• US crude oil inventories decreased by 1.8 MMBbl according to the weekly EIA report. Inventories of gasoline increased 1.1 MMBbl, while distillates were down 0.8 MMBbl. Total petroleum inventories posted another large withdrawal of 5.1 MMBbl. US production increased 37 MBbl/d with the lower 48 accounting for 16 MBbl/d of the increase. Imports were up 59 MBbl/d to an average of 7.4 MMBbl/d versus the previous week.
• Market sentiment around crude oil remained positive last week. The market is still high on the bullish IEA report that showed declining OPEC production and featured an increased demand outlook. Even though OPEC made no decision on whether to extend the cuts beyond the current March 2018 expiration, news remained bullish as Saudi Arabia, Venezuela, and Iraq seem keen on the extension. Turkish President Recep Tayyip Erdogan threatened to cut off a major pipeline that flows 600 MMBbl/d of crude from Northern Iraq to the Turkish port of Ceyhan if the Kurdish independence referendum was successful. The referendum was successful, leaving the market to wait on whether the Turkish president will follow through on his word.
• Price action closed the week at a higher close than the previous week for the fourth consecutive time. The run took prices to the highest daily close since the middle of April and prices broke above the May high of $52.00/Bbl to trade at $52.86/Bbl before selling brought prices back down. According to the latest CFTC release, the managed money long participants added 25,958 contracts, while the speculative short positions declined 26,690 contracts. These levels are starting to reach the same kind of one-sided trade that occurred last winter and spring before the market rejected the rally with violent corrections. Last week’s gains took the speculative long position to 15.1% of open interest, while the short position reflected only 4.3% of open interest. At the highs last April, the speculative long position was lower in number of contracts but that length represented 16.1% of open interest. At the highs in February, the speculative length was higher in number of contracts (448,846 vs 363,758 last week) and represented 21.3% of open interest. The high of 2017 at $55.24/Bbl was on January 3rd and the CFTC report dated the same day had the speculative long position at 356,275 contracts or 17.1% of open interest.
• The current levels of open interest are important to watch as the market has proven over time that there is a potential limit to the amount of positions and percent of the trade that the speculators can manage. The other event that is likely to slow down speculative growth will be the commercial segment taking short positions (hedging). This sector is much larger and represents significantly more open interest than the speculative sector.
• Drillinginfo expects the potential for volatile trade between $45-$53/Bbl in the coming weeks as the market navigates through the speculative length while keeping an eye out for fundamental signs of inventory normalization.
• Natural gas dry production decreased off its record weekly average last week declining 460 MMcf/d on average to 74.2 Bcf/d. Most of the declines occurred in Texas due to pipeline maintenance, so expect these volumes to return in the coming weeks. Canadian imports were basically flat showing a slight decrease of 20 MMcf/d. During the upcoming shoulder season, gains in Northeast production are expected to push back Canadian imports until higher levels of demand starts to show in November.
• On the demand side, power demand was lower with the moderating temperatures falling 780 MMcf/d on average for the week. Res/Com is now starting its seasonal inclines, rising 500 MMcf/d. LNG exports were down 640 MMcf/d on average and calling back below its record weekly average. Expect exports to rebound in the coming weeks as Cheniere’s Sabine Train 4 becomes fully operational. Mexico exports rose slightly, increasing 140 MMcf/d. Total supply fell 480 MMcf/d, while total demand fell by 710 MMcf/d.
• The storage report last week came in below market expectations with an injection of 58 Bcf. Price action had an initial rally off of the injections only to succumb to declines during the day and into the close on Friday. Look for this week’s injections to be well below the 5-year average and below the injections of 2016. The next two weeks, based on current forecasts, are expected to be below both the 5 year and very close to 2016.
• With the expiration of the Oct contract last week, the market remained very consistent with the trends of expirations over the last 10 months by showing weakness early in the expiration process only to find a bid going into expiration day. The rally into expiration took prices up to $2.989 per MMBtu to settle at $2.974. This settlement left an $0.08 premium afforded the Nov contract as it opened as prompt. The market tried to close that premium on during the end of the week but could only close a portion of the premium. Expect the market to close the premium and test expiration lows. According to the CFTC report (September 26th), there was significant selling as Managed Money long trade positions liquidated 12,396 contracts and the Managed Money participants short position increased by 35,488 contracts. While much of that action was likely associated with the previous week’s declines on the storage report release on Sept 21st., these are short positions that may be forced to cover should prices remain above the Oct expiration.
• Price action in the near future will start to transition to demand generated by Res/Com and less with power. The seasonal trend directs price higher into the Q4 period historically, but the last two years have provided additional tests of support extending into Oct and Nov when the longer range and early winter forecasts were adjusted warmer. Expect a continuation of the recent range trade between $2.88 – $3.15 until the upcoming November and December forecasts come into a focus that can support trade.
• The EIA released their July Natural Gas Plant Field Production last Friday, showing overall NGLs flat to slightly increasing. NGL production is expected to grow during the second half of 2017 due to increasing oil and gas-directed drilling.
• Inventories decreased 2.4 MMBbl in last week’s EIA report, the second withdrawal of the season. This withdrawal is still premature compared to previous years, but exports remain high. Propane stocks now sit at 78.4 MMBbl, roughly 24.9 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 67.7 MMBbl for this time of year prior to 2015 (before the crude price crash).
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