- US crude oil inventories increased by 1.8 MMBbl, according to the weekly EIA report. Gasoline inventories increased 3.6 MMBbl, and distillates declined 0.5 MMBbl. Total petroleum inventories declined 2.7 MMBbl. US production was up 20 MBbl/d, with the lower 48 states growing 25 MBbl/d. Imports decreased 4 MBbl/d, to an average of 7.9 MMBbl/d versus the week prior.
- Prices started the week with a brief rally then promptly tested the lows of the previous week. Prices then found a bid after the inventory release and rallied through the week’s close. Most gains were attributed to Khalid al-Falih (Saudi Arabia’s energy minister) announcing that OPEC may have to “overbalance the market a little bit” in an effort to bring crude oil markets into “harmony.” This dismissed the thoughts that OPEC and other quota-carrying countries may formulate an exit strategy from the current cuts to keep market share given growing US production. It appears that OPEC is still focused on normalizing inventories rather than losing market share to the US. This announcement, coupled with the IEA’s increased 2018 demand forecast and confirmation that global inventories were only 52 MMBbl/d above the five-year average, brought a bid to the WTI market.
- How long this positive bias to prices will continue remains to be seen, however, as the same IEA report warned that current market conditions in 2018 seem reminiscent of the first wave of US shale growth that prompted the price crash in 2014. Projected US production growth in 2018 could single-handedly meet global demand growth. The EIA is forecasting that US production will reach 11 MMBbl/d by the end of 2018. This US growth and the upcoming refinery maintenance season are likely to cause serious resistance to a new run-up in prices.
- Speculators started to liquidate positions early the prior week and continued to liquidate length according to the CFTC report. Managed Money long positions declined 22,471 contracts. However, the speculators still maintain a historically high 18.9% of total open interest, keeping the door open for additional liquidation. The trade last week relaxed the oversold market and allowed for some consolidation. Market internals during the rally were not supportive of longer-term price runs, with declines in volume and open interest occurring concurrently with the rally. The price destruction from two weeks ago likely brought some caution to the bullish bias. The market trading back into the key areas (either side of $61/Bbl) seems to indicate a new range for prices ($58/Bbl-$62/Bbl) near term, as the consolidation off the collapse continues. Slight extensions to either side may occur, but the supply and demand elements of the crude market (especially US growth) represent a lower equilibrium. Drillinginfo expects prices to return to a less speculatively induced level, settling in a range around $55/Bbl.
- Natural gas dry production decreased 180 MMcf/d, dipping below the record 78 Bcf/d reached two weeks ago. Canadian imports declined 330 MMcf/d, as demand in the US dropped due to mild weather.
- On the demand side, temperatures warmed last week, causing declines across all sectors. Res/Com demand decreased by 9.2 Bcf/d, industrial demand decreased by 1 Bcf/d and power demand dropped by 0.2 Bcf/d on average for the week. LNG exports decreased by 0.33 Bcf/d, and Mexico exports declined slightly by 0.17 Bcf/d, leaving total demand lower by 11.7 Bcf/d while total supply was down 0.58 Bcf/d.
- The storage report last week came in above expectations, with a withdrawal of 194 Bcf. The initial move on this bullish report was a brief run-up in prices only to decline and close the day in the middle of the day’s range. This week’s release is expected to be well below the five-year average but higher than last year’s withdrawal. With the weather forecasts 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 consolidated during the week, testing major support—the lows from Dec ’17, Feb ’17, Nov ’16 and Aug ’16, all between $2.568 and $2.522—several times during the week. The speculative participants started to show their hand on the break below $2.74 in the previous week, as the latest CFTC report (dated Feb 13) showed the Managed Money short positions adding 52,893 contracts while the Managed Money long sector added to the selling by reducing their length by 17,460 contracts.
- Prices seem to be looking for confirmation of the upcoming spring weather and the effects of the additional production over the course of the spring and summer. The trade will have to continue to press the support levels and, eventually, work through the technical buying on the lows of the past 18 months. If there is enough pressure to break below this key area, those traders buying this support level will be forced to cover and accelerate the declines. This struggle may carry on for the next week or longer, but this key area will be under pressure through the end of the spring. For the traders buying these lows, the weather forecasts will need extended periods of below-average temperatures in the East and Midcontinent markets during March. With production showing no sign of slowing down, it will be difficult for storage levels to end the season below 1.4 Tcf, which will create few concerns for upcoming injection season and add pressure for the key support levels. The potential break of this level will force additional liquidation from the Managed Money long speculators and provide the Managed Money short sector potential for adding to their positions.
- Inventories decreased 3.3 MMBbl in last week’s EIA report. Propane stocks now sit at 45.6 MMBbl, roughly 7.5 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 44.5 MMBbl for this time of year prior to 2015 (before the crude price crash).
- Exports were 1.1 MBbl/d last week, the highest seen since 2017. With exports increasing each year, especially since 2016, stocks have been on the decline since 2016. As a result of this and with higher crude prices, propane prices have increased almost threefold over the past few years. Stocks have had such an impact on prices that last week propane prices surpassed normal butane prices, the first time this has happened since 2014.
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