start to re-enter the trade perspective.
- Inventories decreased 4.0 MMBbl in last week’s EIA report, the second- largest draw of the winter. Propane stocks now sit at 54.0 MMBbl, roughly 14.2 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 52.0 MMBbl for this time of year prior to 2015 (before the crude price crash).
- Despite the significant propane withdrawal, propane prices dropped 11% week-over-week. The bullish storage report was offset by the rebound in production, which increased to levels seen before freeze-offs in weeks prior.
- Kinder Morgan announced last week that the Utopia Pipeline has been placed into service. The pipeline carries ethane from the Utica and Marcellus shales to Ontario, Canada. The initial capacity of the pipeline is 50 Mb/d but is expandable to 75 Mb/d.
- Hess and Targa proposed a new gas plant in North Dakota in order to reduce flaring. If permitting is completed quickly, the 200 MMcf/d processing plant will be in operation by the end of this year.
- Marathon and Targa announced plans to expand cryogenic gas processing plant capacity in the Arkoma Woodford Basin and are calling the project Centrahoma. As part of the project, Targa plans to recommission its 150 MMcf/d Flag City Plant, which was decommissioned last year. The joint venture also anticipates building a new processing plant, Hickory Hills Plant, and Targa is contributing its 120 MMcf/d cryogenic Tupelo Plant to the project. Hickory Hills Plant will be a 150 MMcf/d plant in Hughes County, OK, and is expected to come online by the end of this year.
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