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The Week Ahead For Crude Oil, Gas and NGLs Markets – 12/18/2017

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CRUDE OIL
• US crude oil inventories decreased by 5.1 MMBbl, according to the weekly EIA report. Gasoline stocks increased 5.7 MMBbl while distillate stocks decreased 1.4 MMBbl. Total petroleum inventories showed a withdrawal of 2.6 MMBbl. US production was estimated to be up 73 MBbl/d with lower 48 production rising by 65 MBbl/d. Imports increased 161 MBbl/d to an average of 7.4 MMBbl/d versus the week prior.
• Prices started the week stronger as news came that the Forties pipeline (carries approximately 400 MBbl/d of crude from the North Sea to the Kinneil terminal in Scotland) was shut down. While WTI showed some strength, the shutdown sent Brent to levels not seen in years and widened the WTI-Brent spread above $7/Bbl (widest in two years). The fundamental impact from the Forties shutdown will start to materialize in the coming weeks. The near-term effect may cause US exports to increase, which will lead to faster inventory declines. The speculative excitement surrounding the shutdown lost some of the gains on Tuesday with some profit taking. However, the WTI market has maintained a relatively positive bias since the OPEC extension of the production cuts along with the output cap placed on Nigeria and Libya (a combined cap of 2.8 MMBbl/d). Libya may already be willing to increase production just two weeks after pledging to cap output. The Prime Minister of the UN-recognized Government of National Accord met with the heads of the NOC and the Libyan central bank to discuss funding for increased output from Libya.
• Price action moderated after the initial strength and ended up with a similar price range ($56.09-$58.56/Bbl) as the week prior ($55.82-$58.34/Bbl). This represents a consolidation period for prices and the CFTC report confirmed this process as there were little changes in the positions of the various trade sectors. The bullish bets from the speculative trade group had the managed money long positions decreasing a relatively light 6,914 contracts. Even with this decline, the speculative length remains at a healthy 17% of total open interest.
• The relatively flat movement in prices through the week, did allow the months further out the curve to fall into backwardation. The price differential from prompt to the outer months increased last week and this price behavior should continue. The bullish bias has been generated by speculators who were bullish about the OPEC meeting last month and the geopolitical risks in the Middle East. There still exists a large speculative open position in the market and any profit taking and liquidation as the trade returns to a focus on fundamentals could lead to a downward crude price correction. A re-assessment of the focus in trade could create a decline in prices to the near-term support at $53.89/Bbl (the November low). Should the declines start to materialize, there is the potential for the US operators to take short-term hedges into early 2018 while the backwardation is minimal. This would only add more pressure to the price action. Drillinginfo expects the trade to return to the established range between $52-$56/Bbl in the near term.

NATURAL GAS
• Natural gas dry production rose 360 MMcf/d as compared to the week before on average, with most of the gains coming from the Northeast due to maintenance completion. Columbia Gas and Rover pipelines reported maintenance events that impacted production volumes during the prior week, but have now returned. Canadian imports jumped up, rising 790 MMcf/d with the increased demand on colder temperatures.
• On the demand side, with the temperatures much colder last week, Res/Com demand was up 10.1 Bcf/d and industrial demand increased 1.1 Bcf/d. Power demand also rose 2.0 Bcf/d on average for the week. LNG exports were up slightly rising 150 MMcf/d, however, with the Cove Point beginning the commissioning process gains in this demand sector are expected to increase in the coming weeks. Mexico exports increased 340 Mcf/d leaving total demand up 14.9 Bcf/d while total supply was up 1.2 Bcf/d. There is forecasted cold temperatures coming (starting around the Holiday) to the TX, OK and Gulf region which will likely have production impacts from freeze-offs and perhaps freezing rains that can affect the demand side by impacting wind turbines.
• The storage report last week came in very close to expectations with a withdrawal of 69 Bcf. The market declined after the release but rebounded to close the day above where prices were prior to the release. This week’s report is likely to be well below last year’s but above the 5-year average withdrawal. This was the coldest period last winter so the differences to last year will be substantial.
• On Tuesday, price action finally broke down and through the support that has held the trade since Jun. With the breakdown price action immediately pursued the Feb lows of $2.522. Much of the declines can be sourced by the speculative shorts adding to their extremely high cumulative levels as the latest CFTC (dated Tuesday Dec 12th) showed the Managed Money sector adding another 44,949 contracts to the short positions, now representing 20.2% of total open interest.
• With prices closing at the lowest weekly close since August ’16, the declines were achieved on lighter volume. A major issue with further declines, is that the market is being forced to digest some of the coldest temperatures seen in recent years as forecasts have well below averages coast-to-coast after the Christmas holiday. While declines may pause here for the coming week, without further continuation of the cold temperatures (into early Jan) the market has announced that lower prices will continue as production growth has outpaced demand gains in the longer term. Should the demand (from the upcoming cold) significantly surprise participants in the near term and/or the cold forecasts continue well into Jan then the magnitude of the speculative short position could become a serious issue for price action.

NGLs

Prices
• Ethane prices are recovering from the 17% drop seen last week, gaining 15% this week. Ethane prices now sit at 22.625 cents/gallon, which is within Drillinginfo expectations. As colder weather is expected in the coming weeks, expect ethane prices to recover further.

Propane
• Inventories increased 0.2 MMBbl in last week’s EIA report. For the second week in a row, stocks increased during a time where there are typically withdrawals. This unusual increase for this time of year was due to warmer than normal temperatures and relatively low exports. Propane stocks now sit at 74.7 MMBbl, roughly 21.0 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 64.7 MMBbl for this time of year prior to 2015 (before the crude price crash).

 

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