• US crude oil inventories decreased by 6.5 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories increased 1.2 MMBbl and 0.8 MMBbl. Total petroleum inventories showed a substantial withdrawal of 14.2 MMBbl. US production was estimated to be up 9 MBbl/d. Imports increased 471 MBbl/d to an average of 7.8 MMBbl/d versus the week prior.
• Prices started the week softer as traders continue to look for any new information to extend the last two months of speculative length. The attempted missile attack on the Saudi Arabian capital of Riyadh from Yemen impacted price action briefly and additional support came from the shutdown of the Forties pipeline (effecting 400 MMBbl/d of crude from the North Sea to the Kinneil terminal in Scotland). Ineos (operator of the pipeline) has announced it is moving forward on repairs (crack in the pipe system) to the pipeline which may take up to four weeks to complete. This event supports Brent prices, so expect the spread between Brent and WTI to remain wider in the near term. The market is looking for confirmation that the supply cuts will normalize inventory levels in 2018 and provide fundamental support to the speculative trade. A potential problem with the fundamental recovery is the continued growth in US production, which is nearing record levels and nearing Saudi Arabia levels. US production is expected to surpass 10 MMBbl/d at the beginning of 2018 and as long as prices stay above $55/Bbl this growth will continue, thereby leading to increased US market share.
• The price action last week brought about a positive bias after the early weakness, rising throughout the week and closing at $58.47/Bbl, the highest weekly close since just before the November OPEC meeting. The CFTC report had the managed money long positions decreasing 13,282 contracts (17.3% of total open interest). With expiration of the January contract last week, this reduction of contracts by the speculative sector may be associated more to profit taking rather than a shift in expectations. The positive price action after the expiration confirms this.
• Last week’s gains also occurred on declining volume and open interest. These are elements of a market in consolidation before the next move. Open interest declines on expiration week is a normal occurrence but the declining volume is an indicator that some of the speculative momentum is running low. With the lighter trade during the holiday week, prices could be subject to volatility, with the most exposure to the downside. The continuing long speculative excess now leaves the price action subject to the realities associated with fundamentals. Negative news from inventory reports, quota compliance, or US production growth will jeopardize the speculative trade. Prices have now completed the backwardation process, so expect producers to take short term hedges into early 2018 while the backwardation is minimal. Drillinginfo expects the trade to return to the established range $52-$56/Bbl in the near term.
• Natural gas dry production rose 0.5 Bcf/d to 76.9 Bcf/d on average compared to the week before. The majority of the gains came from Texas and the Gulf regions as they begin to rebound from recent declines. Canadian imports declined 360 MMcf/d due to moderating temperatures and lower demand in the US.
• On the demand side, with milder temperatures compared to the week before, Res/Com demand was down 7.84 Bcf/d and industrial demand decreased by 0.95 Bcf/d. Power demand also declined 2.44 Bcf/d on average for the week. LNG exports were down slightly at 290 MMcf/d. Cove Point is beginning the commissioning and gains in this demand sector are expected in the coming weeks. Mexico exports were essentially flat, only increasing 30 Mcf/d and leaving total demand down 12.47 Bcf/d while total supply was up just 80 MMcf/d.
• The storage report last week came in above expectations with a withdrawal of 182 Bcf. This bullish report suggested a price rise, however, the market had the lowest daily close since last February following the EIA release. The upcoming storage report should be near the 5-year average but below last year’s withdrawal. The two reports after this week’s will be substantively above the 5-year average and last year’s withdrawal.
• Price action last week showed a similar theme to the week before with gains beginning to melt away as the trade week advanced. The break down through the key support area $2.75 on the previous week set the stage for further tests down to the Feb ’17 low at $2.522. Prices did decline further and fell to the week’s low ($2.568) after the storage release. The latest CFTC (dated Tuesday Dec 19th) showed the Managed Money sector adding another 11,351 contracts to the short positions, representing 21.5% of total open interest, while the Managed Money Long positions increased by 13,269 contracts.
• This week’s action will have two driving forces: 1) Expiration process the first three days will have to settle out the Jan contract which has been under pressure all month since becoming prompt. Much of this selling pressure is due to the month-long gains in production, now nearing 77 Bcf/d; 2) Demand will be spiking this week and next due to the coldest temperatures in the last three years (according to most models). Traders will struggle because the cash market will be strong due to the record low temperatures but the expectations (future warming trend three weeks out) will dampen the future movements. Expect the Feb ’17 lows and the highs from last week to hold through expiration. The lighter trade week may provide volatile trade as the forecasts could extend the cold and bring additional demand pressuring the short participants. The forecast warmer weather will clearly open the door for prices to break below the Feb low, bringing additional short participants into the market and downward pressure to prices. Longer term, the natural gas market looks to be entering a bearish bias period as the supply/demand focus has shifted to being long supply waiting for demand to catch up.
• Inventories decreased 3.3 MMBbl in last week’s EIA report. Propane stocks now sit at 71.3 MMBbl, roughly 24.3 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 63.1 MMBbl for this time of year prior to 2015 (before the crude price crash).