- US crude oil inventories decreased by 5.7 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates increased 0.9 MMBbl and 0.5 MMBbl respectively. The total petroleum inventories posted another sizeable decrease with a decline of 8.7 MMBbl. US production was estimated to be down 1,074 MBbl/d with the lower 48 production down 1,083 MBbl/d due to the effects of Hurricane Nate in the Gulf of Mexico. Imports were down 134 MBbl/d to an average of 7.5 MMBbl/d versus the previous week.
- The market digested some additional positive news from regional tensions between the Iraq central government and the Kurdish region. Iraqi forces took control over the oil fields in Northern Iraq around Kirkuk. This region produces and exports nearly 600 MBbl/d via a pipeline that flows oil to the Turkish port of Ceyhan. This is the same pipeline that the Turkish President threatened to shut down. Early reports have 350 MBbl/d of production temporarily shut off due to the unrest in the region. With these regional geopolitical tensions and the expectations around the upcoming OPEC meeting (leaning towards extending the supply cuts), there is a distinct positive bias to the fundamentals. However, with the bullish sentiment around prices comes the probability of US producer hedging. OPEC will also have to address the production from the non-quota carrying Libya and Nigeria, who have continued to grow production and undermine the quota carrying members’ cuts.
- Price action last week was mixed as trade on Monday set the week’s high at $52.37/Bbl. The trade on Friday established the week’s low at $50.70/Bbl before rallying at the end of the day. The volatility on Friday was due to the expiration of the November contract. This action leaves the market in the recent range ($49-$52/Bbl) and towards the high end of the range since August ($46-$53/Bbl). The current level of length from the speculative trade is reaching levels seen during the April and July rallies. This level of exposure provides the potential for serious liquidation declines should the expectations currently being built into the price fail to materialize.
- The consolidation in the recent range is a reflection of the market’s inability to clearly define the market trend. Fundamental inventory data does not yet support the bullish bias of the trade. The market is waiting to see whether the current quotas and expected demand increases are materializing. While any supporting fundamental data will allow for additional buying and continued increase in speculation, any news or events to the contrary will leave the market open to downward volatility. Drillinginfo expects the trade to remain in the recent range between $50-$53/Bbl.
- Dry gas production increased last week, rising 1.82 Bcf/d on average returning to a weekly average above 74 Bcf/d. Most of the gains were attributed to the recovery of production declines associated with Tropical Storm Nate. Canadian imports were down 240 MMcf/d.
- On the demand side, temperatures moderated last week pushing power demand down by 3.47 Bcf/d on average for the week. Res/Com continued its seasonal gains rising 1.80 Bcf/d. LNG exports were up, rising 210 MMcf/d on average (new weekly average record) and Mexico exports rose slightly, increasing 40 MMcf/d. Total supply rose 1.55 Bcf/d, while total demand decreased 1.12 Bcf/d.
- The storage report last week came in above market expectations with an injection of 51 Bcf while the injection traded at 45 Bcf on ICE prior to the release. The bearish report took prices lower to test the Q3 low at $2.753. Expectations for the coming week are near the 5-year and last year’s level (either side of 65 Bcf). As the forecast changes to cooler temperatures, the week after is likely to be below both.
- Prices opened the week down, only to find support and trade to the weeks high at $3.026. From those heights, prices declined and the declines were accelerated with the storage report release. The declines took prices down to a test of the August 4th low at $2.753, but could not extend below. The early week gains were likely the result of short covering from the Managed Money (speculative) sector which covered 29,243 contracts (between Oct 10th and Oct 17th). That short covering was likely replaced with additional short entering the market on the storage release. The Managed Money chart below gives recent historical perspective to the events that occurred after this level of short interest (data can have a slight lag as the data is reported on Tuesday, released on Friday, where price is the close on Friday).
- Price lows of Nov ’16 had short positions (over 18% of open interest) had a rally of 53% that took prices to just below $4.00 in December.
- Price lows in late Feb ’17 had short positions (over 14% of open interest) had a rally of 30% that took prices from $2.54 to the May high of $3.43.
- Open interest by the speculative sector, gained in Oct (back to over 16%) only to cover positions (last week) as prices rallied up to $3.00.
- Expect a similar rise in prices if the current open interest positions are forced to cover
- The short covering at the end of the week had much to do with forecast changes for the last week of Oct and early Nov. Forecasts will have a serious impact on the trader expectation in early Nov. The current change (cooler in early November) is expected to test the price highs of Sept ($3.16).
- On October 9th, Sunoco began shipping ethane by truck from Marcus Hook to domestic markets, marking the first time a facility in the US transports refrigerated, liquid ethane via truck. According to Ashley Madray (Gas Innovation’s executive vice president), in large volumes ethane is used in plastics production, while in smaller quantities ethane is used for research and development in:
- Manufacturing ethane-fueled power generation equipment and facilities
- Refrigeration for manufacturers and storage terminals
- Enhanced oil recovery at well sites
- Manufacturing of electronics
- The smaller volumes provided by trucks will allow companies like Gas Innovations , a specialty gas producer, in their R&D efforts without having to search abroad as they have previously.
- Inventories decreased 0.09 MMBbl in last week’s EIA report. Propane stocks now sit at 78.8 MMBbl, roughly 23.8 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 69.0 MMBbl for this time of year prior to 2015 (before the crude price crash).
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