• US crude oil inventories decreased by 2.4 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates both decreased 4.0 MMBbl and 0.3 MMBbl/d respectively. The total petroleum inventories posted a withdrawal of 5.8 MMBbl/d. US production was estimated to be up 46 MBbl/d. Imports decreased 552 MBbl/d to an average of 7.6 MMBbl/d versus the week prior.
• The response to the inventory data was bullish as prices rallied on the withdrawal of crude and total petroleum stocks. Prices remained bullish through the week as traders continue to look at the bullish news in the market. Foremost in the sights of traders is the consolidation of power by Saudi Crown Prince Mohammad bin Salman and the continued geopolitical instability in the Middle East. Several princes and ministers were arrested over the weekend on corruption allegations. Salman is trying to consolidate power in order to bring his ambitious Vision 2030 economic program to life, which includes selling a stake in Saudi Aramco. Crude oil flow disruptions from Kirkuk to the Turkish port of Ceyhan continue and the news of the missile conflict between Yemen and Saudi Arabia continues to fuel the geopolitical unrest. Additionally, a recent Reuters survey showed OPEC’s production fell 80 MBbl/d last month. The expectation now is that Saudi Arabia will push to extend current quotas in the upcoming meeting to normalize global inventories.
• Price action last week was very bullish before and after the inventory report as prices tested the highs from last January and closed at a new high for 2017. This left the market entering the extreme overbought area (over $80) according to the RSI momentum indicator and well over 2 standard deviations above the 20-week moving average. Historically, markets do not remain this over extended for very long. The events in the Middle East will likely exacerbate this condition today, but the market will need to consolidate for an extended period or correct downward in the future. The most recent CFTC report shows that speculative long positions increased 19,692 contracts while covering 35,576 short positions. All these position changes occurred before the inventory release and the rally at the end of the week.
• With this rally and the potential for additional buying on the news from the weekend, prices could even break the $60.00/Bbl mark. The market has now held $49.00/Bbl for over a month, establishing that as the low end of the new range. Drillinginfo expects the trade to return to the previous range $50-$54/Bbl in the coming weeks as fundamentals start to settle back in.
• Natural gas dry production gained last week, rising 240 MMcf/d on average, establishing another record high average at 75.8 Bcf/d. Most of the gains (663 MMcf/d) were observed in the Northeast, as expected with the pipeline expansions, while the Rockies, Texas and Gulf production combined declined by 422 MMcf/d. Canadian imports were down 270 MMcf/d.
• On the demand side, power demand declined by 1.22 Bcf/d on average for the week. Res/Com increased by 6.6 Bcf/d as a result of continued cooler temperatures, and Industrial demand gained a surprising 590 MMcf/d. LNG exports were down 290 MMcf/d as maintenance reduced demand from the Sabine Pass facility. Mexico exports were flat for the week. Total demand was up 5.96 Bcf/d while total supply was flat.
• The storage report last week came in near expectations with an injection of 65 Bcf. Prices did not react immediately on the release but followed the trend higher. This week’s release should be well below the 5-year average and the injection for this week in 2016.
• Prices opened the week with a small rally only to reverse down to intermediate support at $2.85, closing the small gap left from the Nov expiration, as expected from last week’s discussion. From there prices rallied up, closing the week at the highest level since early October ($2.984). The CFTC report (dated Oct 31st), which included the extremely weak expiration of the November contract, had the Managed Money shorts (speculative sector) rising an extraordinary 40,303 contracts while there was little change in the Managed Money length falling 156 contracts. This action leaves the speculative short position at 17.8% of open interest (extremely extended position) and exposing the potential for a short covering rally.
• As discussed last week the coming trade in natural gas will likely be directionally influenced by the near-term weather forecasts. While these forecasts, have recently had very low confidence levels, the speculative community is banking on a combination of another warmer November (similar to last year and 2015) and the production growth as a result of the pipeline expansions in the Northeast to offset the demand gains from LNG and Mexican exports. Some of the longer-range models are starting to look for temperature declines and are becoming more consistent in the day to day runs. The production growth has commenced in the Northeast so the battle of expectations versus reality will carry prices further into the fourth quarter. Trade continues to look similar to 2016 as discussed previously. Last November, the December contract started to rally after Nov 9th well before substantive changes in the forecast models. The declines this year have not challenged the expiration prices of November at $2.752, unlike 2016. Also, watch the speculative sector as it may have an additional push to it, in-spite of the some of the weather forecast model’s modifications.
• Inventories decreased 0.73 MMBbl in last week’s EIA report. Propane stocks now sit at 78.4 MMBbl, roughly 22.6 MMBbl lower than this time last year. However, the stocks are still above the five-year average of 68.8 MMBbl for this time of year prior to 2015 (before the crude price crash).
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