- US crude oil inventories increased by 2.2 MMBbl, according to the weekly EIA report. Inventories of gasoline and distillates declined 3.3 MMBbl and 3.4 MMBbl/d respectively. The total petroleum inventories posted a sizeable withdrawal of 9.1 MMBbl/d. This total petroleum inventories decline continues the recent trend and is important for future price movements as the market seeks to normalize inventories to pre-price crash levels. US production was estimated to be up 67 MBbl/d and imports decreased 194 MBbl/d to an average of 7.4 MMBbl/d versus the week prior.
- Prices started the week strong, reaching the week’s high at $57.92/Bbl after the inventory release. This strength was once again due to the geopolitical unrest in the Middle East. The missile launch from the Iran backed Houthis (from Yemen toward Riyadh) into Saudi Arabia raised tensions between two major OPEC members. Additionally, Saudi Crown Prince Mohammad bin Salman’s anti-corruption purge has placed several princes and ministers under arrest and more arrests seem imminent. This surprise purge will assist Salman to consolidate power and bring his ambitious Vision 2030 economic program to life.
- The extension of quotas at the upcoming OPEC meeting was discussed among Saudi Arabia, Russia, Kazakhstan and Uzbekistan. These countries stated a willingness to maintain the quotas in order to normalize inventories. In addition to all of these bullish factors, the market also continues to keep an eye on the potential for more supply interruptions in the Niger delta (infrastructure attacks) and Iraq ending crude exports from Kirkuk to Ceyhan. The bullish sentiment in the market has overshadowed the potential for US producers to take advantage of the higher price environment with hedging or Libya’s willingness to increase production to 1.25 MMBbl/d.
- Prices continued the bullish bias reaching the highest level since July 2015. The action tailed off at the end of the week, but closed the week at the highest weekly close since July 2015 (over $1/Bbl higher than the previous week’s close). Even with the weakness on Friday, the market is still overbought and in need of a consolidation trade period (ranging between $55-$58/Bbl) or a correction trade which may take prices down to the longer-term support at $52/Bbl. With the buying and open interest gains, expect additional speculative contracts in the upcoming CFTC data release.
- Should events in the Middle East continue price action may trade up to $60/Bbl. Look for higher prices on lower volume and declining open interest. The market has now held over $49/Bbl since mid-September, establishing that as the low end of the new range and this market is being redefined to a bullish bias. That said, the level of length by the speculative participants leaves little room for error in expectations and may become problematic in any type of correction lower. Any news or events creating doubts about the bullish bias or profit taking by speculative positions leaves the market open to downward volatility. As the market shifts focus to fundamentals rather than geopolitical issues, Drillinginfo expects the trade to return to the previous range between $50-$53/Bbl.
- Natural gas dry production gained last week, rising 590 MMcf/d on average, establishing yet another new record high average at 75.5 Bcf/d. Most of the gains were observed in the Northeast, which added 933 MMcf/d, and set a new record level of production at 26.2 Bcf/d. These historic gains were partially offset by Texas production declines of 451 MMcf/d due to maintenance at ETC’s Ganado Processing Plant. Canadian imports were up 300 MMcf/d as temperatures in the Northeast declined late in the week adding demand.
- On the demand side, Res/Com continued the gains of the week before as the temperatures declined dramatically, rising 4.9 Bcf/d. Power demand also increased by 1.65 Bcf/d on average for the week. Industrial demand was up 210 MMcf/d. LNG exports were up 300 MMcf/d, back to prior levels as maintenance was completed at Sabine Pass, and Mexico exports rose 200 Mcf/d. Total demand was up 7.32 Bcf/d for the week and total supply was up 930 MMcf/d.
- The storage report last week came within expectations with an injection of 15 Bcf. Prices declined on the release but regained the losses by the day’s end. This was likely the last injection of the season and leaves total inventories just short of 3.8 Tcf. The first withdrawal expected in this week’s release compares to injections in 2016 and 5-year average.
- Prices opened the week with a large increase in prices, opening $0.087 above the high from the previous Friday. While prices declined and tried to close the gap, they could not trade below $3.047. From those levels, prices traded a higher high each day during the week and closed the week at the highest level since last May. While the CFTC data will not be released until today (due to the Veteran’s Day holiday), the declines in open interest during the trade on Monday – Thursday highlights the volatility created when the speculative trade is forced to reduce their short positions on a price run. While the percent of open interest is likely lower, there remains a large amount of short positions yet to be challenged.
- The primary reason for the opening and the series of higher daily highs was generated from some near-term and longer-term forecast adjustments showing colder temps (well below the last two Novembers) and the expected increase in Res/Com demand. This caught the extended position by the speculative sector to cover positions which has been discussed. Last week’s action occurred with substantial volume which may lead to an extension early this week. However, the more likely outcome this week will have prices consolidating last week’s gains and finding more buyers on test of support between $3.10-$3.16. Should open interest start to gain on tests of support, it would suggest new length coming into the market with the expectation of higher prices into December.
- Trade continues to look similar to 2016 as discussed previously. The gains in production with the pipeline expansions was on queue with the increased demand last week. Now, the market will have to digest the colder December forecasts with the additional supply. Resolution to this dilemma will drive price action for the remainder of the year.
- Last Wednesday Energy Transfer Partners announced that Mariner East 2 pipeline will be postponed until 2Q 2018, 18 months later than originally planned. The delay is due to the PUC’s recent ban on horizontal/directional drilling at a location in Chester County’s West Goshen Township. The hearing where the PUC listens to the dispute between the township and Sunoco over the placement of a valve is held for April 2018. Until Mariner East 2 comes online, Drillinginfo expects that NE NGL prices will remained depressed as the markets in which they can reach are limited.
- Inventories decreased 1.15 MMBbl in last week’s EIA report. Propane stocks now sit at 77.2 MMBbl, roughly 22.4 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 68.0 MMBbl for this time of year prior to 2015 (before the crude price crash).
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