- US crude oil inventories increased by 1.9 MMBbl, according to the weekly EIA report. Both gasoline and distillates inventories increased, 3.4 MMBbl and 3.9 MMBbl, respectively. Total petroleum inventories posted an increase of 4.4 MMBbl. US production was estimated to be up 332 MBbl/d, with the lower 48 representing 315 MBbl/d of the gains. This jump took US production over 10 MMBbl/d and had a serious impact on prices. Imports decreased by 538 MBbl/d to an average of 7.9 MMBbl/d versus the week prior.
- Prices were on the decline all week. All the bullish elements, discussed here for over a month, remain present in the market (OPEC extension, geopolitical unrest, temporary supply disruptions, and a declining dollar), but the week started with some profit taking. The downward action gained momentum after the inventory release showed an inventory build and US production over 10 MMBbl/d. As forecast here previously, when the speculative elements gave way to the fundamentals of supply and demand, there was a steep correction. The speculative element to the trade started to cover early in the week as the latest CFTC report showed the Managed Money Long Positions decreased by 19,404 contracts. Given the impact of the inventory release on prices, expect the speculative long position to be significantly lower in the upcoming CFTC release.
- The three-day destruction of prices left the market oversold in the short term. Although there may be slight extensions lower early this week, expect prices to consolidate. Additional pressure will come as the EIA increases its US production forecast to over 11 MMBbl/d by the end of 2018 and the upcoming refinery maintenance season. The declines last week broke the major support at $60-$61/Bbl. That level is now the resistance, much like it was last fall prior to the speculative run-up. The supply and demand elements of the crude market should begin to take over now that the speculatively induced price level has been deflated. Drillinginfo expects prices to return to the mid-$50/Bbl level for an extended period.
- Natural gas dry production increased 390 MMcf/d over the previous week and recorded a weekly average of over 78 Bcf/d for the first time. Canadian imports were basically flat week-on-week.
- On the demand side, temperatures continued cooler last week, increasing Res/Com demand by 4.41 Bcf/d. Industrial and power demand also increased week-on-week, up 0.73 Bcf/d and 0.59 Bcf/d, respectively. Exports via LNG and Mexico were basically flat, leaving total demand higher by 7.29 Bcf/d while total supply was up 0.32 Bcf/d.
- The storage report last week came in just above expectations with a withdrawal of 119 Bcf. The initial move on this bullish report was a brief run-up, followed by a decline throughout the remainder of the day and week. This week’s release should be above both the five-year average and last year’s withdrawal. With the weather forecast leaning above average in the East and South in the coming weeks, the next two reports are likely to be well under the five-year average.
- Prices are now seeking tests of major support, with the lows from Dec ’17, Feb ’17, Nov ’16, and Aug ’16 all between $2.568 and $2.522. The speculative participants will likely not place large positions until the market identifies its intentions. The latest CFTC report (dated Feb 6) showed the Managed Money longs (entering on the price rally last month expecting higher prices) reducing positions by 20,709 contracts and the Managed Money shorts adding 11,697 contracts as prices broke below the January lows at $2.74. The two charts below show a clear picture of the role of this market sector in pushing prices up or down. The Managed Money short positions exploded as prices declined to the Dec ’17 lows, only to be forced to cover as prices ran during the weather-induced rally (falling by 200,000 contracts). Now that prices have started to test major areas of support, these shorts should be expected to add to positions in the coming weeks, especially if prices break below the well-defined lows of the past two years.
- On the other hand, now that prices have started to decline from the February settlement, breaking below the January lows, the speculative long positions are starting a liquidation phase, as the chart below displays. The behavior of these two groups will be very important as prices head toward the lows of the past two years.
- Prices will be coming to a directional decision in the near term, and the weather forecasts for February and early March will hold the key. If they continue to show above-average temperature patterns into March, the comparisons to the five-year average will provide a bearish bias for prices. Participants will start to adjust ending inventories (March) higher, and with production showing no signs of slowing (last week’s average was a record high), it will be difficult for the lows of late 2016 and all of 2017 to hold. This potential break will force additional liquidation from the Managed Money long speculators and provide the Managed Money short sector cover for adding to their positions. These two selling elements will continue to push prices lower.
- Inventories decreased 4.1 MMBbl in last week’s EIA report. Propane stocks now sit at 48.9 MMBbl, roughly 6.8 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 46.9 MMBbl for this time of year prior to 2015 (before the crude price crash).
- The sharp drop in crude prices caused normal butane, Isobutane, and natural gasoline prices to drop 12%, 15%, and 10%, respectively, week-on- week. Natural gasoline prices now sit at their lowest since Oct ’17 (130 cents/gal), while butane sits at its lowest since Aug ’17 (86.4 cents/gal). With crude prices expected to hover around $60/Bbl in the near future, propane plus prices are expected to remain in the current ranges for the next few weeks.
- Last Tuesday, Exxon-Mobil announced that its new 1.5 million ton-per-year ethane cracker in Baytown, TX, is mechanically complete. The project is expected to begin operations in the second quarter of 2018, bringing on more ethane demand in the near future.
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