• US crude oil inventories decreased by 0.9 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates had significant decreases with gasoline declining 5.5 MMBbl and distillates down 5.2 MMBbl/d. The total petroleum inventories posted a sizable withdrawal, decreasing 12.2 MMBbl/d. US production was estimated to be up 1,101 MBbl/d with the lower 48 production up 1,109 MBbl/d as production in the Gulf of Mexico recovered from the effects of Hurricane Nate. Imports were up 640 MBbl/d to an average of 8.1 MMBbl/d versus the week prior.
• The inventory data was perceived as slightly bearish but prices regained their footing by Thursday as the market continues to reflect the predominantly bullish news. The continuing geopolitical unrest in the Middle East (uncertainty around the Iran nuclear agreement and Iraqi forces taking control over the fields in Kirkuk) has helped foster the bullish sentiment. Even though the majority of Iraq’s production is in the south, should this situation get worse, the unrest in Kirkuk could impact as much as 600 MBbl/d. OPEC, led by Saudi Arabia, is still aiming to take measures to help reduce inventories back to the five-year average from prior to the price crash. OPEC will be looking at extending quotas beyond the current 1Q2018 expiration at the upcoming OPEC meeting. The expectation of the extension is providing support for continued gains. Rumors now seem to indicate that the push will be for a nine-month extension of the deal.
• Price action last week was mixed until Friday as prices broke above the April high of $53.76/Bbl to close the week at $53.90/Bbl. This late week run left prices borderline over bought. However, the sights are now on the February high of $54.94/Bbl. The action left prices two standard deviations above the 20-week moving average, a level of strength that the market has historically backed off from. The CFTC report showed gains in the managed money long positions (11,097 contracts), while the managed money short positions covered 6,733 contracts.
• With the upside expansion of the recent range last week, expect additional advances early this week. The market has now held over $49.00/Bbl for over a month, establishing that as the low end of the new range. That said, the level of length by the speculative participants puts the market at risk of a liquidation should bullish expectations fail to materialize. Drillinginfo expects the trade to remain in the recent range of $50-$55/Bbl.
• Natural gas dry production gained last week, rising 870 MMcf/d and establishing a new record high average. Most of the gains were generated in Texas, Southeast and GOM, which regions are now at levels seen pre- tropical storms. Canadian imports were up 260 MMcf/d week-on-week.
• On the demand side, temperatures moderated last week and power demand was lower by 1.17 Bcf/d on average for the week. Res/Com continued its seasonal reflection of colder nights rising 2.90 Bcf/d. LNG exports were flat week-on-week and Mexico exports declined, falling 80 MMcf/d. Total supply rose 1.15 Bcf/d, while total demand increased 2.33 Bcf/d.
• The storage report last week came in slightly below expectations with an injection of 64 Bcf while the injections expectations were traded around 65 on ICE prior to the release. The data release was slightly bullish but was overwhelmed by the bearish forecast adjustments looking for the near-term cooler temperatures to be short lived and above average temperatures returning to the market after the first week in Nov. Look for this coming injection to be near last years and the 5-year average but the following week should be well below the injections of last year and the 5-year average.
• Prices opened the week with a rally up above a well-defined resistance, only to succumb to the bearish sentiment surrounding the weather forecasts and strong supply outlook. The market expects additional production coming on during November from the new pipeline expansions that offer additional takeaway capacity for Northeast production, which is in line with Drillinginfo’s expectations of a 1.5 Bcf/d gain over the next two months. The CFTC report (dated Oct 24th before the extremely weak expiration of the November contract) had liquidation of the Managed Money length (speculative sector) which reduced length by 9,335 contracts and the Managed Money shorts adding to positions by 2,712 contracts. The extremely weak close (expired below the previous Q3 low) on Friday will leave a small premium ($.065) for the December contract which closed at $2.964 vs the high of the expired November contract high of $2.899 on Friday. It also leaves a $.21 premium to the Nov expiration. While prices may try to extend upward from the premium afforded December contract this action will likely fail and during the week close that small gap (down to $2.899) and perhaps decline into the range established during Friday’s trade.
• Near term trade in natural gas is expected to be influenced by the 11-15 day weather forecasts. While these forecasts, from the various models, have been inconsistent, they also carry low levels of confidence. Until they show a significant positive (colder temperatures) bias confirmed over time, the current bearish behavior should be expected to continue. Trade is looking very similar to 2016 as the November contract expired at its lows and the December contract was awarded a $.304 premium over November expiration only to give up all of the premium and set the lows for December as prompt on Nov 9th. This decline last year tested the lows from August ’16 at $2.526. Should a test of this area occur, it will likely leave the speculative shorts with even a larger short position and a higher percentage of open interest. As discussed last week, this may provide the fodder for the potential of a rally (also similar to 2016) when prices rallied nearly $1.50 off of the November low to the late December high of $3.994.
• NGLs saw price gains week over week, with propane and natural gasoline coming in with the highest gains at 9% and 7% respectively. Crude oil saw a 5% gain week over week, which contributed to the propane plus increases, but propane made further gains due to winter weather on the horizon.
• Inventories decreased 1.22 MMBbl in last week’s EIA report. Propane stocks now sit at 77.6 MMBbl, roughly 22.9 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 69.1 MMBbl for this time of year prior to 2015 (before the crude price crash).
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