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The Week Ahead for Crude Oil, Gas and NGLs Markets – Feb 26

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CRUDE OIL

  • US crude oil inventories increased by 1.6 MMBbl, according to the weekly EIA report. Gasoline inventories increased 0.3 MMBbl, and distillates declined 2.4 MMBbl. Total petroleum inventories posted a withdrawal of 7.9 MMBbl. US production was estimated to be down 1 MBbl/d; however, the lower 48 states posted growth of 10 MBbl/d. Imports decreased 867 MBbl/d, to an average of 7.0 MMBbl/d versus the week prior.
  • Prices started the shortened holiday week with a brief decline, as the US dollar showed early strength. WTI strengthened after the bullish inventory release. As discussed last week, Khalid al-Falih (Saudi Arabia’s energy minister) announced that the Saudis will be adhering to the production cuts through the end of the year. He stated that producers will adhere to the quotas for the entire year even if it causes a supply shortage. The recent news items from Saudi Arabia have come following the recent steep declines in prices. Lower prices are a threat to the Saudi plan to maintain higher, stable prices into next year to support the IPO of Saudi Aramco. OPEC and the Saudis will continue to utilize the press to fuel speculative price increases.
  • While it is in the Saudis’ best interest to keep crude oil prices strong, it is also in the best interests of the gaining competitors (US operators) to take advantage of these prices. The latest EIA report stated that US production is set to reach 11 MMBbl/d by the end of 2018. This growth will lead to further market share losses for other leading producers from OPEC and Russia.
  • The speculators that started to liquidate positions in previous weeks continued the trend, as the latest CFTC report showed Managed Money Long Positions decreased by 17,409 contracts. However, they are still at a historically high 18.9% of total open interest, leaving potential for additional liquidation should prices correct again as they did two weeks ago.
  • While prices increased last week, the gains were achieved on declines in volume and open interest. Previous runs in prices (the past three months) were accompanied by stronger volume and open interest gains. The lack of significant shifts in trader sector positions confirms an apprehension over the longer-term gains that crude can achieve. While the new range of $58-$62/Bbl seems to be expanding to the upside, additional gains will need to occur with increases in volume and open interest to test prior 2018 highs. Short of that event, expect another correction to test support. The market will continue to struggle to strike a balance between the Saudis’ higher price motives and fundamental realities in the short term. Drillinginfo expects prices to return to a range around $55/Bbl once fundamental realities set in.

NATURAL GAS

  • Natural gas dry production remained nearly flat this week, increasing only 80 MMcf/d. Production is back above the average of 78 Bcf/d this week, which compares to an average of 72.6 Bcf/d in 2017. Canadian imports increased 90 MMcf/d.
  • On the demand side, with temperatures rising a little last week, Res/Com decreased by 4.0 Bcf/d and industrial demand decreased by 0.6 Bcf/d. Power demand increased by 0.6 Bcf/d on average for the week. LNG exports decreased by 0.45 Bcf/d, while Mexico exports were basically flat, declining slightly at 0.1 Bcf/d, leaving total demand lower by 4.9 Bcf/d and total supply up 0.3 Bcf/d.
  • The storage report last week came in above expectations, with a withdrawal of 124 Bcf. The initial move on this bullish report (comparatively) was a brief runup only to range trade the rest of the week. This week’s release is expected to be well below the 5-year average but higher than last year’s withdrawal.
  • Prices made another run and tried to test the major support provided by the lows from Dec ’17, Feb ’17, Nov ’16 and Aug ’16, all between $2.568 and $2.522. The speculative participants continued to provide selling to the price action, as the latest CFTC report (dated Feb 20) showed the Managed Money short positions adding 17,510 contracts while the Managed Money long sector added to the selling by reducing their length by 11,271 contracts.
  • Traders and the price movement appear to be waiting on March weather to confirm a directional bias. The fundamental information shows that production levels are high and expected to grow during the storage injection season, therefore eliminating any supply concerns for next winter. Price action shows many tests of the multiyear lows, only to find support. The technical trade will be looking at the multiyear lows with interest, as a break below support signals a negative bias confirmation and will accelerate the declines. If the trade supports these lows with buying, then the market will likely range-bound ($2.50-$3.10) in the near future and perhaps through the summer, similar to price action in 2017.

NGLs

Announcements

  • Total, Borealis, and NOVA Chemicals announced last Monday that they have entered into a joint venture in petrochemicals on the U.S. Gulf Coast. The JV will include:
    • The under construction 1 Mt/y ethane stream cracker in Port Arthur, TX
    • Total’s existing polyethylene 400 kt/y facility in Bayport, TX
    • A new 625 kt/y Borstar polyethylene unit at Total’s Bayport, TX site
  • ONEOK made announcements Wednesday with plans to build:
    • A new 400 MBbl/d NGL pipeline, the Arbuckle II Pipeline, intended to bring NGLs from OK to Mont Belvieu, TX
    • A new 125 MBbl/d NGL fractionator in Mont Belvieu, TX
    • A new 200 MMcf/d processing plant in the Williston Basin

Propane

  • Inventories decreased 2.5 MMBbl in last week’s EIA report. Propane stocks now sit at 43.1 MMBbl, roughly 6.8 MMBbl lower than this time last year.  However, propane stocks are still slightly above the five-year average of 42.7 MMBbl for this time of year prior to 2015 (before the crude price crash).

Prices

  • Propane prices sky-rocketed this week, increasing 20% week over week. The significant change is due to increasing crude prices, along with a larger than expected withdrawal; causing stocks to drop lower than 2012 stock levels.
  • Normal butane and isobutane also saw significant gains of 30% and 21%, respectively. The increases in prices are likely due to a combination of increases in crude prices, butane demand growth from gasoline winter blends, and higher exports.
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